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Since 2022, he adds, performance has shown that of a zero-rate environment but with rates going up, it equities may be dampened.
“There has been a little bit of a trend in portable alpha, where [investors] can replicate a 60/40 [portfolio] via futures that’s very efficient in terms of cash futures. [Investors then] take the remaining 55 per cent or 60 per cent and invest it in a liquid form of a hedge fund to pick up [beta and alpha] on top with the same dollar amount.”
Cheng has noticed a change in sentiment to hedge fund strategies over the last three years but fundamentally investors’ goals haven’t changed.
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“What you want your hedge fund portfolio to do is basically have that entire portfolio be lowly — [not that] you can’t have it zero — to have low correlation [to] equities and fixed income. That’s really the key in terms of asset allocation and it just depends on a specific institution’s investment policy and how large that amount might be.”
A separate report by Amundi Investment Solutions found a combination of quality returns, investors’ search for diversification and concerns around private assets attracted flows to the hedge fund industry. It noted while the second half of 2026 should continue to be supportive of hedge fund performance, it’s not a regime of abundant, easy beta. Instead it will be narrower, more selective and a capital expenditure-driven market.
The current environment — defined by a strong risk appetite but not one capable of lifting every asset indiscriminately or weak enough to trigger a defensive regime — favours fundamental pricing, sector rotation and alpha while generating more frequent asset rotations, the report noted.
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Looking ahead to the remainder of 2026, Cheng says asset allocators must be in tune with how much tactical allocation is needed in one area. “We’re generally going to maintain a balanced book. We’re going to have global macro as part of our allocation, but we’re also going to have all the other strategies.”
A recent survey by Barclays Investment Bank, which polled 340 institutional investors representing $8.7 trillion in assets, found four in 10 investors plan to be net allocators to hedge funds in the second half of 2026. Net interest in the asset class rose to 43 per cent in the second half of 2026, compared to 37 per cent during the same period last year.
While discretionary equity has led recent performance, returning 22.1 per cent over the last 12 months and generating 10.6 per cent alpha, nearly every hedge fund strategy generated returns and alpha above its respective five-year annualized average, according to the survey.
It also revealed the most sought-after hedge fund investment strategies — equity market neutral (29 per cent), global macro (27 per cent), quantitative multi-strategy (23 per cent) and equity statistical arbitrage (19 per cent) — have low equity beta for the balance of 2026. Investors also expressed interest in an equity sector long/short strategy (24 per cent), the survey noted.
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