Video: Diversify with alternatives
Hedge funds
In our view, hedge fund strategies like discretionary macro, equity market neutral, and multi-strategy platforms are well-placed to earn returns amid volatility.
From 1997 to November 2025, discretionary macro traders posted an average annualized return of 7.0% (BarclayHedge Global Macro Index) with volatility of 5.5%—comparable to equities but with less than half the volatility. Meanwhile, the maximum drawdown for macro strategies over the past two decades was 8.1% versus 54.0% for developed market equities (MSCI World).
We also see ongoing opportunities for equity market neutral and multi-strategy funds, which can generate returns in both rising and falling markets as they flexibly position around economic trends. We remain positive on merger arbitrage, though performance may soften if deal activity slows.
Private equity
Private equity returned around 8% through the end of 3Q25 (Cambridge Associates), underperforming public benchmarks, but we see signs of potentially improved performance going forward. US private equity deal value grew 36% year over year in 2025 (PitchBook), led by health care and technology. While raising fresh capital remains challenging—especially for smaller funds—the outlook is supported by increasing exits and a more favorable macro environment.
Attractive valuations, renewed deal activity, and a constructive macro backdrop in terms of robust US growth and lower US interest rates all support a positive view on private equity overall. We favor value-oriented, middle-market buyout strategies and secondaries, which should be less affected by volatility in the software sector. Select European and Asian assets are also increasingly attractive for diversification.
Select direct lending
For those considering adding to direct lending allocations, we continue to urge selectivity with a bias toward higher-quality, larger-cap, and sponsor-led deals and an avoidance of riskier and growth-sensitive underwriting in the lower-middle markets and below.
Risks are rising among lower-middle-market borrowers and 2021-22 vintages, with defaults rising to 2.46% in 4Q, though overall credit metrics remain broadly stable. In Europe, direct lending volumes reached a record EUR 41 billion (Lincoln and Morningstar). Looking ahead, we expect returns to moderate, as spreads remain tight and default rates normalize.
Diversification across private market strategies may help manage risk, but investors must be prepared to tolerate illiquidity and limited transparency in both good and more challenging market conditions.
Private real estate and infrastructure
We believe infrastructure assets are well-positioned to deliver resilient, inflation-protected returns. Current market conditions are favorable, in our view, with attractive valuations, solid fundamentals, and strong fundraising momentum, led by core-plus and digital infrastructure strategies. Infrastructure-linked assets returned 9.4% in the first three quarters of 2025 and have averaged 11% annually over the past decade (Cambridge Associates).
In the context of energy prices potentially remaining higher for longer, infrastructure assets may appear especially attractive as developed market core and core plus infrastructure assets tend to exhibit stable, inflation-linked cash flows that make them particularly resilient to 'stagflation' environments.
In global direct real estate, we expect total returns to be primarily driven by income, with a smaller contribution from capital gains, as rental growth slows. We favor core/core-plus strategies, especially in logistics, data centers, and living sectors offering robust fundamentals and attractive risk-adjusted returns.
Alternatives carry unique risks that investors must be aware of before investing, including limited transparency, potentially high fees, and illiquidity.
