The storm raging across the heath in William Shakespeare’s King Lear is more than a backdrop. It is a manifestation of Lear’s fractured mind, a tempest of sound and fury that mirrors his descent into madness. As he cries, “Blow, winds, and crack your cheeks!” (3.2.1–3), the noise is not just atmospheric; it is existential.
Today’s markets, too, are filled with noise: geopolitical tension, inflationary crosswinds, and algorithmic volatility. But for the discerning investor, this storm is not just chaos – it is a crucible for clarity.
The first half of 2025 has tested investors’ resolve. Hedge funds, however, have shown resilience. The global hedge fund index posted a +2.1% return year-to-date through May, outperforming many traditional asset classes.1 Equity long/short strategies led the way, particularly those with market-neutral positioning, as dispersion increased and macro uncertainty created fertile ground for alpha generation.
This performance is not accidental. It is the result of filtering through the noise. In a market where headlines shift sentiment by the hour, hedge fund managers have leaned into adaptability. They’ve reduced gross exposure, added tactical hedges, and rotated into sectors like energy and Asia-Pacific equities, where fundamentals remain strong despite global dissonance.1
Recent hedge fund outlooks reinforce this trend: allocators are increasing their commitments, with over 60% planning to raise hedge fund allocations this year. We believe the rationale is straightforward: hedge funds delivered 10.12% in 2024 with a fraction of the volatility of global equities, and alpha generation has become a key differentiator.2
Today’s market noise can be revealing – it exposes fragility, but also opportunity.
Equity markets have recovered, but uncertainty remains over trade and fiscal policy, and the storm is far from over. Trade tensions between the US and China, shifting central bank policies, and the unpredictable path of inflation continue to generate volatility. But as in Lear, where the storm strips away illusion and forces truth into the open, today’s market noise can be revealing – it exposes fragility, but also opportunity.
For hedge fund investors, we believe the imperative is not to avoid the storm, but to interpret it. To filter the noise – whether it be from the headlines, crowded trades, or short-term sentiment – and find the signals that point to durable value.
As Lear emerges from the storm with a clearer, if tragic, understanding of his world, so too must investors seek clarity amid the chaos. The noise is real, but so is the opportunity.
Global economic scenarios
As the second half of 2025 unfolds, investors face a volatile global storm shaped by a tariff-driven slowdown, collapsing US consumer confidence, a dramatic President Trump policy pivot, a global bond market rout, surging European fiscal spending, and escalating geopolitical conflict risks.
Tariff-driven slowdown
Our base case scenario is one in which the US and global economies slow amid policy uncertainty and higher tariffs, but a recession is avoided. US inflation rises, and the US Federal Reserve (Fed) eases by less than the market expects.
US confidence collapse
With trade wars intensifying, upending the global economy, and pushing inflation higher, the Fed initially tightens to curb a de-anchoring of inflation expectations. Still, it ultimately eases sharply as a US recession pulls inflation lower.
Trump policy pivot
President Trump focuses on the more market-friendly aspects of his agenda, such as tax cuts and deregulation. US tariffs settle well below 10% while trade policy uncertainty recedes, leading to the Fed returning to neutral at a faster pace.
Global bond market rout
More developed market bond issuance interacts with fading demand for longer-dated paper, leading to a sharp rise in global bond yield across the curve and a painful tightening of global financial conditions.
European spending surge
Higher Euro-wide defense spending and investment lead to a significant cyclical upswing while implementation of the Draghi plan boosts potential growth.
Conflict risks dominate
Failure of the Russia-Ukraine peace process, or direct conflict between Israel and Iran, results in a global energy price shock that weighs on growth. Global defense spending increases sharply.
Aberdeen strategy ratings and outlooks
Equity
Expanding alpha environment: Greater breadth and dispersion across developed markets (i.e., Europe, Japan), sectors, and style factors are enhancing opportunities for both long and short stock selection.
Sector-specific opportunities: Emerging value and growth potential in sectors such as energy and healthcare are creating attractive entry points for active managers.
Guidance revisions fueling stock picking: A wave of corporate earnings guidance updates for Q2 through Q4 is generating new opportunities for fundamental analysis and alpha generation.
Tech leadership reasserting: Renewed optimism around AI is reigniting momentum in the tech sector, which still shows room for further upside.
Persistent beta tailwinds: Improved clarity on tariffs and the outlook for Fed policy is supporting continued market gains, even as the equity risk premium compresses (Chart 1).
