H1 2026 hedge fund outlook

Navigating markets in 2025 was anything but easy with volatility, policy pivots, and unpredictable macroeconomic shifts making the terrain treacherous. Yet, it is in these demanding conditions that skilled hedge fund managers often find their best routes – turning uncertainty into opportunity.

As we enter the first half of 2026, the trail ahead remains complex, with new peaks and shifting paths shaped by evolving economic scenarios, sector rotations, and policy surprises. However, we believe the challenge is no longer about waiting for favorable weather; it’s about orienteering through rugged terrain, staying agile, and positioning portfolios to capture opportunities as the next ascent begins.

Global economic scenarios

The global economy continues to move forward, buoyed by resilient US growth and ongoing advances in artificial intelligence (AI). While the cycle rolls on, underlying risks and opportunities shape the outlook for investors and hedge funds alike.

In our base case, the US economy outpaces expectations, supported by robust AI-driven capital spending and fiscal stimulus. Equity markets remain elevated, with no immediate signs of a bubble, and the Federal Reserve (Fed) – under new leadership – continues to cut interest rates. China’s slowdown is less severe than feared, and Europe benefits from increased government spending. In this environment, equities are supported by both technology and policy tailwinds, interest rates trend lower in the US and the UK, and the US dollar remains stable or modestly weaker. Commodities hold steady, and credit spreads stay tight, reflecting positive investor sentiment.

However, the cycle’s momentum is not guaranteed. In one downside scenario, a collapse in AI-related equities and capital spending could trigger a broader market correction. Here, equities could fall sharply – especially in technology sectors – interest rates would drop as the Fed eases policy, and safe haven currencies like the Swiss franc and Japanese yen would strengthen. Commodities would weaken, and credit spreads would widen, particularly in high yield and tech-exposed sectors. Other concerning scenarios include renewed tariff uncertainty, rising geopolitical tensions, a new inflation scare, and extreme volatility in the bond markets.

Conversely, an upside scenario envisions a supply-side upswing, where productivity gains from AI or new reforms lift US growth, lower inflation, and allow the Fed to cut rates more rapidly. We believe this would spark a rally in equities, especially in sectors benefiting from higher productivity, while credit and commodity markets would also strengthen as investor confidence improves.

Aberdeen strategy ratings and outlooks

Equity

Alpha environment

Despite ongoing concentration in major equity indices, market breadth and dispersion remain constructive for active managers. As mentioned above, the AI theme continues to drive returns across a wide range of sectors, extending well beyond traditional technology stocks. This broadening of market participation is creating new opportunities for stock selection, both across sectors and within developed markets.

As a result, we are seeing clear winners and losers emerge (Chart 1), with significant dispersion in earnings and valuations – a dynamic that also benefits quantitative Market-Neutral strategies. Managers who maintain diversified style exposures and flexible net positioning are best equipped to navigate the macro-driven factor rotations that arise from policy shifts and inflation surprises.

While shorting proved more challenging in 2025, conditions are expected to improve as rallies in lower-quality stocks begin to unwind. Persistent factor premia continue to support quantitative approaches, though crowding in popular factors can amplify the severity of market corrections. Overall, we believe the environment favors adaptable Equity Hedge strategies that can capitalize on dispersion, manage risk from crowded trades, and adjust to shifting macro and policy landscapes.

Beta environment

Given the more balanced beta backdrop offering neither strong headwinds nor tailwinds, we believe pro-growth policies tilt conditions positive, maintaining support for directional strategies.

Event-driven

Performance dispersion between leading and lagging companies within sectors remains high, fueling a steady pace of mergers and acquisitions (M&A). Most recent deals have been strategic in nature, suggesting that the current M&A cycle is still in its early stages (Chart 2). Strategic buyers are willing to pay premiums to secure competitive advantages, and the most attractive opportunities are expected to arise in competitive bidding situations, where risk and reward are both heightened.

