Hedge funds poised for larger role in private wealth portfolios

This article was first published in FT Adviser on 18th June 2025 here.

Hedge funds are often perceived as suitable only for institutional investors, but they can be a valuable addition to investment portfolios for a broader investor base. Wealth advisors, in particular, should consider hedge funds as a compelling option for portfolio diversification—and demand is growing.

This interest stems from widespread dissatisfaction with the performance of traditional 60/40 portfolios and alternative assets like private credit and real estate. The key question for financial advisors is no longer how many strategies are in an investment portfolio, but whether those strategies truly diversify risk.

What Does True Diversification Look Like?

Diversification is frequently misunderstood as simply holding a balanced mix of asset classes—equities, bonds, currencies, and alternatives. But when markets falter, as they did in early 2025, many investors discovered their portfolios weren’t as diversified as they thought.

Alternative assets such as private credit and real estate often behave similarly to traditional investments. Private credit is typically exposed to the same macroeconomic risks as traditional credit, while real estate is sensitive to inflation and interest rates. These are not true diversifiers—they’re familiar risks in different packaging.

To improve outcomes, advisors must seek investments that behave differently from existing holdings – recognizing that finding these differentiated investments can be difficult because there are many similar investment options in the equity and fixed income world today.

Why Hedge Funds?

Hedge funds are one such attractive investment option for financial advisors and certain high-net -worth-individuals that are seeking diversification. Their broad investment universe and flexibility—such as the ability to go long or short, use relative value strategies, and operate across time horizons—make them uniquely positioned to navigate volatile markets. They also tend to employ rigorous risk management, often leveraging large data sets to inform decisions.

According to Barclays’ Hedge Fund Outlook, hedge funds have rebounded in recent years, delivering a 10.1% return last year—outpacing 2023. Post-COVID, they’ve shown resilience amid market turbulence and shifting investor sentiment.

As such, the appetite to invest in hedge funds has grown.

Strength in Volatility

In recent years, we have seen traditional diversification struggle in the face of inflation shocks, geopolitical tensions, and policy shifts, and we’ve seen that even well-constructed portfolios are not immune to drawdowns when macro forces hit. In such environments, correlations break down, and hedge funds have demonstrated their value by capitalizing on volatility and identifying market signals.

The Role of Systematic Strategies

Systematic hedge fund strategies are particularly effective diversifiers. They rely on diverse inputs and signals, trading in multiple directions without depending on a single market view or discretionary judgment. This adaptability makes them well-suited for today’s complex markets.

A Growing Opportunity for Wealth Advisors

Hedge funds are increasingly seen as a way to enhance the traditional 60/40 equities and fixed income portfolios, and serve as substitutes to alternative assets like private credit and real estate, especially for high-net-worth individuals. As demand for uncorrelated returns grows, hedge funds are poised to play a larger role in private wealth portfolios.

Disclaimer: All opinions and estimates included in this document constitute judgments of CFM as at the date of this document and are subject to change without notice. Future evidence and actual results could differ materially from those set forth, contemplated by or underlying these statements. CFM does not give any representation or warranty as to the reliability or accuracy of the information contained in this document. CFM accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. This is general information and should not be considered as investment advice or a solicitation to offer or subscribe to any security or interest.