Hedge funds emerge as ‘winners’ of JP Morgan AM’s new world order

JP Morgan Asset Management has upgraded its 10 to 15-year return forecast for diversified hedge funds by 140 basis points to 6.7%, highlighting the class as one of the "winners from this new world." According to the firm, the upgrade spans across all strategies, with event-driven funds rising 190 basis points to 7.1% and equity long bias increasing 180 basis points to 7.3%.

For investors holding sterling, diversified funds hedged into GBP now anticipate returns of 6.4%, up from 5.0%. The primary reason behind the upgrade is attributed to alpha rather than market beta. Higher interest rates contribute to the carry earned on short positions, while governments funding growth unlock new pools of capital and create opportunities for uncorrelated returns.

Additionally, more frequent macro and policy catalysts are expected to make relative value dislocations more common. However, a significant portion of the alpha boost is due to enhancements in JP Morgan's forecasting methodology from the current year, rather than a change in market view alone. The upgrade has substantial implications for portfolio construction, as allocating an additional 30% of a blend of diversified hedge funds, gold, infrastructure, and transport to a 60/40 portfolio is projected to boost its Sharpe ratio by 22% while preserving returns.

The report also indicates that macro strategies exhibit a lower correlation to US large cap equities and a positive correlation to the Bloomberg US Aggregate, making them an attractive option amidst increasing stock-bond correlations instability. Despite the upgrade, the firm cautions that global equity manager dispersion has remained elevated through 2026, even amidst economic expansion and robust earnings, a phenomenon historically linked to recessions or unexpected shocks.