Artificial intelligence Is Changing the World. But Will It Change Long-Term Equity Market Returns?

 

Artificial Intelligence is transforming industries, reshaping business models and accelerating productivity across the global economy. Many investors therefore assume that AI will also permanently increase stock market returns. But history tells a more nuanced story. Looking back at previous technological revolutions—from the personal computer and the Internet to cloud computing and smartphones—provides valuable perspective on what AI may, and may not, mean for long-term investors.rtificial Intelligence is transforming industries, reshaping business models and accelerating productivity across the global economy.

Many investors therefore assume that AI will also permanently increase stock market returns. But history tells a more nuanced story. Looking back at previous technological revolutions—from the personal computer and the Internet to cloud computing and smartphones—provides valuable perspective on what AI may, and may not, mean for long-term investors.

Artificial Intelligence Is Changing the World. But Will It Change Long-Term Equity Market Returns?

Written by ANGEL SANZ

Download PDF version AI Is Changing the World. But Will It Change Long-Term Equity Market Returns?

This content is provided for information purposes only and does not constitute investment advice, an offer, solicitation or recommendation to buy or sell any financial instrument or investment product.

The views and opinions expressed are those of NS PARTNERS SA at the date of publication and may change without notice. References to specific securities, sectors or market developments are provided for illustrative purposes only and should not be interpreted as investment recommendations or investment research.

Past performance does not predict future returns. The value of investments and the income derived from them may fluctuate and investors may not recover the amount originally invested. Investments involve risks, including possible loss of capital.

References to market indices, benchmarks or other measures of relative market performance are provided for information purposes only. NS PARTNERS SA makes reasonable efforts to ensure the accuracy of the information contained herein but provides no warranty or representation as to its completeness or accuracy.

Some entities of the NS Partners Group or their clients may hold positions in the financial instruments mentioned or may act as advisor to related issuers.

This content may not be distributed or used in any jurisdiction where such distribution or use would be contrary to local laws or regulations. Additional information is available upon request.

© NS Partners Group

does the traditional fund of funDs model still have a future?

 

As a firm, NS Partners has been involved in managing fund of hedge funds strategies for almost 57 years. Back in the 1990s, almost every private bank in Switzerland managed its own fund of funds for clients. At the time, it was relatively easy to generate double-digit returns: there were fewer hedge funds (and therefore less competition), while regulation remained light. The introduction of Regulation Fair Disclosure (Reg FD) in 2000 marked the end of the “fast money” era.

Given their success, many fund of funds became too large and suffered from the classic “diworsification” syndrome, which subsequently led to sub-par returns. Fast forward to today and most traditional fund of funds have disappeared, having largely been cannibalized by pod shops. The liquidation of Leverage Capital Holdings, one of the world’s oldest hedge fund of funds, in 2025 is a sign of the times.

Today, most investors have gravitated towards the multi-strategy pod-shop model, which has proven more efficient at allocating capital and cutting losses, despite being significantly more expensive than the traditional fund of funds approach. Others have turned to tailored hedge fund solutions offered by private banks.

With hedge fund assets at an all-time high, the number of new fund launches has steadily declined over the last 20 years. This highlights how the billion-dollar club of hedge funds continues to grow, attracting an ever-increasing share of industry assets.

As we all know, performance is typically inversely correlated with growth in assets under management. More importantly, the strongest portion of a manager’s track record is often generated during the first three to five years after inception—the very period before most institutional investors are willing to allocate capital.

At NS Partners, we have a long and proven history of backing hedge fund managers in their early innings, particularly in the equity long/short space. This has enabled us to build strong partnerships over time, often resulting in capacity rights, preferential fees and attractive liquidity terms. As a result, a concentrated fund of funds strategy can remain highly competitive compared with alternative hedge fund structures.

It is worth remembering that George Soros launched the Quantum Fund with a 1% management fee and a 10% performance fee. Somehow, 2%/20%—and often considerably more once pass-through costs are included—became the industry norm.

This month’s chart illustrates the performance of our equity long/short strategy over the last four years versus the average equity long/short fund of funds and the Barclays Multi-PM Equity Index over the same period.

 

So What Options Are Left in Today’s World of Hedge Fund Alternatives?

The Advisory Mandate

• Buy high and sell low (everyone chases past performance—that’s human nature), making underperformance versus a concentrated fund of funds strategy highly likely.
• Access to the best talent is often limited by capacity constraints.
• Rarely invests alongside managers at an early stage.
• Layered fee structures.

