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IN THIS PAPER
Classic statistical diversification is not necessarily enough to justify an allocation to Hedge Funds or Liquid Alternatives. Investors are increasingly concerned with downside awareness and the portfolio’s ability to navigate falling or volatile markets. This paper considers the diversification power of strategies in four distinct ways—‘market-independence’, ‘non-directionality’, ‘convex directionality’ and ‘divergent performance’—and re-classifies a range of hedge fund and liquid alternative strategies with these lenses in mind.
Creating sub-allocations to market-independent and convex (or tactical) directional strategies: While portfolio design should depend on the existing exposures and the objectives of the investor, these two complementary groups can work together to provide a more robust, downside-sensitive profile.
The hedge fund (and broader liquid alternative) universe continues to grow in size and complexity. Investors should seek to gain a comprehensive understanding of available strategies when constructing a diversifying allocation.
WHY DOWNLOAD?
Against the backdrop of stretched equity valuations and tight credit markets, clients are looking at hedge funds to diversify both their equity and fixed income exposures.
The level of client conversations and engagement around hedge funds – which is often a pre-cursor to search activity at bfinance – signify to us pronounced near-term appetite for the asset class. As such, we expect similar or higher levels of client hedge fund search activity in 2026 than we saw 2025, itself the third year of strong appetite.
The paper will help investors step back and consider the mechanics of how hedge fund allocations can be designed and constructed.
Important Notices
This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
