Looking For Diversification? Try Hedge Funds, BlackRock Says.

Hedge fund managers were once the kings of Wall Street. But the 2010s weren’t kind to active portfolio managers: Hedge fund returns trailed indexes, while institutional investors poured their cash into sexier alternatives like private equity.

Buying a basket of hedge funds, spread across multiple investment strategies, could be a good diversifier, BlackRock says. Photo: Dreamstime

But in today’s more volatile market, the old kings—armed with new business models and upgraded technology —are back. Hedge funds lured a record $37 billion of inflows in the first half of 2025, and, in a new report, fund managers at BlackRock are making the case that the boom is set to continue.

Hedge funds’ biggest appeal is for their diversification, BlackRock argues. Today’s market is characterized by sharp swings, geopolitical uncertainty, widening deficits, and expensive bets on artificial intelligence. “In this environment, traditional portfolio diversifiers such as government bonds may be less reliable,” says Michael Pyle, deputy head of BlackRock’s portfolio management group.

“Long-term asset allocation and diversification frameworks designed for the last decade are not fit for purpose in this new moment,” he says.

Buying a basket of hedge funds, spread across multiple investment strategies, could be a good diversifier, BlackRock says. The world’s largest asset manager published a report in August arguing that some investors can increase their allocation to hedge funds by five percentage points while maintaining the same level of risk.

BlackRock says “dispersion” is important to the bullish case for hedge funds. As countries and companies adopt different approaches to AI, trade, monetary policy, and more, returns are diverging. “This fragmentation fuels dispersion—creating more laggards across equity, rates, credit, and volatility,” says Raffaele Savi, global head of systematic investment at BlackRock.

As the spread between winners and losers widens, hedge funds that can truly identify top dogs are set to outperform the market. (Of course, predicting which funds can accomplish such a feat is another challenge.)

Savi said BlackRock’s systematic multistrategy portfolio was overweight information-technology stocks, with a focus on firms adopting AI within products and operations rather than firms building foundational models. “Valuations are more compelling” for AI-adopting businesses compared with the model-building and infrastructure-providing segment, he noted.

The portfolio is also betting on companies in the defense and energy sectors that will benefit from fiscal stimulus, and is short in tariff-sensitive sectors including food, beverages, and metals.

Surveys suggest many investors are planning to pour more money into hedge funds, according to BlackRock. Capital is being reallocated away from cash, long-only active equity funds, and long-only fixed-income.

Hedge funds aren’t for everyone, however. Due to their complex strategies and limited disclosures, they are generally restricted to accredited investors —those with a net worth of more than $1 million, excluding their primary residence, or individual annual income of more than $200,000. (Some investors can also meet professional criteria to qualify.) Top firms also have long waiting lists to gain access, as their strategies can only accommodate a limited amount of capital.

Meanwhile, hedge funds themselves are locked in a talent war. Top portfolio managers are raking in pay packages north of $100 million over several years. Smaller hedge funds are struggling to keep up, as inflows accrue to a handful of favorites such as Millenium Management, Citadel, Point72, and Balyasny Asset Management.

The top 20 managers, ranked by net gains since inception, oversaw 20.2% of total hedge fund assets under management in 2024, according to Hedge Fund Alpha.

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