Essentials of Hedge Funds

Hedge funds seek to generate consistent returns across markets, enhance portfolio diversification, and reduce risk.

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introduction to HEDGE fUNDS

What You Need to Know

Consistent Return Potential

Multi‑strategy hedge funds seek to generate attractive returns across market environments by combining diversified, uncorrelated strategies. Their ability to adapt exposures over time aims to deliver more consistent outcomes compared to traditional assets.

Diversification Benefits^{[ 1 ]}

Multi-strategy hedge funds can improve portfolio balance by targeting low correlation to traditional stocks and bonds. Diversification across asset classes, strategies, and time horizons helps prevent any single risk factor from dominating outcomes.

Risk Mitigation Focus

Risk management is central to hedge fund investing. Multi‑strategy hedge funds aim to deliver downside mitigation through prudent position sizing, active portfolio management, hedging overlays, and real‑time portfolio monitoring.

What are Hedge Funds?

Hedge funds invest primarily in liquid public markets, using fundamental and trading‑oriented strategies to generate alpha independent of market direction. They typically take both long and short positions, dynamically adjust exposures, and actively manage risk. Multi‑strategy hedge funds combine multiple approaches within a single portfolio, reallocating capital as opportunities and market conditions change.

Hedge funds seek to offer:

Strong Returns

Potential for attractive returns on a standalone basis

Consistency

Typically positive regardless of market conditions

Diversification

Aim to add balance and offset weakness when other assets struggle

Low Drawdowns

Seek to exhibit limited downside in periods of market stress

Uncorrelated Returns

May offer return sources that are independent of broader markets

Common Hedge Fund Strategies

Equity Long / Short

Fundamental stock selection focused on business quality, valuation, and variant perception, with the goal of capturing alpha while actively managing market risk.

Credit Strategies

Opportunistic investing across public and structured credit with a focus on income generation and capital preservation across credit cycles.

Global Macro

Relative value and directional trading in rates, currencies, commodities, and broader macro themes across emerging and developed markets.

Quantitative Trading

Systematic, data‑driven investing across alpha horizons and asset classes, with the goal of capitalizing on short‑term inefficiencies.

Special Situations

Specialized event‑driven and idiosyncratic opportunities emphasizing asymmetric payoff profiles that may not be closely tied to broader markets.

Why Invest in Hedge Funds Now?

For decades, investors relied on a combination of stocks and bonds to drive returns and manage risk, based on the assumption that bonds would reliably diversify equity exposure.^{[ 2 ]} Historically, however, stock‑bond correlations have been positive more often than not, making that diversification benefit inconsistent over time.

In recent years, this challenge has become more pronounced. Inflation volatility, rising rates, tighter monetary policy, and shifting correlations have reduced the effectiveness of bonds during equity sell‑offs, contributing to higher volatility and deeper drawdowns for traditional portfolios.^{[ 3 ]} When equities decline, the key question is not just how much returns fall, but what holds up?

Multi‑strategy hedge funds have historically demonstrated the ability to generate positive returns during equity drawdowns. This reflects their focus on diversification, alpha generation, and active risk management. For investors, this kind of return profile can help improve outcomes during periods of market stress.

In Recent Periods, Bonds Have Been Less Diversifying
Percentage of Months Up When Stocks Were Down^{[ 4 ]}
(Last Five Years, Jan 2021 to Dec 2025)

Percentage of Months Up When Stocks Were Down Bar Chart: Bonds, 15%; Multi-Strategy, 70%

Downside Mitigation

Historically, multi‑strategy hedge funds have demonstrated resilience during equity and bond market drawdowns while participating in rising markets. By combining multiple strategies with distinct return drivers, multi-strategy hedge funds can enhance portfolio resilience in challenging environments while still participating in positive market environments. The key takeaway is that hedge fund investing is not just about return potential, but also about reducing volatility and preserving capital, making it a complement to traditional equity and fixed income allocations.

