Higher short-term rates boost ILS returns, reshape hedge fund attribution: Agecroft’s Steinbrugge

Higher short-term interest rates are providing an additional source of return for insurance-linked securities (ILS) and are reshaping strategy-level return attribution across the hedge fund industry, according to Don Steinbrugge, Founder and CEO of Agecroft Partners. Writing in a recent article, Steinbrugge argues that shifting macroeconomic conditions are changing which management styles deliver relative performance, and that the underlying drivers of an investment's return now carry as much weight as its headline figures.

Steinbrugge says strategies that hold substantial cash or collateral, including quantitative funds, low-net relative-value strategies, and ILS, are earning an extra return on their short-term holdings. Highly leveraged strategies, by contrast, face mounting pressure from elevated financing costs. He notes that while investors often associate rising rates with falling asset values, the effect on hedge fund strategies is more nuanced, because some benefit from higher short-term rates while others see financing costs materially reduce returns.

Steinbrugge placed the change in context: after more than a decade of near-zero short-term rates, investors can again earn a meaningful return on cash and short-term Treasury securities. As of September 2026, the Federal Reserve's target range for the federal funds rate was 3.75% to 4.00%, with more increases expected. Inflation has declined significantly from its 2022 peak but remains above the Fed's 2% target. He stressed that this distinction is particularly important for institutional investors evaluating hedge fund performance.