The Pod-Shop Model

• Attractive risk-adjusted returns, although the most successful platforms are often capacity constrained.
• Significant use of leverage, sometimes excessive.
• Large numbers of underlying portfolio managers (often 100+) with the strongest contributors becoming less scalable over time.
• Factor hedging can be detrimental to performance, particularly over the last two years.
• High barriers to exit through both investor- and fund-level gates.
• End investors can surrender more than 55% of gross performance through pass-through cost structures.
• Often exposed to pod deleveraging events that can impair performance.

The Quant-Shop Model

• High turnover and short investment horizons (from intraday to approximately 30 days), which have benefited recent performance.
• Constant need to reinvent investment signals due to crowding and signal decay.
• Frequently employs even more leverage than pod shops.
• Investors rarely know precisely when or why losses occur (e.g., the “Quant Winter” from 2018 to 2020).
• Relies primarily on algorithms with limited human intervention.

The Traditional Directional Fund of Funds Strategy

• Low-cost, high-conviction portfolio of managers (12 remains the lucky number).
• Backs managers before they reach the pinnacle of their careers.
• Provides access to managers whose minimum investment requirements often range from USD 1 million to USD 25 million.
• Liquid, with no investor-level gates that can delay capital returns for years.
• Uses less leverage.
• Highly difficult to replicate through an advisory mandate.

With pod shops and quant shops dominating market share today, perhaps it is time to revisit a less crowded and more focused fund of funds approach—one built around capacity-constrained managers with longer investment horizons.

The old-school approach of making directional equity bets with conviction, accepting that difficult years are inevitable, and relying on a disciplined long-term investment horizon may ultimately prove more rewarding than chasing year-to-date performance. Every strategy experiences setbacks, but a well-constructed short book can provide valuable protection along the way.

Beat Notz, our founding partner, is often quoted in research pieces published by Gavekal, a business he backed in the 1970s when it was known as Cecogest and was founded by Charles Gave:

Remember, it’s an easy business. When things get complicated, and markets are all over the place, just bear in mind that the Fed will always follow policies that benefit equity holders, because everyone in the US owns equities, and the Bundesbank will always follow policies that benefit bund holders, because everyone in Germany owns bunds. So, when markets are panicking and you don’t know what to do, just buy equities in the US and buy bunds in Germany.

Although bunds no longer exist, he was right about equities.

Written by CARON BASTIANPILLAI

Download PDF version Chart of the Month – Does the Traditional Fund of Funds Model Still Have a Future?

This content is provided for information purposes only and does not constitute investment advice, an offer, solicitation or recommendation to buy or sell any financial instrument or investment product.

The views and opinions expressed are those of NS PARTNERS SA at the date of publication and may change without notice. References to specific securities, sectors or market developments are provided for illustrative purposes only and should not be interpreted as investment recommendations or investment research.

Past performance does not predict future returns. The value of investments and the income derived from them may fluctuate and investors may not recover the amount originally invested. Investments involve risks, including possible loss of capital.

References to market indices, benchmarks or other measures of relative market performance are provided for information purposes only. NS PARTNERS SA makes reasonable efforts to ensure the accuracy of the information contained herein but provides no warranty or representation as to its completeness or accuracy.

Some entities of the NS Partners Group or their clients may hold positions in the financial instruments mentioned or may act as advisor to related issuers.

This content may not be distributed or used in any jurisdiction where such distribution or use would be contrary to local laws or regulations. Additional information is available upon request.

© NS Partners Group

PERMIAN PURE-PLAYS: WHY INDEPENDENT E&PS ARE EMERGING AS STRATEGIC EQUITY ASSETS

 

Recent instability in the Middle East has once again reminded energy markets that not all oil barrels carry the same value. When nearly one-fifth of global seaborne crude flows through the Strait of Hormuz, even a limited disruption can rapidly lift the geopolitical premium embedded in oil prices. In that environment, investors are increasingly forced to distinguish between oil producers exposed to geopolitical uncertainty and those positioned far from it. In this environment, Permian Basin equities are increasingly attracting investor attention as strategically positioned energy assets.

That shift in perception directly benefits the Permian Basin.

Stretching across West Texas and southeastern New Mexico, the Permian has become the most important oil-producing region in the United States, accounting for roughly 45% of total U.S. crude production and more than 40% of domestic proved reserves. Producing close to 6 million barrels per day, the basin now rivals major OPEC nations in scale while offering something many international producers cannot: political security, rapid development cycles, and low-cost supply.

