Change hedge fund allocations during high rate environment

It is important to realize that the interest rate environment will have a strong impact on returns for different asset strategies. For the long-only manager, higher rates will increase the discount rate for any cash flows. Hence, if there is not an increase in cash flows, the valuations will fall. This will impact private equity because these investments are often levered, so these first will be more rate sensitive. Additionally, the risk-free asset will improve which will make holding cash more attractive. 

What is important from an asset allocation perspective is that hedge funds will become more attractive.  Arbitrage strategies may be unaffected by the rate environment. Futures strategies like trend-following will earn more on their cash holding which are large. Market neutral will be able to exploit the differences between levered and unlevered firms. This is a good time to increase hedge fund allocations.