Markets in 2026 are not what they were a decade ago. For much of the 2010’s, investing was fairly straightforward. Interest rates were low, central banks kept liquidity abundant, and equity markets moved in one direction. Passive investing thrived in this loosened monetary policy era because, in these conditions, consumers and companies have more access to credit, leading to more borrowing and spending. These conditions stimulate pure economic growth.

The post-pandemic world brought with it the highest inflation in decades, aggressive rate hike cycles, and a geopolitical landscape that has reshuffled trade routes and capital flows. Dispersion is rising across regions and sectors. Liquidity is thinner, which means market reactions are sharper. And the traditional relationship between equities and bonds has broken down, leaving the classic “60/40 portfolio” (a portfolio consisting of 60% equities and 40% bonds mix) less effective as a risk management tool than it once was.

In today’s market environment, hedge funds have emerged as a highly relevant consideration for investors.

Why hedge funds?

At its core, a hedge fund is simply an investment vehicle with a broader toolkit than a traditional long-only fund. Where a conventional unit trust can only buy assets and hold them while the markets appreciate, a hedge fund can go both long and short, use derivatives, access private markets, and apply leverage in a controlled way.

Although hedge funds are not highly regulated globally, in South Africa, they are fully regulated to protect both the consumers and to hold hedge funds accountable for safe and ethical practices. Hedge funds in South Africa are regulated by the Financial Sector Conduct Authority (FSCA) under the Collective Investment Schemes Control Act (CISCA)

This flexibility is not about taking more risk. It is about having more ways to manage it. The goal is to reduce the probability of loss from market fluctuations while still participating in growth. Done well, hedging achieves three things simultaneously: it reduces market risk, dampens volatility and preserves capital during downturns.

The numbers support the case

Recent data reinforces what the theory suggests. According to Goldman Sachs Prime Services, hedge funds delivered an average return of 11.9% in 2024 and 11.8% in 2025, outperforming a traditional 60/40 equity-bond portfolio every year since the Federal Reserve began hiking rates in 2022. In the decade before that, hedge funds lagged the 60/40 by roughly 50 basis points per year. Since 2022, they have outperformed it by nearly 190 basis points annually.[1]

It is worth noting that these numbers are not made public as they were taken from Goldman’s Prime Brokerage book (their best clients), which also highlights that the share of those returns is attributable to genuine alpha. This shows that skill-based returns, rather than simply riding market beta, have reached their highest level in over 30 years. As markets become more dispersed, the ability to identify winners and position against losers becomes more valuable, and well-run hedge funds are designed to do exactly that.

It is worth noting that these numbers are not made public as they were taken from Goldman’s Prime Brokerage book (their best clients), which also highlights that the share of those returns is attributable to genuine alpha. This shows that skill-based returns, rather than simply riding market beta, have reached their highest level in over 30 years. As markets become more dispersed, the ability to identify winners and position against losers becomes more valuable, and well-run hedge funds are designed to do exactly that.

Portfolio analysis also shows the practical impact. Portfolios with hedge fund exposure demonstrate lower standard deviation, smaller maximum drawdowns, and a higher percentage of positive months over rolling 60-month periods compared to conventional equity portfolios[2]. The data is consistent with what global research shows: in volatile, dispersed markets, uncorrelated return streams earn their place.

Let’s illustrate this by means of an example:

Source: Morningstar. Data as at 28 May 2026. For illustrated purposes only. Past performance is not indicative of future results.

In the table above, “Portfolio 1” has a hedge fund exposure of 33%, while “Portfolio 2” has no hedge fund exposure. As can be seen in the data, the portfolio with the hedge fund exposure – Portfolio 1 – exhibits a lower standard deviation, smaller maximum drawdown and a higher percentage of positive months (given the time period) in comparison to a portfolio with no hedge fund exposure.

The structural changes in markets today necessitate active risk management

One of the less discussed, yet highly important, roles of a hedge fund is its ability to support disciplined investor behaviour. Market volatility does not just test portfolios; it tests people. The cycle of investor emotions, from optimism at market peaks through fear, capitulation, and despondency at the bottom, is one of the most well-documented patterns in finance. And it is responsible for a significant portion of the gap between what funds return and what investors actually experience.

A portfolio that limits the depth of drawdowns keeps investors anchored to their long-term plan. When markets fall 10% instead of 25%, the emotional response is manageable. When they fall 25%, people make decisions they later regret. Hedge funds, in this sense, are not just a financial tool; they are a behavioural one.

Beyond the emotional dimension, the structural changes in markets today make active risk management more necessary than it has been in a long time. Market dispersion is accelerating: regions are diverging, sectors are decoupling, and the old assumption that a rising tide lifts all boats no longer holds the way it did. Passive strategies by design cannot respond to this, as they stay the course regardless of conditions. Active managers and hedge fund strategies can rotate, reduce exposure, and position defensively when the signals are there.

A note on what hedge funds are not

It is worth being clear: hedge funds are not suitable for every investor, and not all hedge funds are equal. Strategy selection matters enormously. Data from Canoe Intelligence covering the 2023 to 2025 period shows that the performance gap between the best and worst hedge fund strategies was wide and persistent. Equity long/short strategies led over the period, while macro funds lagged despite an environment that should have favoured them[3]. Choosing the right strategy for the right market environment is as important as the decision to allocate to hedge funds in the first place.

This is why working with a trusted Discretionary Fund Manager (DFM) matters. Hedge funds work best as part of a broader, well-constructed portfolio, not as a standalone bet. They are one tool in a larger toolkit, and using them well requires understanding how they interact with the rest of a portfolio’s risk and return profile. One of the biggest benefits of working with a DFM is that they are able to blend the correct hedge funds with other asset classes to ensure the individual client’s risk/return objective is met.

In closing

Markets are no longer in a calm, predictable phase. Dispersion is higher, liquidity is thinner, correlations are shifting, and the forces driving volatility, from geopolitical realignment to divergent monetary policy, are not going away anytime soon. In that context, the old passive playbook carries more risk than it once did.

Hedge funds, when selected and used well, offer something genuinely valuable: the ability to participate in market growth while managing the downside more deliberately. That combination, growth with protection, is not a luxury in the current environment. It is a necessity.

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[1] Source: Goldman Sachs Prime Services; “Hedge Funds Have Momentum After Posting Double-Digit Returns Last Year”. Published 2026. 

[2] Source: OIG data; FundFocus (2026). Internal portfolio risk and drawdown analysis. Past performance is not indicative of future results.

[3] Source: Canoe Intelligence. 2025 Hedge Fund Report: Hedge Fund Returns Across Strategies. Retrieved from. Published 2026. 

Additional Resources:

Optimum Investment Group (2026). Navigating a More Complex Investment Environment. OIG Hot Topic, March 2026.
Optimum Investment Group (2026). Weatherproof Your Wealth: An Umbrella-Ready Portfolio. OIG Hot Topic, April 2026.