The Red Thread for alternatives – Edition January 2026

As 2026 begins, further monetary loosening is expected over the coming year, even amid lingering unease about potential inflationary spikes. Falling interest rates should be supportive of alternatives asset classes. The Fed delivered a quarter-point cut in its latest decision on 10 December 2025, bringing target rates down to 3.5-3.75%. The ECB decided to hold deposit rates at 2.00% for the fourth consecutive meeting on 18 December 2025. Conversely, Japanese rates have continued to climb, with a 25bps increase to 0.75% in December, marking a 30-year high. The anticipation of, and now action by, Prime Minister Takaichi to call a snap election has driven stocks to record highs in recent weeks.

Continued signs of recovery heading into 2026

After accounting for seasonal effects, global all property investment volumes increased in 3Q25 after two quarters of declines, according to MSCI, and we expect this upward trend to continue as investors shift away from their cautious stance. As past rate cuts potentially continue to feed through, the improved economic backdrop should continue to encourage investors. The preliminary global all property investment volumes from MSCI suggest that a further increase occurred in 4Q25.

A limited global real estate supply pipeline should help market fundamentals and support recovery in 2026. According to the MSCI Global Quarterly Property Index, all property capital values grew 0.2% QoQ in 3Q25, the same growth rate as the past three quarters, indicating that capital values showed continued resilience. The residential sector showed the strongest capital value growth, at 0.6% QoQ, while retail, industrial and hotel also saw uplifts over the quarter. The hotel sector saw positive capital growth after two quarters of declines. All property total returns were 1.3% QoQ in 3Q25, held up by the residential, retail and hotel sectors.

Despite the office sector experiencing negative capital growth on a global level, the prime market, primarily in Europe, has experienced stronger capital growth. The continued flight to quality trend has reduced vacancy rates in prime city locations and rising rents amid falling supply are attracting investors. Rental growth and positive economic growth across Europe are expected to bring selective yield compression. However, older offices will need to be refurbished to meet new demand requirements.

Hard assets, soft power

In our 8^th annual infrastructure outlook, we argue that infrastructure has become a useful lever for nations to project soft power – through energy security, technological leadership and supply chain dominance.

In addition, the asset class now sits at the center of several powerful secular themes. First, growth in AI is increasing the need for digital infrastructure, energy and grid investments. Second, decarbonization remains a global secular tailwind that we think will endure economic cycles. Finally, onshoring policies have accelerated demand for traditional infrastructure across all sectors, as reindustrialization has become a priority.

Moreover, infrastructure can help bridge economic disparities, create more jobs, and improve the daily lives of citizens. Services such as energy, transportation, water and digital access are critical to the smooth functioning of economies and the well-being of populations.

Against this backdrop, investment opportunities remain broad. We believe a sector-agnostic approach, grounded in disciplined underwriting, an understanding of nuances, and a focus on risk-adjusted returns, remains the clearest path to navigating the year ahead.

Renewed optimism for exits as 2026 begins

Turning the corner into 2026, market participants are hopeful for a resurgence in M&A and IPOs, which could catalyze exit activity down the line. This hope is supported by what is expected to be a more supportive (lower) interest rate environment this year.

We already saw exit activity and distributions improve in 2025, but not to the extent seen before the 2022-2023 slowdown.

Private equity backed companies, in general, continue to show positive performance in the face of lingering fears over consumer sentiment and the broader state of the economy in many markets, while forecasts are trending positively as we enter the year. This is important, as managers looking to capitalize on stronger M&A activity to sell their portfolio companies tend to receive significantly more interest for companies that can show a consistent earnings record, pointing to a good supply of well-positioned exit candidates when markets become accommodating.

Direct lending fundamentals and expected return outlook amid declining interest rates

Despite the noise in the press in the last couple of months, the fundamental outlook for the corporate direct lending strategy remains stable. In terms of strategy fundamentals, company earnings have generally been positive as the borrower universe has demonstrated high single digit EBITDA growth coupled with stable and healthy margins. Furthermore, the credit profile of the underlying borrowers has remained strong. Non-accrual rates for the platform investments have consistently been low, ranging from 0.0% to 0.3% over the past four quarters with no material increases observed. In addition, many managers have started to exhibit improving interest coverage ratios despite interest rates remaining elevated in recent years. While there has been an upward trend in PIK loans across the industry, the current level remains manageable for the platform investments.