The strategic appeal of the Permian lies in the quality of its barrels. These are politically secure barrels, located well outside maritime chokepoints, with breakeven prices often in the low $30–40 per barrel range. Unlike offshore or conventional megaprojects that require years of development, shale wells in the Permian can be drilled and brought online in a matter of months. That gives operators an embedded option on higher oil prices: if crude remains elevated, production can be adjusted quickly without committing to long-cycle capital spending. This combination of low-cost production and geopolitical insulation has strengthened the investment case for U.S. energy equities.

For equity investors, however, the most compelling opportunity may not be in the integrated majors, but in the independent pure-play producers.

Large integrated companies such as Exxon and Chevron use the Permian as part of a broader corporate system, where upstream production often serves downstream refining and chemical operations. That diversification provides stability, but it also dampens direct exposure to rising crude prices.

Independent operators such as Diamondback Energy, Permian Resources or Devon Energy offer a different proposition. Without downstream hedges, they retain much greater sensitivity to commodity prices, allowing shareholders to participate more directly in oil price upside. In periods of geopolitical disruption, that operating leverage can translate into disproportionately stronger cash flow.

Importantly, today’s Permian independents are no longer the aggressive shale producers of the last decade. The industry has undergone a structural transformation. Where companies once pursued production growth at any cost, management teams now prioritize return on capital at almost any oil price. Instead of reinvesting every dollar into drilling, many producers now focus on maintaining production while directing excess free cash flow toward base dividends, variable dividends, share repurchases, and debt reduction.

This shift has fundamentally changed the investment profile of the sector. As a result, leading independent E&P companies are increasingly viewed as disciplined hard-asset equities rather than purely cyclical commodity businesses.

Rather than behaving like speculative growth companies, leading Permian independents increasingly resemble disciplined cash-return businesses. Even at oil prices near $70–80 per barrel, many can generate attractive free cash flow yields while still maintaining modest production growth. The result is an equity class that can deliver income, inflation protection, and commodity upside simultaneously.

Yet despite this improvement, valuations remain undemanding. Independent Permian E&Ps continue to trade at a substantial discount to the broader equity market and often at lower multiples than the integrated majors. Investors are effectively paying less for businesses that now have stronger balance sheets, better capital discipline, and a more shareholder-friendly approach than at any point in the shale era.

That valuation disconnect suggests the market may still be pricing these companies as old-cycle commodity producers rather than recognizing their evolution into strategic energy assets.

The broader macro backdrop only strengthens the case. In a world defined by persistent inflation, geopolitical fragmentation, and supply insecurity, low-cost domestic oil producers can provide a natural hedge against many of the risks affecting traditional equity portfolios. Their earnings are tied less to consumer demand or technology spending and more to the physical value of energy itself.

In that sense, independent Permian producers are no longer simply oil stocks. They are increasingly becoming hard-asset equities—businesses that combine real asset exposure with disciplined capital allocation.

For investors seeking exposure to rising geopolitical risk without taking direct commodity ownership, the best Permian independents may offer one of the more compelling opportunities in global energy today. In a market where security of supply is becoming as valuable as the commodity itself, the most attractive barrels may be the ones located furthest from conflict—and the equities most exposed to them may still be undervalued. In today’s environment, Permian Basin equities increasingly represent a differentiated source of portfolio diversification and inflation resilience.

Written by MAXIMILIEN MESTELAN

Download PDF version Permian Basin Equities: Strategic Energy Assets in 2026

This content is provided for information purposes only and does not constitute investment advice, an offer, solicitation or recommendation to buy or sell any financial instrument or investment product.

The views and opinions expressed are those of NS PARTNERS SA at the date of publication and may change without notice. References to specific securities, sectors or market developments are provided for illustrative purposes only and should not be interpreted as investment recommendations or investment research.

Past performance does not predict future returns. The value of investments and the income derived from them may fluctuate and investors may not recover the amount originally invested. Investments involve risks, including possible loss of capital.

References to market indices, benchmarks or other measures of relative market performance are provided for information purposes only. NS PARTNERS SA makes reasonable efforts to ensure the accuracy of the information contained herein but provides no warranty or representation as to its completeness or accuracy.

Some entities of the NS Partners Group or their clients may hold positions in the financial instruments mentioned or may act as advisor to related issuers.

This content may not be distributed or used in any jurisdiction where such distribution or use would be contrary to local laws or regulations. Additional information is available upon request.

© NS Partners Group