Chart 1. Equity risk premium trending lower
Event-driven
Mergers and acquisitions (M&A) rebound delayed: Expectations for more M&A activity under the new Trump administration have been tempered by increased uncertainty and volatility stemming from the latest trade and foreign policies (Chart 2). Deal activity is expected to rebound as macro uncertainty diminishes and buyers prioritize rapid value creation.
Chart 2. Global announced M&A activity
Regulatory tailwinds subsiding: A less restrictive regulatory environment is taking shape. The appointment of Andrew Ferguson as FTC Chair signals a more business-friendly stance, while leadership changes at the UK’s CMA suggest a more constructive tone toward M&A.
Private equity (PE) under pressure: PE firms face mounting pressure to both deploy capital and divest assets, which could drive increased deal activity.
Return of the special purpose acquisition company (SPAC): After a period of dormancy, SPACs are regaining attention as investors reappreciate the value of the embedded call option inherent in the structure.
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.
Further, we remain neutral on the following sub-strategies:
- Event-driven: Distressed given the medium volume of debt trading at distressed values
- Relative value: Fixed income - Asset-Backed given that spreads are tight, but fundamentals are strong and supportive
- Relative value: Fixed income – Corporate with performing credit remaining healthy, and spreads accurately pricing this reality
- Relative value: Fixed income – Convertible arbitrage with primary issuance strong, but crowding increasing
Macro
Economic and geopolitical uncertainty reached a crescendo during the first half of 2025 as global investors were forced to rethink the regional nature of their strategic asset allocation models. The fear of slowing global economic growth alongside a return to heightened levels of inflation kept central bank policy tightly managed along a narrow path of expectations. Macro managers lacked conviction in the direction of markets, significantly limiting thematic risk-taking, while strength in systematic signals weakened due to breaks in key trends and sharp market gyrations.
Uncertainty is expected to remain elevated, which will limit the ability of Discretionary thematic managers to have conviction in their medium-term thematic views, contributing to our maintaining a neutral outlook for the strategy. However, we believe that asset prices can exhibit strong trends as global investors reposition their portfolios for the current backdrop, which supports our maintaining our positive outlook for Systematic diversified.
We believe micro-Relative value: Fixed income – Sovereign trading is beginning to see a few positive data points, but the opportunity set remains concentrated in the US. Until this changes, we are maintaining our neutral outlook. With that, we believe uncertainty is creating a better opportunity set for Volatility trading, and we are now positive on the outlook for both Relative value and directional volatility-focused strategies.
Final thoughts
As we move deeper into the second half of 2025, the storm of macroeconomic uncertainty will continue to swirl with tariff-driven slowdowns, collapsing US consumer confidence, and geopolitical flashpoints dominating the landscape. Yet, as Shakespeare illuminates, the storm is not merely a force to be feared – it is a moment of reckoning, a chance to strip away illusion and see clearly. For hedge fund investors, this is a time not to retreat, but to refine. Equity strategies remain the most compelling, with an expanding alpha environment driven by sector dispersion, earnings revisions, and renewed tech momentum. Managers who can filter through the noise of headline risk and focus on fundamentals are well-positioned to capitalize on both long and short opportunities. Event-driven strategies, which have faced a delayed M&A rebound due to policy volatility, are poised for resurgence as regulatory headwinds ease and PE activity intensifies. The return of SPACs adds another layer of optionality for opportunistic capital. Credit strategies hold a neutral outlook across the board. While spreads remain tight, strong fundamentals and elevated base rates continue to offer Relative value, particularly for managers with disciplined risk frameworks. Macro strategies are bifurcated: Discretionary thematic managers remain cautious amid persistent uncertainty, while Systematic diversified, and volatility-focused strategies are gaining traction as investors reposition portfolios and price dislocations emerge. In this environment, we believe the edge belongs to those who can filter the noise, weather the storm, and act decisively on the signals that remain. Remember: the storm is real, but so is the opportunity.
Endnotes
1 "Q2 2025 in Review and Q3 2025 Market Outlook." Morningstar, July 2025. https://www.morningstar.com/markets/q2-2025-review-q3-2025-market-outlook.
2 "2025 Hedge Fund Outlook." BNP Paribas, February 2025. https://globalmarkets.cib.bnpparibas/app/uploads/sites/4/2025/02/bnpparibas-hf-outlook-2025.pdf.
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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