Key Takeaways
- • The BlackRock Investment Institute (BII) published a paper titled "More room for hedge funds," arguing hedge funds are emerging as a key portfolio tool in today's more volatile macro environment.
- • BII believes some investors can hold up to 5 percentage points more in hedge funds than they did before 2020, holding risk preferences and governance constraints equal.
- • BII identifies the loss of long-term macro anchors (stable growth, contained inflation expectations, fiscal discipline) as the defining feature of a new regime driven by mega forces such as geopolitical fragmentation and AI.
- • Top-performing hedge funds, especially macro hedge funds, have delivered greater excess returns since the pandemic, according to BII research, while static factor exposures have become a drag on returns.
- • BlackRock manages $80bn in client assets through hedge funds globally and ranks among the top 10 hedge fund managers (data as of March 31, 2025).
Summary
The BlackRock Investment Institute (BII) has published a new paper, "More room for hedge funds," arguing that hedge funds are emerging as a key tool for harnessing returns in today's more volatile macro environment, according to a report by Hedge Fund Alpha. The BII contends that some investors can hold up to 5 percentage points more in hedge funds than they did before 2020, provided risk preferences and governance constraints are held equal. The paper is the first part of a portfolio construction series that rethinks the "neutral" multi-asset allocation for a world without macro anchors.
The central thesis rests on the loss of long-term macro anchors, including stable growth, contained inflation expectations and fiscal discipline, which underpinned portfolio construction for decades. BII characterizes this as part of a transformation driven by mega forces such as geopolitical fragmentation and artificial intelligence, producing a wider range of potential outcomes for growth, inflation and government debt and deficits. According to the research, static exposures to factors such as growth, inflation or the value equity style factor are now a drag on portfolio returns, a sharp change from the decade following the 2008 global financial crisis.
On alpha generation, BII finds the current environment is better than the prior decade for achieving above-benchmark returns. Top-performing U.S. equity fund managers have delivered greater alpha and reduced the drag of macro risk since 2020, although the average manager has not become more skilful. BII defines skill as performance in the top quartile among alpha-seeking portfolio managers. Elevated dispersion of individual S&P 500 stock returns, which surged in 2020 and has stayed above post-GFC levels, is cited as supporting the greater reward for skill.
BII recommends sizing hedge fund allocations by client-specific liquidity, governance and risk constraints rather than treating hedge funds as one more component of an "alternatives" bucket alongside private markets. One suggested funding route is trimming developed market government bonds and equities, depending on the risk added, with no change to private market allocations. BlackRock manages $80bn in client assets through hedge funds globally and is one of the top 10 hedge fund managers, with data as of March 31, 2025.
The central thesis rests on the loss of long-term macro anchors, including stable growth, contained inflation expectations and fiscal discipline, which underpinned portfolio construction for decades. BII characterizes this as part of a transformation driven by mega forces such as geopolitical fragmentation and artificial intelligence, producing a wider range of potential outcomes for growth, inflation and government debt and deficits. According to the research, static exposures to factors such as growth, inflation or the value equity style factor are now a drag on portfolio returns, a sharp change from the decade following the 2008 global financial crisis.
On alpha generation, BII finds the current environment is better than the prior decade for achieving above-benchmark returns. Top-performing U.S. equity fund managers have delivered greater alpha and reduced the drag of macro risk since 2020, although the average manager has not become more skilful. BII defines skill as performance in the top quartile among alpha-seeking portfolio managers. Elevated dispersion of individual S&P 500 stock returns, which surged in 2020 and has stayed above post-GFC levels, is cited as supporting the greater reward for skill.
BII recommends sizing hedge fund allocations by client-specific liquidity, governance and risk constraints rather than treating hedge funds as one more component of an "alternatives" bucket alongside private markets. One suggested funding route is trimming developed market government bonds and equities, depending on the risk added, with no change to private market allocations. BlackRock manages $80bn in client assets through hedge funds globally and is one of the top 10 hedge fund managers, with data as of March 31, 2025.
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