Active management has received a boost from institutional investors in recent years. Institutional investors started moving back into hedge funds and absolute return strategies in 2022, in response to heightened volatility and growing economic and geopolitical uncertainty, and that trend has only continued.
According to data from HFR [Hedge Fund Research] Inc., global hedge fund industry capital increased for the 14th consecutive quarter in the first quarter of 2026, pushing the asset class to $5.22 trillion—a new high watermark for AUM.
Investors put $44.5 billion into hedge funds in the first quarter, nearly matching the $44.8 billion of inflows in Q4 2025. Both the trailing two-quarter total of $89.3 billion of net asset inflows and the calendar 2025 total of $115.8 billion in net inflows were the strongest performances since 2007, according to HFR data.
That is a lot of movement for an investor group that has spent the last decade cutting back on new allocations to active managers, citing fees and lackluster returns. Sources say the drivers of the push into active management are a mix of structural market changes and a desire to diversify away from heavily concentrated and expensive U.S. equities. But it remains to be seen whether this change will last.
Dulari Pancholi, a partner in and the head of marketable credit and multi-asset investments at NEPC, says it is important to remember that even though there is significant activity focused on hedge funds and active management, a significant portion is cautious restart, rather than a high-conviction move.
“What we’re seeing is people increasing from 0% to 5% of the portfolio,” she says. “Or they are already at 5%, so it’s going a bit higher, but we’re not in a time where hedge funds are going to be 20% of the portfolio like they might have been 10 or 15 years ago.”
Shifting Dynamics
The structural impacts hitting institutional portfolios are complex. Pancholi says shifts are happening both at the portfolio construction level and at the market level. The slowdowns in private equity distributions and in private credit are pushing more investors to increase allocations to hedge funds and active management overall, even if only on the margins, to rebalance their portfolios.
“Allocators are at the point where they need to find other sources of return in their private markets portfolios,” Pancholi says.
Actively managed funds can be that source of return, she says, but investors are more clear-eyed about it than they have been in the past. There is still a hesitancy to add a fund that will come with higher fees and higher risk, if investors are not going to see the investment returns that justify that move.
Pancholi is spending time talking to investors about their goals when considering increasing allocations to active management. Her recommendations are likely going to be different if an investor is purely return-seeking than if one wants to focus on diversification. She adds there is such a diverse product offering that investors may find they can achieve what they want with passive or lower-cost products.
“We have a lot of options for determining the best fit,” Pancholi says. If investors are coming to active management with best fit in mind, she adds, they are more prepared for the higher costs and higher risk profile.
Portable Alpha
Alongside the return to active management, approaches such as portable alpha are also making a comeback. In theory, portable alpha allows investors to maintain the bulk of their passive public equity exposure while adding in sources of alpha. These sources are actively managed and are meant to be uncorrelated to benchmark returns. A number of institutions had portable alpha programs in the years immediately preceding the global financial crisis of 2008 and 2009. When the line between correlated and uncorrelated returns broke down during the crisis, many of those programs fell apart.
Pancholi says investors looking at portable alpha now are taking a more measured approach: They are using providers with which they already have an existing relationship, so that they are not taking on additional counterparty risk and beta risk at the same time.
“I don’t think we’re going to see the kind of growth we saw in these programs the first time. … Everyone was offering portable alpha,” Pancholi says. “Investors are very focused on liquidity. They’re focused on making the most efficient use of capital. They are also being more intentional about the sources of alpha and aren’t just using swaps. Their lived experience is influencing how those programs are constructed now.”
Osman Ali, a partner in and the global co-head of quantitative investment strategies at Goldman Sachs, agrees and adds that there are new factors at play this time. He notes that for the investors that stuck with their portable alpha program, they are now in a position to reap its benefits and show other investors the possible outcomes.
“I’m not saying it’s been easy for those investors—there is a constant re-underwriting of these programs that has to happen, and that takes resources,” he says. “But the investors that stuck with it have been shown to be right—they made the right call.”
Ali adds that the market share of passive is so much larger, and the overall size of active management is so much smaller, that there are new opportunities for alpha, simply because there are fewer players paying attention. Active investment managers with the experience to identify those opportunities are finding higher-quality, more durable sources of alpha. This same trend is supporting active managers broadly, even if they are not building portable alpha programs.
Curves May Lie Ahead
Portfolio construction concerns are not the only thing driving the return to active management. Markets have been volatile since the COVID-19 pandemic began in 2020, and investors are looking for managers that can capture those opportunities while also providing diversification. There is also a growing sense that the future might be more challenging for passive, long-only managers, in part because of high equity-benchmark concentration in the U.S. and abroad.
Passive funds in the U.S., for example, are going to participate in the big tech run-up as the AI trade continues to boom. But the size of those companies means they are dominating the indexes. Equities are more expensive and less efficient, which is putting some pressure on passive managers. Active managers have more of a mandate to manage risk, based on factors such as concentration, but there are potential performance trade-offs if that risk management involves selling out of a portion of high-growth technology exposure.
“You might have great ideas about how to invest in the U.S. equity market, but if you tell me to outperform a benchmark that is very skewed or concentrated, that is its own problem, because how do I manage risk on a skewed benchmark?” Ali says. “It can force you to make suboptimal decisions because you have to account for what’s going on with the benchmark.”
Ali notes that it is still easier for active fund managers to implement their best ideas because they are less constrained in terms of how they can do so, but the levels of market concentration are forcing asset managers of all types to reexamine their assumptions.
Investors that might look to mid- or small-cap growth stocks to diversify, for example, are running into some of those challenges. Dan Boston, who leads Polar Capital Corp.’s global small company team and is lead portfolio manager on the Polar Capital International Small Company Fund, says policy changes that began late last year and continued through the beginning of this year have made it tough for growth strategies.
“We’ve had a reset in our expectations on interest rates, and inflation is trending persistently higher,” Boston says. “Typically in that scenario, you’d expect some return multiple compression. When that happens, it usually hurts growth companies more than companies that are more mature.”
For investors that want to invest in the artificial intelligence boom or technology companies more broadly, without just adding to their Magnificent 7 mega-cap exposures, that diversification might come with more volatility, at least in the short run.
There are other structural challenges as well.
Boston adds that commodity prices are rising across the board, which is likely to have an ongoing impact on the economy and on a variety of investment strategies. Commodity costs rapidly eat into cash flow across all types of companies, even mature ones, a fact that gets compounded in an environment with preexisting high inflation. Countries forming new commercial and trade partnerships to realign away from the U.S. will also likely impact investor portfolios, as companies respond to changing global alliances.
“When the plates are shifting like this, there is a lot of volatility, but new opportunities are also created,” Boston says. “We could see more dispersion of return among active managers as they try to identify those opportunities and work through some of these structural challenges. Investors are going to have a lot of data from that to take in as well. It will be important for investors to stay focused on what their goals are.”
Tags: Active Management, active vs. passive, Commodities, dispersion, Hedge Fund, market volatility, passive investing, Portfolio Construction