BlackRock Says Hedge Funds Are Key as Diversification Falters in Volatile Markets

Hedge funds are well positioned to turn alpha opportunities — arguably more plentiful than they’ve been since the global financial crisis — into a source of differentiated returns, even as traditional tools like diversification and static asset allocation fall short in an environment marked by macro risk.

In its fourth quarter hedge fund outlook, Raffaele Savi, global head of BlackRock Systematic, makes the case that investors need hedge funds to build resilience into their portfolios as markets “lurch, pivot, and accelerate in unexpected ways.”

In fact, “AI has delivered a blunt but powerful truth: Scale beats cleverness,” writes Savi, adding that scale can inform investing as well. BlackRock, the world’s largest asset manager, is betting that its scale advantage in data gives it an edge in finding alpha signals in text, images, and other alternative sources. Its compute power allows it to do real-time stress testing and quickly change direction when news sends markets surging or plummeting.

In recent months BlackRock has taken bold positions on hedge funds. In August, the world’s largest manager published research finding that that some investors can increase their hedge fund allocation by five percentage points — without ramping up risk.

The end-of-year outlook also includes market views from top investors at the firm, including Tom Becker, senior portfolio manager of the Global Tactical Asset Allocation team, on global macro, fundamental equity, and event-driven strategies.

Savi says the multistrategy hedge fund uses AI text analysis to identify and exploit opportunities popping up in the widening dispersion between global market policies and trade. While AI text analysis isn’t new or uncommon in the industry, BlackRock drills down, writing “our tools recalibrate exposures in near real-time” so it can move away from “overextended” stories and toward less crowded themes.

BlackRock says its signals now indicate quiet but persistent inflation, a softening labor market, except for the highest earners, and tariff policies that are making it difficult to predict earnings for many companies. As a result, in Europe, the systematic group is positioning the multistrat for a steepening yield curve, favoring value over growth for example, and it continues to be overweight technology names. In a contrarian move, the fund favors companies that are using AI in their operations and products, rather than rebuilding their business models. The fund also holds long positions in companies that will benefit from government stimulus in defense and energy and is short companies in sectors such as food that are sensitive to tariffs and where it believes investors haven’t fully priced the risks.

Investors need to think differently about classic concepts like a long-term portfolio with 60 percent in stocks and 40 percent in bonds.

“In a world of fragmented cycles and constant macro resets, strategies that are scale-enabled, cross-asset and risk engineered seek to deliver what 60-40 alone cannot: persistence, adaptability, and differentiated returns.”