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 and an environment where the performance differences between the top and bottom performing stocks is historically large.
From 1997 to March 2026, discretionary macro traders posted an average annualized return of 7.2% (BarclayHedge Global Macro Index) with volatility of 5.6%—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 developments.
One way to look at the opportunity for equity hedge funds is to explore how much the market expects stocks to move. In May, the implied volatility of the average S&P 500 stock has been 42%, 2.4 times higher than the index volatility. Normally, this ratio averages about 2.0x and means that individual companies’ stock prices are expected to make very large moves, even if the widely reported headline S&P 500 price appears relatively stable. Measures of how much individual stocks in an index move in tandem also show that the average pairwise correlation of the S&P 500 stock has dropped to around 0.1, compared to a median 0.23 (our analysis based on 2002-2026 data). And beyond the US, a more holistic measure of the variation in single stocks’ returns—known as cross-sectional standard deviation—appears elevated relative to the last 20 years of data from JP Morgan—especially for MSCI Asia ex Japan and MSCI Chinese markets.
Investors seeking diversification, ways to limit portfolio losses, and access to unique return opportunities within a broader alternatives or multi-asset portfolio can also consider Asian hedge funds. Underresearch and high levels of retail participation may add to dislocations and dispersion that local hedge fund managers can exploit. While no guarantee of future returns, Asian hedge funds have historically delivered appealing returns. Over the past five years, Asian hedge funds have delivered returns broadly comparable to Asian equities and a global 60/40 portfolio, but with less than half the volatility of both. Relative to global hedge funds, returns and risk-adjusted performance have also been broadly comparable.
We also remain positive on merger arbitrage, though performance may soften if deal activity slows.
Private equity
Private equity returned around 8% through the end of the third quarter of 2025 (Cambridge Associates), underperforming public benchmarks, but we see signs of potentially improved performance going forward. US trailing-12 month deal value grew 26% in the first quarter of this year, led by the energy sector and hard assets with low obsolescence risk (HALO).
While raising fresh capital remains challenging—especially for smaller funds—we expect a gradually improving trend of exits and a resilient US macro environment to support the asset class.
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, especially in times of elevated geopolitical tension.
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 2.7% in the first quarter. 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-linked 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 elevated for an extended period, infrastructure assets—particularly developed market core- and core-plus segments—may offer investors the benefits of lower correlation, stable and often inflation-linked cash flows, and resilience in slower growth 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 moderates. We currently see core/core-plus strategies—particularly in logistics, data centers, and living sectors with robust fundamentals—as offering relatively attractive risk-adjusted returns.
Alternatives carry unique risks that investors must be aware of before investing, including limited transparency, potentially high fees, and illiquidity.
