Institutional investors ought to boost their allocation to hedge funds to unlock potentially superior returns, according to BlackRock.
In the asset manager's latest Investment Institute publication, strategists advocated for increased capital deployment into hedge funds, citing how persistent economic uncertainty and geopolitical strife are undermining returns from conventional investment vehicles like bonds and equities, as reported by .
The world's largest asset manager contended that hedge funds possess the capability to weather heightened market volatility, thereby creating enhanced opportunities for institutional investors.
READ MORE: {}
The research noted that the "loss of long-term macro anchors" - the reliable drivers of sustained growth such as steady expansion and controlled inflation that investors previously depended upon - has rendered the asset class increasingly appealing to fund selectors.
The paper said: "Structural shifts, like geopolitical fragmentation, are reshaping economies."
"We see hedge funds emerging as a key tool in portfolio construction as a result."
Generating superior returns
Following a spell of lacklustre performance that prompted numerous investors to redirect capital towards private equity and private credit, the sector is gradually returning to favour as more funds post robust returns.
Hedge funds have demonstrated superior ability to capitalise on the evolving economic landscape compared to traditional investment vehicles, resulting in enhanced performance. According to BlackRock, leading hedge funds have generated "greater excess returns since the pandemic."
Most Read
Specifically, macro hedge funds, an investment approach that concentrates on worldwide events rather than equity markets, has enhanced investor returns by capitalising on the significant market volatility triggered by economic uncertainty.
Don't treat hedge funds like alternatives
BlackRock also advocated for the necessity of removing the asset class from the "alternative" investment category, which encompasses private equity and debt, as these frequently impose restrictions on investment amounts.
Strategists suggested that by "breaking up that bucket" and establishing a distinct allocation for hedge funds, investors would be capable of deploying additional capital without encountering constraints.
The research proposed this could be achieved by reallocating assets from other portions of investors' portfolios, particularly by "trimming developed market government bonds and equities."