Unlocking Alpha in 2026
We have spent much of the last few years highlighting to clients and prospects alike the benefits hedge fund exposure can potentially bring to portfolios. From their downside protection characteristics in times of volatility, to how hedge funds can positively contribute to the traditional 60/40 equity-bonds portfolio construction, we continue to believe in the important role hedge funds play as part of wider asset allocations. And now it seems the wider market is beginning to open up to what we have been preaching. In the first few weeks of 2026, we have seen a marked uptick in widely read financial commentators highlighting the benefits of hedge funds given the prevailing market environment, with the liquidity challenges of private markets and lofty equity valuations just some of the factors playing on investors’ minds. This paper will look at the key market characteristics at present which we feel make the case for hedge fund exposure particularly compelling.
Why invest in hedge funds?
We believe hedge funds as an asset class have become a key component of the financial ecosystem and in asset allocation. Regardless of which stage in the market cycle investors find themselves in, we believe there are persistent, longstanding reasons why hedge funds should be included in client portfolios.
Market dispersion, shifting policies, and rising geopolitical tensions are creating fertile ground for hedge funds to generate alpha across strategies, positioning them as both important diversification tools and potentially effective return boosters within portfolios.
Geopolitical shifts unlock new avenues
Geopolitical uncertainty has been an ongoing theme we have highlighted in recent years – and it is only intensifying. Tensions in the Middle East have seemingly settled in one part of the region only to ignite in another. Meanwhile, in Europe, the Russia-Ukraine conflict continues, which is now being complemented by uncertainty over the future leadership of Greenland. The threat of tariffs has pushed Chinese exports to record highs, whilst the potential impact of additional Venezuelan oil supply is being baked into future commodity prices. It goes without saying that the US, the world’s largest economy, has found itself front and centre to these developments.
Whilst the backdrop detailed above is not an exhaustive list of all the geopolitical factors impacting financial markets at present, continued government intervention drives price dislocations which hedge fund managers will look to exploit. Skilled hedge fund managers will look to utilise this fertile opportunity set, particularly within debt, commodity and FX markets, to drive returns. In our view, this backdrop is especially advantageous for Macro and Managed Futures strategies, which are well positioned to navigate such complex and dynamic market conditions, and benefit from resulting pricing dislocations.
Dispersion in markets grows
Underperformance in markets outside of the US was a common theme for much of the past decade, however it seems as if the new market paradigm is moving away from this US exceptionalism. 2025 was still a year of solid performance for US indices, albeit performance was inferior to that of international markets as perhaps the long-held view of US perpetual superiority was questioned. As such, across last year and into 2026, we have seen investors broaden their horizons, whether that be due to revisions to their confidence in the US market, or because of apparent greener pastures elsewhere.
Also referred to as increasing market dispersion, investors allocating capital away from a concentrated portion of the market and investing in a wider range of securities ultimately widens the opportunity set, especially within equity markets. Astute and skilful investors, such as Equity Long/Short and Market Neutral managers, will be particularly well positioned to capitalize on the opportunity increased dispersion provides, with potential scope for greater alpha.
Monetary policy uncertainty creating opportunity
In the near-zero interest rate period of the 2010s, it was notably more difficult for hedge fund managers to generate consistent returns from fixed income. With risk-free rates often a baseline return for many hedge fund strategies, zero rates penalised returns. Combining this with suppressed macro volatility and asset price inflation, the opportunity set for many hedge funds was admittedly smaller. The same cannot be said now.
Sticky inflation and elevated rates compared to what much of the market has grown accustomed to over the last decade have swung the door of opportunity wide open for hedge fund strategies.
Not only are higher rates and volatility levels a tailwind for many strategies’ returns, the trading opportunities which are created bode well for savvy managers. Central banks remain focused on balancing inflation and strained labour markets, with shifting policy creating trading opportunities for hedge funds, especially Macro and Credit managers who often have significant exposure to debt markets.
Corporate activity back with a vengeance
2025 saw the return of the IPO and M&A market with a strong year for deal-making. Lofty equity valuations and tight credit spreads boosted board confidence making corporate activity a more attainable target. We saw 20%+ QoQ growth in M&A volumes in Q4 2025, with a particular increase in Asia where recent legislative changes have made corporate actions more amenable. Providing no significant reversal in the confidence of boards, we see no reason why these trends should meaningfully reverse. For hedge funds, this means a healthy hunting ground for Event Driven and Credit managers. Corporate activity impacts both equity and credit markets creating price discrepancies as the market attempts to quantify the weighted value of potential synergies. A more buoyant market in corporate activity can also be seen in the large growth in the number of activism campaigns launched in the year. This embodies the confidence hedge fund managers have in being successful activists on company boards where they feel they can deliver higher returns for shareholder than the current c-suite level.
Conclusion
In summary, the current geopolitical landscape and uncertain monetary policy have created compelling opportunities for hedge funds in 2026. In our view, allocating to hedge funds has never been more relevant, as generating alpha becomes increasingly critical for clients seeking portfolio returns regardless of the market environment.
Hedge Funds at HSBC Asset Management
Past performance does not predict future returns. The return may increase or decrease as a result of currency fluctuations. There is no guarantee that any named funds will be held within the portfolio in the future. Diversification does not ensure a profit or protect against a loss. The views expressed above were held at the time of preparation and are subject to change without notice. This document provides a high level overview of the recent economic environment. It is for marketing purposes and does not constitute investment research, investment advice nor a recommendation to any reader of this content to buy or sell investments. Source: HSBC AM Alternatives. As of January 2026.
1WithIntelligence FoHF Billion Dollar Club Report, November 2025. 2As of December 2025.
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