The evolution of hedge fund performance: From enhancer to diversifier

Kumar Panja · J.P. Morgan

Manager dispersion is huge, so manager selection matters more than strategy or average returns.

Kumar says averages hide wide dispersion. In equity long/short, managers at the 75th percentile returned over 12%, while those at the 25th percentile were barely positive at 0.5%. Even in the best-performing strategy, outcomes vary dramatically, which he says highlights the importance of manager selection. Long-only managers have been more consistently successful, with a median return of 12% versus 5.65% for equity long/short.

“And the biggest story is, for us, is dispersion, not just returns.”at 2:44

Kumar Panja · J.P. Morgan

Hedge fund portfolios have shifted from return enhancers to diversifiers, but leverage and crowding are eroding that diversification.

Institutional hedge fund portfolios were once built mainly to enhance returns, but are now built to diversify. Investors raise concerns that some managers run high leverage, and that leverage combined with crowding or concentration means hedge funds may provide less diversification than planned. Kumar calls this a sentiment not yet backed by flows. He also says tail-hedging managers are a useful tool in principle, but the strategy has been costly, with capital bleed over recent years, though there are exceptions.

“So traditionally, a hedge fund portfolio was very much built to be, in some case, a return enhancer... Nowadays, they're built to be a diversifier.”at 7:53

Kumar Panja · J.P. Morgan

Tail-hedging hedge fund strategies have been very expensive, eroding capital, though notable exceptions exist.

Kumar says portfolio theory makes tail hedging a useful tool, but tail-hedging strategies have been very expensive over the last few years, causing capital bleed and erosion. He caveats this by noting there have been and continue to be some notable exceptions. As a result, fewer investors use hedge funds as protectors and more use them for diversification.

“tail hedging strategies have been very expensive in terms of capital bleed and capital erosion over the last few years.”at 8:36

Kumar Panja · J.P. Morgan

Institutional investors plan to keep or raise hedge fund allocations, with new capital driving most of the growth.

Kumar cites a large investor survey in which 98% of investors expect to maintain or increase their hedge fund exposure. 53% of incremental hedge fund exposure is coming from newly deployed capital, not just compounding. He treats new money as the key barometer that investors are voting for hedge funds, and says feedback from the wider investor base points to continued inflows despite recent dislocations.

“So just to back up, so the investor sentiment... continues to be positive. And just to give you a stat from that survey, 98% of investors expect to maintain or increase their hedge fund exposure.”at 11:07

Kumar Panja · J.P. Morgan

Allocators strongly favour large hedge fund managers: 86% of H1 2026 flows went to managers above $5bn AUM.

In the same survey, 86% of the roughly $90bn of hedge fund flows in the first half of 2026 went to managers with more than $5bn of AUM. Kumar uses this as evidence of a clear preference for larger managers. He links it to scale: large multistrategy managers can absorb the large checks that big institutional investors want to deploy.

“So another statistic from that survey that's quite interesting is 86% of the $90,000,000,000 of flows in the first half of twenty twenty six this year have gone to managers with greater than $5,000,000,000 of AUM.”at 11:55

Kumar Panja · J.P. Morgan

Quant strategies, especially stat arb and high-frequency quant, are the most in-demand hedge fund strategies.

In the investor survey, statistical arbitrage and high-frequency quant have been the most in-demand strategies. Kumar links this to strong quant performance this year. He also says investors' understanding of how systematic strategies fit into a wider portfolio has grown, so more investors are now including quant in their portfolios. Quant is therefore moving from a popular niche to a standard allocation.

“Statistical arbitrage, high frequency quant have been most in demand.”at 12:24

Kumar Panja · J.P. Morgan

Multistrategy hedge funds deliver high-single to low-double-digit uncorrelated returns, which attracts investors.

Kumar says multistrategy funds have shown they can deliver high-single to low-double-digit returns that are uncorrelated with markets through the cycle. That is attractive to investors, especially with worries about leverage and a need for managers who can perform. Their scale also suits the large checks institutions want to deploy, which supports demand.

“And as we said before, Multistrats have proven that they can provide that high single, low double digit, uncorrelated return through the cycle.”at 13:06

John Schlegel · J.P. Morgan

Equity hedge fund clients have delivered more alpha in down markets than in up markets.

Schlegel's firm sees, in its equity client data, that hedge funds generate more alpha when markets are falling than when they are rising. He presents this as an interesting pattern. Kumar agrees that hedge funds have historically been able to protect capital, even if a net long book does not make money in a downturn. The argument rests on one client-data observation, so it is tentative.

“we actually see in the equity space, [at least] clients delivering more alpha when the markets are down than when they're up.”at 16:49

Kumar Panja · J.P. Morgan

Asia-Pacific hedge funds have far outperformed; geography matters as much as strategy, drawing global investor interest.

Kumar's data show a large regional gap within the same strategy. APAC equity long/short managers averaged 22% year to date, versus 4% in EMEA and 9% in the Americas. In several cases the gap between regions for the same strategy was larger than the gap between different strategies. He links rising investor interest to performance chasing and to Asia having been underweight in global portfolios, so the two factors have come together.

“in several cases, the gap between the same strategy in different regions was larger than the gap between entirely different strategies.”at 5:17

John Schlegel · J.P. Morgan

Hedge fund leverage is high and rising but tracks market growth, so it has not overshot.

Schlegel accepts that hedge fund leverage is objectively higher and trending up, which regulators and others have flagged. He argues the wider context matters. Market capitalisation, turnover and retail participation have all grown significantly over five to ten years. Levered hedge fund assets have only kept pace with those market metrics rather than exceeding them. As long as markets hold up, he sees no big disconnect. He says this needs watching over the next few years, depending on whether AI-led growth and economic growth continue.

“we're only seeing the total assets on a levered basis kind of keep up in line with those market metrics rather than exceed them.”at 10:23

John Schlegel · J.P. Morgan

JPMorgan's house view is that US equities will rise into year-end, with a sharp Q4 selloff unlikely.

The JPMorgan house view is still fairly constructive, and equities are expected to go higher into year-end. The AI theme is still expected to drive the market and remains helpful for client portfolios. Historically, when the S&P has been up more than 10% through September, it has rarely fallen in Q4, and by his count it fell more than 1% in only one of those years. He calls a sharp Q4 selloff statistically very unlikely. The main risk is a significant reversal in the AI theme, which would be challenging for many funds, though he says clients are not heavily exposed directionally.

“So equities generally we think will go higher into year end.”at 14:54

John Schlegel · J.P. Morgan

Bond yields may ease from recent highs but stay elevated; hedge funds are leaning short bonds.

Schlegel expects yields to come off the recent highs somewhat but still stay more elevated than before. He says hedge funds have been leaning short bonds, especially systematic funds, which have made good money as yields trended higher. He flags the risk that a surprise drop in yields would make bonds rally hard, but notes that yields usually fall on recession fears, which would be a very negative scenario.

“Bond yields may come off a little bit from the recent highs that we're seeing, but still could remain a bit more elevated.”at 15:04