Video: Diversify with alternatives
Hedge funds
The environment of low stock correlation and high return dispersion—drivers of strong hedge fund returns since 2010—remains in place and should support performance in 2026. We believe that equity market neutral strategies can enhance portfolios due to their ability to generate returns in both rising and falling markets, while limiting directional exposure. We also see appeal in global macro and multi-strategy funds.
Global macro tends to benefit in periods of high uncertainty and volatility, including heightened geopolitical risk. Indeed, fom 1997 to November 2025, discretionary macro traders have posted an average annualized performance of 7.0% based on the BarclayHedge Global Macro Index, with a volatility of 5.5%. This performance is comparable with that of equities, while showing less than half of the volatility. The maximum drawdown over this period is the lowest of all hedge fund strategies at 8.1%, and markedly lower than the maximum drawdown of developed market equities (MSCI World) at 54% over the past two decades.
We believe multi-strategy funds can benefit from their flexibility to position around economic trends and risks like persistent inflation, trade tensions, or debt sustainability concerns.
Meanwhile, the resurgence in M&A activity is creating fresh opportunities for merger arbitrage strategies.
Private equity
With central banks easing and fiscal policy remaining pro-growth, we expect increased distributions and exits, supporting private equity returns. Mega-deals have returned and global private equity (PE) deal flow between January and September 2025 stood 14.5% higher than 2024, according to Pitchbook.
Raising fresh capital remains challenging and timelines are extended—especially for smaller funds—but the outlook on increasing exits and a more favorable macroeconomic environment are supportive of new capital flows in the coming quarters.
In a world of lower rates and high public market valuations, we focus on middle-market, value-based buyouts, complex carveouts, and secondary funds, with a preference for regional diversification in Europe and Asia to mitigate local risks.
Select direct lending
Private credit headlines highlight the need for quality and selectivity. While direct lending remains relatively small compared to broader credit markets, and risks to overall financial stability appear moderate, investors should recognize that the market is not uniform.
Recent data suggest that asset quality is not deteriorating at the industry level, but there is growing bifurcation: Stress is more evident among smaller, lower-middle-market borrowers and certain sectors and vintages, while more recent, larger sponsor-backed loans have generally shown more resilience.
Our analysis of US listed and non-traded business development companies (BDCs; a vehicle through which investors can access direct lending) finds that most private loans are valued in line with public market standards, with average price discrepancies below 1%. However, valuation differences can occur—especially for weaker or distressed loans—and the absence of transparent market pricing means investors must rely on manager judgment.
While tighter spreads and Federal Reserve rate cuts have moderated returns, we believe direct lending still offers attractive income and diversification for underallocated investors. Risks are mainly contained to lower-middle-market borrowers; senior, sponsor-backed loans to larger, less cyclical companies remain resilient, in our view.
For those considering private credit, robust positioning is key: Regularly review liquidity needs, prioritize quality, and exercise selectivity in manager and deal choice. 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
Reliable, inflation-linked cash flows and exposure to structural trends make these appealing portfolio assets in our view.
Infrastructure assets stand out as a compelling opportunity in today’s investment landscape. Their high barriers to entry, monopolistic positioning, and strong cost passthrough mechanisms make them uniquely resilient to economic slowdowns and positively correlated with inflation—offering a potential hedge in uncertain times.
Infrastructure-linked assets returned 7.1% in the first half of 2025 and have averaged 10.8% annually over the past 10 years (Cambridge Associates). Recent fundraising has rebounded sharply, led by core-plus funds and robust deal activity in renewables, while valuations remain attractive and competition is limited, in our view.
In global direct real estate, we estimate that transaction volumes ended 2025 up roughly 20%, to around USD 850bn. We anticipate further growth in 2026 as financing and opportunity costs decline. Performance has varied across sectors, with industrial and logistics largely outperforming, though capital gains in these segments have been volatile. Looking ahead, we expect total returns to be primarily driven by income, with a smaller contribution from capital gains as rental growth continues but at a slower pace.
We favor digital infrastructure, renewables, logistics, living sectors, and data centers, with a preference for core and core-plus assets that derive a greater share of returns from income rather than capital appreciation.
Alternatives carry unique risks that investors must be aware of before investing, including limited transparency, potentially high fees, and illiquidity.
