The rise of alternatives with pensions - the great hedge fund demand increase

 

The key development for the hedge fund industry was a change in demand from institutional investors. The shift in risk-taking was the overall driver for pension behavior in the last 35 years. This change in risk-taking reduced exposure to fixed income and increased the desire to seek higher-returning investments with a similar low overall risk. This shift is presented in the paper, The Rise of Alternatives. 

The shift in risk allocation by pensions and endowments led to a considerable increase in hedge fund demand across all strategies, with two effects. One, money flows into hedge funds increased as expected from any shift in demand. Two, the institutional investors demand greater oversight through their due diligence, which has increased the demand for legal, compliance, and risk management. Hedge funds grew larger, more sophisticated, and more complex in response to this greater demand.

What will be the impact from tariff in 2026

 

The standard trade world seemed to be coming to an end during the Liberation Day debacle, yet the US moved away from its strongest tariff rhetoric, and the world seemed to adapt to a higher-tariff environment. The worst tariff policies were not implemented, yet many policy effects take time to take effect. Firsm can adjust pricing, reduce profit margins, hold-off prcie increases, yet many responses are temporary.  Goods shipments increased, but now both importers and exporters will have to normalize in a world with a higher tariff. For Chinese manufacturers, this will mean tighter margins, but it will also likely lead to a shake-up of firms and industry-wide considerations. This will be a global effect. 

The end of the Great Globalization

 

Every analyst develops and markets year-end forecasts, but the most important part of forecasting is not knowing where we are going, but knowing where we are in the world economy. You cannot map the future if you do not know the current or past, and the critical issue is the end of globalization. Many discuss tariffs, but the real problem is what will happen to global trade and foreign direct investment. 

Global trade is showing flat growth, and FDI flows have fallen significantly. There is a change in relative trade; however, for most living standards, the overall trade flattening is the key driver of growth. 

The Great Globalization is over, and we will all suffer from this in 2026.

Distinction between US and Europe - the type of capitalism?

There is a growing distinction between the United States and Europe. Growth is slower in the EU. Productivity has been lower, especially in the last 25 years. Government is bigger. But, most important is the development of companies and technology. There is no substantial growth of start-up firms that may be developing new technology. 

Just look at the number of public companies that have gained scale from scratch over the last 50 years. This is the critical issue if you believe the EU stock market will grow faster than the US over the next decade. 

There needs to be introspection on why this is happening. A start was the Draghi report last year, but there has to be a willingness to incorporate these recommendations. There is a different view of capitalism that may be holding back firm development.