Hedge funds and portfolio construction - better in a high inflation environment

In a higher inflation environment, hedge funds will closely match the returns on the market portfolio. Below average inflation is the problem for hedge funds. Additionally, hedge funds seem to be a better diversifier now that the stock/bond correlation has moved higher. You are getting less from the 60/40 portfolio mix and now you are getting more from holding hedge funds.  See the research paper from UBS, "Hedge fund performance in the context of the current market & macroeconomic environment".