Why Hedge Fund Selection Matters More Than Ever

Periods of market euphoria often encourage excessive risk-taking, the consequences of which only become apparent when the cycle turns.

Earlier this year, in our article Hedge Funds: 2026, the Year of Discipline, we argued that risk management would be one of the key differentiators in 2026. Looking back, that assessment appears to have been well founded.

For hedge fund selectors, 2026 has generally been a constructive year. Yet the environment has been anything but straightforward. Geopolitical tensions, the conflict involving Iran, persistent political uncertainty in the United States and the growing concentration of investment flows around artificial intelligence have created particularly demanding market conditions.

Equity long/short managers have, on the whole, generated positive alpha. Until the end of the second quarter, results were supported by sound sector allocation and effective stock selection. July, however, marked a sharp reversal. According to Goldman Sachs Prime Brokerage, it was the most destructive month for alpha generation since January 2022.

In an environment characterised by extreme market concentration, even highly disciplined managers struggled to avoid simultaneous losses on both long and short positions, despite the MSCI World Index ending the month in positive territory. The situation was further amplified by the collapse of a hedge fund heavily exposed to the artificial intelligence theme. Its concentrated and highly leveraged portfolio failed to withstand margin calls, triggering forced selling that reverberated across the broader hedge fund industry.

This episode serves as a reminder of a simple but critical reality: when markets become dominated by only a handful of investment themes, manager selection becomes increasingly important. Moments of euphoria often encourage excessive risk-taking, while the consequences tend to emerge abruptly when sentiment shifts.

At the same time, the hedge fund industry has attracted substantial inflows over the past five years. Several high-profile managers now oversee more than USD 100 billion in assets, while many multi-strategy platforms have experienced remarkable growth. At that scale, delivering differentiated performance becomes increasingly challenging. Maintaining a selective approach is therefore essential in order to avoid future disappointments.

We continue to favour two areas in particular: niche managers with limited capacity and strategies that still offer meaningful alpha potential, especially in Asia and within certain quantitative approaches.

Dispersion Creates Opportunity

Global Macro strategies have also experienced significant performance dispersion this year. In a volatile environment, the strongest managers have demonstrated an ability to manage risk effectively while adapting rapidly to changing market conditions. We continue to see particular merit in macro strategies given the economic and geopolitical uncertainties that remain. Access to the most talented managers, however, remains difficult and represents a meaningful advantage for investors with long-standing relationships across the industry.

Perhaps the most encouraging development this year has come from Asian long/short equity managers, particularly those focused on China. These managers successfully captured a meaningful share of the upside related to artificial intelligence while simultaneously reducing exposure during periods of market weakness. Their ability to adapt resulted in significant alpha generation while providing valuable diversification within portfolios.

Hedge Fund Selection Remains the Key Driver of Alpha

The hedge fund landscape continues to offer a wide range of opportunities, but manager selection and ongoing monitoring remain the primary drivers of long-term success. While private banks and investment platforms increasingly facilitate access to many of the industry’s best-known names, that is only part of the equation. The most compelling opportunities are often found among less widely known managers with limited capacity, specialised expertise and a genuine competitive edge. It is precisely in this segment of the market that active manager selection continues to create value.

Written by Cédric Dingens

Read the original French article published in AllNews:
Hedge Funds: la sélection fait toute la différence

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities.

References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.

Additional information is available on request.

© NS Partners Group

“From TINA to TALA”

Long deprived of a real alternative to equities, investors now find they are spoiled for choice.

In recent years, with the market dominated by zero interest rates and low volatility, most investors accepted the philosophy of TINA – “there is no alternative” – to equities. The result was an unprecedented bull market that hamstrung those hedge fund managers seeking to add value through active management. Now, though, the tables have turned and, at long last, we are seeing hedge funds and alternative strategies making a comeback. In fact, the mantra now is more TALA – “There are lots of alternatives”. We give a snapshot of the winning strategies of 2022 and the front runners for 2023.

Talent back to the fore

The last 18 months brought a brutal revival in inflation, and in 2022 the Fed unleashed one of the steepest series of rate hikes in its history. Meanwhile, the resurgence of economic uncertainty revived volatility across all asset classes. This was bad news for most in the markets, but not all. It put talented traders back in the limelight.

Long/Short Equity funds on the ropes

Last year was undeniably challenging for trading on equity markets, which rotated between Value and Growth stocks at least once a month on average. This was bad news for Long/Short Equity fundamentals managers, particularly those with a growth and quality bias and general underweight to the energy sector. While they did manage to generate positive alpha on the short positions, 2022 was still one of the worst ever years for alpha on long positions for the reasons sketched out above.

Tough times for Equity managers

With rising interest rates calling the shots – as is clear from the MSCI World’s near perfect inverse correlation to the US 10Y bond – equity markets were clearly tough for managers working on fundamentals, whose picks heavily underperformed with no fundamental logic. In consequence, the HFRI Equity Hedge fund lost -10.4% in 2022, with losses of -17.1% for AKO Europe, -12.0% for Blackrock Strategic and -12.7% for Egerton. However, in Q4 2022 the tide turned, and the start of 2023 provided much better pickings for these managers.

Rebound should be good news

The encouraging news is that, if we crunch the numbers for alpha generation by Long/Short Equity funds over 30 years, a distinctly cyclical pattern emerges. In other words, as interest rates move back to normal, 2023 could well bring a return to healthy performances for Long/Short Equity funds. All the more so in relative terms as it is currently hard to see equity markets mounting a strong rally amid a slowing economy and downgrades to company earnings forecasts.