Performance in Up / Down Equity Markets^{[ 5 ][ 6 ][ 7 ][ 8 ]}
(Jan 1998 to Dec 2025)

Performance In Up Down Equity Markets Column Chart: Down Market, Multi-Strategy, 0.3%, Global Bonds, -6.5%; Up Markets, Multi-Strategy, 3.2%, Global Bonds, 6.3%

Performance in Up / Down Bond Markets^{[ 5 ][ 6 ][ 7 ][ 8 ]}
(Jan 1998 to Dec 2025)

Performance In Up Down Bond Markets Column Chart: Down Market, Multi-Strategy, 2.2%, Global Bonds, -2.1%; Up Markets, Multi-Strategy, 2.3%, Global Bonds, 2.9%

The Role of Hedge Funds in Portfolios

Multi‑strategy hedge funds are often used as a core alternative allocation within diversified portfolios. Their focus on absolute returns, diversification, and downside risk mitigation can complement traditional stock‑and‑bond allocations. Multi-strategy hedge funds can help mitigate challenges such as elevated equity valuations, shifting stock‑bond correlations, and heightened macroeconomic uncertainty, with the potential to enhance portfolio returns over time.

Hedge Funds Enhance Portfolio Outcomes Across Key Metrics^{[ 9 ][ 10 ][ 11 ]}^{[ 12 ]}
Jan 1998 to Dec 2025

Illustrative Portfolio Impact — Adding a Dedicated Multi-Strategy Allocation Aims to Improve Returns With Less Risk^{[ 9 ][ 10 ][ 11 ]}

Illustrative Portfolio Impact - Donut Charts: Chart 1 - Global 60/40 Portfolio; Chart 2 - +20% Multi-Strategy Allocation

Considerations Before Allocating

We believe a balanced portfolio should include a dedicated hedge fund allocation, but where you invest and whom you invest with matters — especially in times of increasing market volatility, macroeconomic uncertainty, and geopolitical instability. Multi‑strategy hedge funds aim to provide investors with a broad range of return sources within a single portfolio, offering the potential for attractive absolute returns, improved diversification, and greater portfolio resilience across market cycles.

Private fund returns may rely on monthly NAVs or less frequent pricing vs. continuously traded public equities. Investors should consult their own legal, accounting, tax, and financial advisers to evaluate whether hedge fund allocations, if any, are appropriate for overall portfolio objectives, risk tolerance, liquidity needs, and tax circumstances.

Frequently Asked Questions

What do hedge funds do?

Hedge funds seek to generate returns by identifying investment opportunities across a variety of markets, asset classes, and strategies. Many hedge funds combine multiple approaches, such as equity investing, credit investing, macroeconomic trading, and quantitative strategies, which may help reduce reliance on any single market outcome or source of return.

What are the features of hedge funds?

Investors may allocate to hedge funds for their potential to enhance portfolio diversification, improve risk-adjusted returns, and reduce reliance on traditional stock and bond market performance. Because hedge funds can invest across multiple asset classes and employ a variety of strategies, they may provide exposure to differentiated sources of return across market cycles. However, hedge funds involve risks, including the potential for loss of capital.

What are the differences between hedge funds and mutual funds?

The primary difference between hedge funds and mutual funds is their structure, regulatory framework, and investment flexibility. Each is designed to meet different investor needs, goals, and risk preferences. Mutual funds are generally designed to provide broader investor access, greater transparency, and daily liquidity, with Net Asset Values (NAVs) typically calculated each business day. Hedge funds are usually available only to accredited or institutional investors and may use a wider range of strategies, including leverage, short selling, derivatives, and other risk management techniques. Hedge funds also often calculate NAVs and offer liquidity on a monthly, quarterly, or other scheduled basis depending on the fund structure and underlying investments. As a result, hedge funds and mutual funds typically differ in their investment objectives, liquidity terms, investor eligibility requirements, and portfolio construction approaches.

Who can invest in hedge funds?

Access to hedge funds is generally available to eligible individual investors through financial advisors. Before investing, advisors and their clients should consider factors such as their investment objectives, risk tolerance, liquidity needs, and time horizon to determine whether hedge funds may be appropriate.

Past performance does not predict future returns. Diversification does not ensure a profit or protect against losses.