As it pertains to expected returns, the base case is for positive, albeit lower, returns for the corporate direct lending strategy in 2026. The US Federal Reserve announced several interest rate cuts during the second half of 2025, such that the Federal Reserve’s target Federal Funds Rate is 3.50% to 3.75% as of January 2026. In addition, markets are projecting additional interest rate cuts in 2026. While base rates have trended lower, credit spreads are at the tighter end of their historical range due to positive credit performance and relatively muted deal flow. As a result of tighter credit spreads and lower base rates, the corporate direct lending strategy will likely produce marginally lower returns in 2026 compared to the prior two years. However, lower base rates could support increased deal activity and an uptick in capital deployment, potentially offsetting some of the reduced return expectations stemming from the floating rate component of the strategy. Overall corporate direct lending still provides an illiquidity premium to public credit markets and the platform managers are expected to deliver 150 to 200 bps of excess returns above the broadly syndicated loan market.

In summary, the corporate direct lending strategy has maintained a stable fundamental profile characterized by strong operating performance and limited defaults from the underlying borrower universe. While there have been some idiosyncratic defaults in the market, these events have not impacted the corporate direct lending strategy. The fundamental outlook should be further supported by the upcoming interest rate cuts by the Federal Reserve. That said, the lower base rates will likely result in marginally lower expected returns and distribution rates for the strategy. Nonetheless, corporate direct lending managers are still positioned to deliver a quality, risk-adjusted return.

Macro tailwinds drive year‑end upswing

December was broadly positive across most hedge fund strategies, supported by benign macro conditions, sector rotations, carry, and idiosyncratic alpha. While dispersion remained elevated, the overall environment was constructive heading into year end.

US equity hedged strategies posted positive returns, driven largely by stock specific alpha rather than market direction. A continued rotation from growth to value and sector broadening supported long/short portfolios, with financials, communications, and materials outperforming. Utilities lagged, particularly within AI infrastructure names. Both long and short books contributed, with a favorable spread between crowded longs and shorts. Europe also delivered positive performance, mainly through beta gains, even as the region was net sold via single names. Managers increased both gross and net exposures to near multi year highs. Asia generated broad based gains across China, Japan, and Korea. Japan rebounded after early rate hike concerns eased, while China was mixed – offshore markets softened but domestic markets rose – yet still posted its best annual return since 2017.

Relative value strategies were generally positive. Fixed income RV benefited from European basis trades, yield curve themes, Japan rate positions, cross currency basis, and inflation strategies, though US swap spreads were more mixed. Capital structure and volatility arbitrage produced mixed results, with dispersion in AI linked convertibles and modest losses in index level long vol positions. Merger arbitrage & event driven strategies ranged from mixed to positive amid wider deal spreads and healthy deal activity, including 10 new US deals over USD 1bn. Agency MBS performance was uniformly positive, supported by carry and mortgage derivative gains. Quantitative equity strategies were mostly positive, with strong alpha from crowdedness, asset selection, and China exposures, despite weakness in factors such as momentum, size, and quality.

Credit & income strategies produced broadly positive returns. Corporate credit benefited from long positions amid spread tightening and company specific catalysts, with strength in telecom, utilities, and EM. ABS performance was driven by interest income, led by RMBS and SRT, while CLO equity lagged. Reinsurance/ILS generated positive carry and saw no loss events.

Trading strategies were mostly positive. Discretionary performance was led by rates (Fed related trades, US/EU steepeners, Japan payers), with additional gains from equities, metals, and emissions. Emerging markets were also additive. Systematic/trend programs delivered positive returns from metals, FX, equity indices, and shorts in European natural gas.

The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice. Please note that past performance is not a guide to the future.