China, meanwhile, had its own story to tell, with volatility running at highs. In this environment, Chinese Long/Short Equity managers proved pretty successful, substantially beating the Eurekahedge Greater China L/S index, which dropped -14.6% in 2022, compared to -23.6% for the MSCI China. Managers were largely successful in hedging the falls and then ramping up risk exposure in recent months to capture much of the market rally. This combination persuades us to retain exposure to the Chinese market via a Long/Short Equity approach.

A stabilising role for Relative Value

Relative Value strategies, meanwhile, had a stabilising influence on portfolios. According to UBS HF PB, Relative Value hedge fund managers averaged a +3.9% performance in 2022. Funds such as Millennium +11.7%, DE Shaw Oculus +20.4% and Balyasny Atlas Enhanced +10.4% added substantially to their AuM. Their model means they can hire the top traders and their ability to effectively manage risk means they can deliver performances with little correlation to the market. As many are also low in volatility, they offer portfolios an alternative to fixed-income positions that avoids the consequences of rate movements. Expected returns remain attractive, particularly if volatility continues to run relatively high.

And the winner is…

Finally, the top winning strategy in 2022 was discretionary Global Macro. For hedge funds, this is in a way a return to their roots in the 1970s and 1980s, when markets were beset by a lack of clear direction and high inflation. Looking again at the data of UBS HF PB, discretionary macro managers made +23.1% last year. A lot of money was made betting on rate rises, which allowed a specialist in these markets like Rokos to post +50.9% performance in 2022. Their opportunist approach and ability to apply risk across all asset classes, has given them a much-enlarged playing field recently. What is more, their preference for futures and options means they can be long convexity, giving the funds an attractive asymmetry. Another bit of good news is that they are now being paid to sit and wait, giving them greater flexibility in how they manage their book. Among the stand-out performances of 2022 we must mention Caxton Macro with +34.8% and Brevan Howard Master +20.1%.

It is hard to say how 2023 will pan out, but there can be no doubt that active strategies are back in vogue. At heart, it is a question of investment philosophy, and a willingness to sit back in peace, while your savings do their work on the markets.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.

Active investment to finance an active retirement

By actively managing their pension assets people can maintain their lifestyles and therefore ensure they have an active retirement

When we think about our retirement, we most often imagine being able to finally take advantage of the time no longer spent working to travel the world or devote more time to our interests or families. The 80s/90s dream, which allowed people to hope that the second pillar would enable them to lead the same lifestyle is now being undermined, however, by the protracted fall in yields and longer life expectancies. This could make our retirements, which we saw as well-deserved and care-free, a dreaded prospect and a source of anxiety.

More difficult markets on the horizon

The markets are admittedly hardly reassuring. Given the major geopolitical uncertainties, which are jeopardising the globalisation-based economic model that has ensured our prosperity for the last 30 years; the return of inflation, which is the mortal enemy of pensioners; the policy shift by central banks, which are announcing interest rate hikes that are bad news for bond and real estate investments; and relatively expensive equities, volatile and complex markets are to be expected in the years to come. This of course creates not insignificant risks for pensions.

The end of the 60/40 portfolio

In addition to increased volatility, we should also see a sharp fall in returns on conventional 60% equity/40% bond portfolios. The investment group AQR believes, for instance, that the real annual performance (after inflation) that might be hoped for from this type of portfolio is likely to be only 2.1% for the next 5 to 10 years, in other words half the historic average.

An investment approach more suited to negative headwinds

In such circumstances, it therefore seems vital to switch, for our pension assets, from mostly passive investing based on index-linked investments, to a more active investment style able to quickly adapt to changing conditions. The adopting of an investment strategy with a target absolute return is all the more important as it takes a long time to make back any capital lost, which is too often forgotten. Note, for example, that a 50% loss requires a 100% rise to get back to where you started, rather than a 50% rise, although this might seem more intuitive. Due to its flexibility, this “all-weather” investment approach allows investors to benefit from price exaggerations or any opportunities that may arise during periods of volatility. It also generates positive returns, even in opaque or bear markets.

Pension funds are (finally) taking an interest in alternative strategies

For a long time, alternative funds and conviction-based investing have been the preserve of high net worth private investors. This is underlined in a UBS study showing that family offices invest 43% of their assets in alternative instruments. As a result of better knowledge of the techniques used and greater transparency, institutional investors have being showing an interest over the past few years though, prompted by the successful example of the Yale University endowment funds, which allocate more than 75% of their assets to alternative strategies in general, including 23.5% allocated to hedge funds. That said, more risk-averse Swiss pension funds are limiting themselves to an average allocation of between 8% and 10%.

Active pension asset management solutions are available

Although it is difficult, at an individual level, for a person to influence the investment policy of their occupational pension fund (LPP), investment strategies that are more in keeping with their wishes can still be chosen through third pillar or vested benefits foundations. By looking beyond the lacklustre products offered by the big banks or insurance companies, people can indeed find dynamically-managed solutions that include significant allocations to alternative strategies, available from private banks and independent asset managers.

A considerable impact on your retirement

Why concern yourself with how your pension assets are managed? Quite simply because, given the particularly long time horizon for this type of investment, an apparently modest difference in annual returns will become a yawning gap over time. For example, after 10 years, an annual return that is 2% higher translates into +21.9% extra capital. After 20 years, the capital gain rises to +48.6%, and +81.1% after 30 years. This may have a very tangible impact on the capital and annuities available to you on your retirement. If you invested CHF 1 million in a vested benefits product, this would equate to CHF 810,000 after 30 years, increasing your annuities by CHF 44,000 assuming a 5.4% conversion rate.

And these thousands of extra francs each month could mean the difference between a retirement marred by financial uncertainty and care-free golden years when you can finally make the most of your free time!