Hedge funds
Hedge fund strategies like discretionary macro, equity market neutral, and multi-strategy platforms are well placed to earn returns in the second half of 2026, in our view. We think they can build on their 7.5% return in the first half (initial HFRI data as of mid-July), which was the strongest first six months in five years.
From 1997 to June 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. Equity hedge was the top strategy first-half strategy returning +9.6% based on HFRI data, and has benefited from elevated stock dispersion and greater opportunities for security selection.
That said, we are in an environment where performance differences between the top- and bottom-performing managers remain wide. While roughly 55% of managers delivered positive performance in June, the top 10% of the HFRI Fund Weighted Composite gained an average 8.1%, while the bottom 10% lost an average 8.4%, indicating the need for extra selectivity.
We remain positive on merger arbitrage supported by a healthy deal pipeline, a more pragmatic regulatory backdrop, and idiosyncratic catalysts.
Private infrastructure
We believe infrastructure assets are well positioned to deliver resilient, inflation-linked returns through market cycles. Many infrastructure assets face limited competition and high barriers to entry, so owners can pass through cost increases to users. Infrastructure investments can help hedge against inflation because revenue streams are often tied to CPI, particularly for core strategies operating in regulated or contracted assets. Their income streams may therefore be more robust than other yielding assets to both economic volatility and inflation. Such qualities appear increasingly valuable in the current environment.
Infrastructure’s returns have looked appealing relative to other parts of a well-diversified portfolio. Private infrastructure has delivered annualized returns of around 11% over the past decade, according to data from Cambridge Associates. But infrastructure also behaves differently to other assets, potentially helping steady portfolios. Recent years have seen the asset class’s already low correlations with traditional stocks and bonds fall further. Infrastructure returns display only a 30% correlation with a standard 60/40 portfolio, and even less so with other diversifying assets like gold.
In the current climate, we believe investors who focus on diversified, core/core-plus assets in non-cyclical sectors—prioritizing predictable, inflation-linked cash flows—are best positioned to capture attractive, risk-adjusted returns, while supporting the essential modernization of the global economy.
Core and core-plus infrastructure strategies focus on already mature assets with stable income, potentially more matched to income-focused or balanced investors who want to generate the bulk of returns through yield. When observing historical performance of lower risk, core infrastructure strategies, more than 50% of total returns were derived from income. Investors overallocated to other private assets that pay income (private credit and real estate) could look at these types of assets.
Private equity
Private equity returned around 11% in 2025 (Cambridge Associates, global private equity), underperforming the MSCI AC World and S&P 500 indexes by 12 and 7 percentage points, respectively. But we see signs of potentially improved performance going forward.
Over the 12 months to the end of the first quarter of this year, deal value and deal count grew 15% and 9% year over year, respectively, driven by increased interest in HALO (hard assets with low obsolescence risk) and the energy sector.
Meanwhile, investor appetite for private equity appears to be recovering. Global PE fundraising reached USD 262 billion in the first half of 2026, already more than 60% of the full-year 2025 total. Asia Pacific has led the rebound, with first-half fundraising running 30% above the full-year 2025 level, while the US and Europe are also tracking ahead of last year's pace.
We view managers with a value bias who are active in the middle market or skilled at executing complex transactions as best positioned. Regionally, we recommend diversification beyond the US. Meanwhile, the appeal of the secondary market remains intact—and areas such as tech, health care, energy, and defense present attractive thematic opportunities to capture long-term growth.
Select direct lending
Direct loan returns are normalizing, coming in flat to slightly up in the first quarter of 2026 despite headwinds from public credit volatility, spread movements, and the potential for rising credit losses.
Over a full economic cycle, CIO sees merit in diversified allocations to direct lending, sized to investor individual risk and liquidity preferences. However, CIO downgraded direct lending to Neutral in the third quarter of 2025 given growing differences between the strongest and weakest borrowers and our expectation that a mix of lower central bank rates and tight loan spreads (the latter exacerbated by competition between direct lenders and the syndicated loan market) would lead to more moderate direct loan returns.
Since September, investors have had further considerations including the potential disruption of AI on direct-lending-backed software businesses, and a broadening group of evergreen funds limiting redemptions.
CIO continues to believe a diversified allocation to direct lending can add value to a well-diversified portfolio over the longer term, but the risk-return outlook in the near term remains more balanced.
We still believe the asset class offers long-term income potential and diversification benefits. Investors who are underallocated may still capture attractive yields and diversification benefits over a full cycle.
But in the short term, we see a more balanced risk-return outlook, with returns likely to moderate. Investors with an overallocation to direct lending should consider diversifying into other alternative strategies. We also believe selectivity, diversification, and a focus on quality are especially important qualities in the current landscape.
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.
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.
Investors subject to redemption restrictions in evergreen structures should:
- Review liquidity terms, redemption mechanics, and governance provisions.
- Pay particular attention to manager quality—including liquidity management, communication, and alignment—particularly in stress scenarios.
- Diversify across fund structures and liquidity profiles to help mitigate concentration risk.
- Ensure their own liquidity needs are compatible with their chosen vehicle's design and be prepared for periods of restricted access to capital.
Private real estate
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.
Diversified private markets vehicles
Similar to public markets, we think allocation to private assets should be diversified across sectors, strategies, geographies, managers, and vintages. We view this approach as the best way to mitigate overconcentration to any specific theme, reduce localized disruption or currency risk, and enhance access to specialized expertise and other levers of value creation.
Building robust portfolios however requires time, consistency and institutional access to maximize chances of success. For first time investors, we see merit in considering diversified private market fund of funds.
