Summary
As we enter the second half of 2026, the investment landscape remains constructive but increasingly dependent on continued economic resilience and supportive policy expectations. Risk assets have benefited from improving liquidity, resilient corporate earnings and ongoing investment tied to artificial intelligence (AI) and productivity-enhancing technologies. However, elevated valuations, concentrated market leadership, and heightened sensitivity to macroeconomic and geopolitical developments have left markets vulnerable to bouts of volatility and rapid repricing.
While financial conditions remain generally supportive, recent inflation surprises, evolving central- bank expectations and persistent geopolitical tensions have narrowed the margin for policy flexibility. As a result, investors face a backdrop in which optimism remains prevalent, but the tolerance for disappointment appears increasingly limited. We believe this environment is likely to produce greater differentiation across regions, sectors, industries and individual securities.
In this setting, we also believe hedge funds remain well positioned to provide diversification, active risk management, and alpha generation. Rising dispersion, uneven fundamental performance and periodic market dislocations are creating attractive opportunities for managers with flexible mandates and disciplined risk frameworks. We continue to favor strategies that emphasize security selection over broad market exposure, capitalize on episodic volatility, and can adapt quickly as market leadership, policy expectations and macroeconomic narratives evolve.
- Long/short equity (technology): Improving market breadth, robust earnings growth, increased stock dispersion and secular disruption make the strategy compelling for active managers.
- Systematic macro: The recent resurgence in performance highlights the value of diversification and the importance of remaining patient when maintaining long-term conviction in a strategy.
- Event-driven: AI-motivated capital spend is contributing to record-setting levels of corporate activity across mergers & acquisitions (M&A), debt and equity issuance, and initial public offerings (IPOs).
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Strategy |
Outlook |
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Long/short equity |
Constructive on long/short equity as corporate fundamentals, resilient earnings growth, increasing market dispersion and global breadth afford an attractive environment for stock selection. The specter of macro and valuation concerns still linger, and therefore we continue to favor less beta-driven fund structures. |
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Relative value |
Neutral outlook, with benefits of certain strategies—such as strong new convertible bond issuance and potential for higher equity volatility—being offset by higher risks due to geopolitical fragility, rich valuations and elevated strategy leverage. |
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Event-driven |
Neutral though slightly improving outlook. Tailwinds of record levels of corporate activity across M&A, activist campaigns, leveraged buyouts (LBOs) and IPO issuance, offset by concerns about elevated valuations, tight spreads and geopolitical risks, resulting in a moderated outlook for the strategy. |
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Credit |
We remain underweight amid historically tight spreads and an oversupply of capital, favoring nimble, idiosyncratic and long/short credit opportunities that are better positioned to take advantage of volatility and dispersion. |
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Global macro |
The outlook remains positive, with active central-bank policy shifts and elevated market volatility providing a robust opportunity set for macro-focused managers. We continue to expect performance dispersion as tail risks remain in place. |
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Commodities |
The outlook remains compelling, but complex. Market volatility, geopolitical fragmentation and structural shifts in global trade and industrial policy are helping create a more dynamic environment for directional and relative value approaches. |
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Insurance-linked securities (ILS) |
The Atlantic hurricane season started with a near-average season prediction from forecasters, though El Niño conditions may still lead to surprising idiosyncratic events. ILS markets continue to grow with a broader issuer and buyer base, expanding opportunities. Spreads have moderated but remain attractive given the uncorrelated nature of the asset class. |
Macro Themes We Are Discussing
1. Markets remain resilient, but the margin for error is narrowing
Economic growth and corporate earnings have remained more resilient than expected, while AI-related capital spending continues to support investment and sentiment. However, market valuations remain elevated; positioning is increasingly concentrated, and investor expectations leave little room for disappointment. Markets appear increasingly sensitive to incremental changes in growth, inflation, and policy expectations.
Hedge fund implication: Strong stock and sector dispersion should continue to reward managers focused on security selection and relative-value opportunities rather than relying on broad market beta.
2. Policy uncertainty has replaced policy support as the key macro variable
While monetary easing provided a tailwind in 2025, the discussion has shifted toward the sustainability of growth, the path of inflation and the degree of flexibility available to policymakers. Recent inflation surprises and geopolitical developments have reduced confidence around the path of future policy, increasing the potential for market volatility around economic releases and central-bank communication.
Hedge fund implication: Macro, relative value, and opportunistic trading strategies may benefit from recurring repricing events across rates, currencies, and risk assets.
3. Dispersion is broadening across regions, sectors and individual securities
Headline volatility remains relatively contained, but underlying dispersion continues to increase. Regional growth trajectories, differing policy responses, balance-sheet quality and varying exposure to secular themes such as AI are creating meaningful divergence beneath the index level. The result is a market environment where winners and losers are becoming more differentiated.
Hedge fund implication: Elevated dispersion creates a favorable backdrop for long/short equity, credit selection and multi-strategy approaches that can exploit relative mispricings.
4. Geopolitical risks are becoming a more persistent market factor
Geopolitical developments continue to influence commodity markets, inflation expectations, supply chains, defense spending and investor sentiment. Rather than producing one-off shocks, geopolitical developments are increasingly acting as a recurring source of uncertainty that can alter market leadership and create episodic dislocations.
Hedge fund implication: Flexible managers with the ability to dynamically adjust risk exposures are likely to be advantaged relative to more static investment approaches.
5. Crowding and concentration remain important sources of risk
Although equity leadership has broadened somewhat, a relatively narrow group of companies and themes are still heavily influencing major indexes. Elevated investor consensus around a small number of secular growth narratives increases the likelihood of sharp rotations should expectations shift.
Hedge fund implication: The opportunity set increasingly favors managers capable of identifying both underappreciated beneficiaries of structural trends and crowded areas where expectations have become overly optimistic.
GLOSSARY
Alpha: A mathematical value indicating an investment's excess return relative to a benchmark. Measures a manager's value added relative to a passive strategy, independent of the market movement.
Beta: Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.
Correlation: The degree of interaction between an investment’s return and that of the comparison Index. The correlation coefficient, expressed as a value between +1 and –1, indicates the strength and direction of the linear relationship between the investment’s returns and the returns of the index.
Credit Spread: A credit spread is the difference in yield between two different types of fixed income securities with similar maturities.
Duration: Duration is a measure of the price sensitivity of a fixed-income security to an interest rate change. It is calculated as the weighted average of the present values for all cash flows, and is measured in years.
Lower-net strategies: Lower-net (or low-net) market strategies involve balancing long and short equity positions to maintain a small net exposure—typically 10-20% long—reducing overall portfolio volatility and market risk.
Z-score: A Z-score is a numerical measurement used in statistics of a value's relationship to the mean (average) of a group of values, measured in terms of standard deviations from the mean. If a Z-score is 0, it indicates that the data point's score is identical to the mean score.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. Some subadvisors may have little or no experience managing the assets of a registered investment company. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Currency management strategies could result in losses to the fund if currencies do not perform as expected.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments. Short selling is a speculative strategy. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. Investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued.
Active management does not ensure gains or protect against market declines.
WF: 11387263