This backdrop is challenging traditional portfolio construction. Government bonds, long relied on for diversification, have at times failed to offset equity losses amid rising inflation and fiscal pressures.
As a result, hedge funds are taking on a more central role in portfolios. The report highlights rising investor demand, with nearly one-third planning to boost allocations, reflecting a search for alternative sources of return and downside protection.
Dispersion driving stock selection opportunities
A key theme across strategies is the growing divergence in performance between companies, sectors and regions. Rather than moving in tandem, markets are increasingly rewarding firm-specific fundamentals.
BlackRock points to AI as a major force behind this trend, accelerating disruption and creating clear winners and losers across industries. This is particularly evident in equity markets, where long-short strategies are benefiting from sharper distinctions between companies positioned to capitalize on AI and those at risk of being displaced.
The firm notes that this environment is shifting returns away from broad market exposure and toward more selective, skill-driven strategies.