Institutional investors should increase their exposure to hedge funds in order to generate potentially higher returns, Blackrock has said.
In the latest paper of the firm’s Investment Institute, strategists encouraged more money to be placed in hedge funds, as ongoing economic uncertainty and geopolitical tensions erode returns on traditional investment assets, such as bonds and equity.
The global asset manager argued that hedge funds have the ability to withstand the increased volatility affecting the market, granting greater opportunities for institutional investors.
The paper added the “loss of long-term macro anchors”, which investors relied on to drive long term-growth, such as stable growth and contained inflation, has also led to the asset class becoming a more attractive offer for stockpickers.
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.”
Delivering greater returns
After a period of disappointing performances, which saw many investors pivot to allocate funds into private equity and private credit, the asset class is creeping back into investor’s sights as more funds deliver stronger returns.
Hedge funds have been better able to take advantage of the changing economic environment over traditional investment funds, leading to higher returns.
According to Blackrock, top-performing hedge funds have delivered “greater excess returns since the pandemic”.
In particular, macro hedge funds, an investment strategy that focuses on global events rather than the stock market, has boosted investor returns by profiting from the large market swings caused by economic instability.
Don’t treat hedge funds like alternatives
Blackrock also called for the need to remove the asset from the “alternative” asset category, which includes private equity and debt, as they often have constraints to the amount that can be invested.
Strategists said by “breaking up that bucket” and creating a separate allocation for hedge funds, investors would be able to add more capital without hitting a limit.
The paper argued this could be done by moving assets from other areas of investors portfolio in particular by “trimming developed market government bonds and equities”.