Taking A Deep Dive Into BlackRock’s Recommendation To Boost Hedge Fund Allocations

BlackRock’s Investment Perspectives paper suggests that some investors may be able to hold up to five percentage points more in hedge funds today than before 2020, depending on client-specific liquidity, governance, and risk constraints, with potential funding from government bonds or equities. The firm noted that the current environment is the result of an evolution of the “new regime of transformation we’ve been in for some years.”

Mega forces such as geopolitical fragmentation are transforming economies. The transformation could lead to many very different potential outcomes for growth, inflation and government debt and deficits. According to BlackRock, the new regime is characterized by the loss of long-term macro “anchors” such as stable growth, contained inflation expectations and fiscal discipline. Therefore, deliberately managing exposures to fluctuations in macro factors like growth and inflation matters more now..

In an interview with Hedge Fund Alpha, co-author Vivek Paul of BlackRock Institute shared some more insights related to the paper.

More dynamic

If before factor exposures were contributing positively to excess returns, in this new regime, factor exposures represent a drag. Therefore, Paul believes that in this environment assessing and deliberately managing macro risk is crucial.

“In an environment like we're in, being dynamic and deliberate is crucial with regards to macro exposure,” Paul explained. “You lean into it, and you're deliberately trying to profit from the opportunity set that's arising as a result of macro being more volatile, or you try and deliberately mitigate that macro factor exposure.

Managing or neutralizing macro risk

The paper says that above-benchmark returns delivered by most top-quartile hedge fund managers have been higher since the pandemic than they were post-GFC. That’s especially true for the best-performing macro hedge fund strategies. Styles vary across macro hedge fund managers, with managers either managing deliberately macro risk or neutralizing it by following strategies uncorrelated with broad market performance. The paper finds that hedge fund managers are shifting their factor exposures more often today than they were in the past.