As the cycle progresses and strategic assets become scarcer, private equity activity is likely to increase, easing the pressure on private equity firms to deploy capital and divest holdings. Reinvestment risk is improving, supported by faster deal closures that enhance capital recycling and have the potential to compound returns over time. While tariff and regulatory risks have moderated, careful political analysis remains essential for underwriting deals in this environment.

Overall, we believe the outlook for Event-Driven strategies is constructive, with active managers well-positioned to benefit from ongoing M&A activity, improving reinvestment dynamics, and a more favorable regulatory backdrop.

Credit

Under the Base and Bull cases, we expect credit spreads to grind tighter as the economy continues to grow. While risk premiums are historically tight, credit managers will continue to benefit from high base rates vis-à-vis other asset classes.

Given the medium volume of debt trading at distressed values, we remain neutral on Event-Driven: Distressed. There is approximately $73 billion in bonds (+1000 bps) and $103 billion in loans (< 80 cents) trading at distressed levels (~7% of market) up slightly from last year, but given the current spreads in the market, historically this has pointed to a more average return environment.

We are also maintaining our neutral rating on Relative Value: Fixed Income - Asset-Backed and Relative Value: Fixed Income - Corporate. The fundamentals are strong and supportive for both; however, spreads are tight and are accurately pricing the reality.

Lastly, we are upgrading Relative Value: Fixed Income – Convertible Arbitrage to positive, supported by strong expected issuance of over $100 billion globally and improving credit quality, including a rising share of investment-grade issuers. Lower interest rates and policy uncertainty should create volatility that benefits arbitrage strategies, while increased M&A activity and more than $90 billion of converts is set to mature in the next two years, which we believe is expected to drive significant refinancing issuance and exchange activity (Chart 4). Although hedge fund concentration and slower exchange activity present risks, we believe dedicated managers are well positioned to capitalize on these dynamics.

Macro, Fixed Income - Sovereign, and Volatility

Although markets have seemingly calmed down from chaotic headlines witnessed following the Trump Administration’s Liberation Day announcements, we still see economic and geopolitical uncertainty elevated and markets prone to shocks/shifts in mindset. Fears of a global economic slowdown have also been growing and while inflation levels have declined from peaks there are notable upside inflationary concerns.

Despite the above, Macro strategies are well positioned for 2026 as global conditions remain resilient, and managers shift from risk avoidance to actively seeking opportunities. A supportive backdrop of lower bond yields, potential equity market strength, and regional fiscal initiatives creates fertile ground for thematic trades across equities, currencies, and interest rates. On this basis, we have updated the outlook for Discretionary Thematic to positive.

We expect managers to capitalize on idiosyncratic opportunities driven by US policy shifts and European fiscal divergence, alongside improving prospects in emerging markets. Systematic Diversified strategies should also benefit from global fiscal and monetary stimulus supporting trend-following and risk-premia models. Lower US interest rates and improving conditions in equities and commodities create a favorable environment for quantitative approaches, while emerging market and alternative trend opportunities add further diversification. After a challenging 2025, these strategies are positioned for a strong rebound as volatility normalizes and persistent macro themes reemerge. (Chart 5).

Relative Value: Fixed Income - Sovereign trading is still seeing a few positive data points, but the opportunity set remains concentrated in the US and until this changes we will maintain our neutral outlook.

With uncertainty remaining elevated, we believe the opportunity set for Volatility trading, both Relative Value and directional should continue to be attractive.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.
Past performance is not an indication of future results.
The guidelines for ratings are as follow: Positive: We believe the strategy will outperform its long-term average; Neutral: We believe the strategy will perform in line with the long-term average; and Negative: We believe the strategy will underperform its long-term average.
Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Hedge funds use sophisticated investment strategies that may increase investment risk in your portfolio. Among the risks presented by hedge fund investments are: the use of unregistered investments, which may make it difficult to assess the performance of the holding; risky investment strategies, which may result in significant losses; illiquid investments that may be subject to restrictions on transferability and resale; and adverse tax consequences.
Investments in asset backed and mortgage-backed securities include additional risks that investors should be aware which include those associated with fixed income securities, as well as increased susceptibility to adverse economic developments.

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