Hedge fund rotation in 2026

 

Every year, we see investors change their appetite across hedge fund strategies, and 2026 is no different. There generally is a momentum component to hedge fund allocations. Strategies with strong performance will see strong interest in the following year.

For 2026, we are seeing increased interest in European hedge funds and in multi-strategy and event-driven strategies. There is also increased demand for digital assets, but we believe the current sell-off has cooled interest in these strategies. Interest in multi-strategy strategies has been the strongest among hedge fund strategies over the last few years. The low volatility and strong Sharpe ratios have been the primary drivers, despite the strategy’s high fees.

The value from trend-following is in the quintiles

 

The Mann Group provides another simple chart that explains why investors want to hold trend-following managers. We have seen the quantile chart before, but the comparison with global bonds and multi-strat provides more insight. First, we have higher-yielding investors who think they can just hold bonds as a safe asset. Bonds will not help you at the downside extreme. The darling of hedge funds has been multi-strat firms. They will do well in most cases except for the lowest equity quantile. When you need protection wuou will not get it. 

Strategy blend is important. Take a combination of trend and multi-strat, and you will be well served across all states of the equity market. 

“Low-hire, Low-fire” labor environment - Labor gridlock

In a K-shaped economy, we are seeing labor market gridlock. Job openings are falling, and separations are low. Quit rates are also at the lowest levels since the pandemic. Workers do not want to leave their jobs. Firms do not want to hire workers, nor do they want to fire them, because they don’t think they can find better workers. Turnover is a good sign for a labor market, and we are not seeing this in the US economy. The economy is gridlocked on uncertainty. If you don’t know what the future may hold, you don’t want ot make new investment decisions in labor or capital. 

Putting Fed dissent in perspective

 

Whenever there is dissent with Fed votes, there is an uproar by market analysts who are trying to make sense of why someone would have a different opinion. Indeed, dissents have increased, but the absence of dissents was unusual during the Powell period. If you look at other periods, the number of dissenting votes was greater and more often. Greenspan was the exception with few dissents, but that was only later in his tenure as Chairman. During the Volcker period, one could say the Fed was in revolt. 

The lack of consensus is beneficial. Yes, it creates uncertainty, but it also tells us there is honest debate.