2026 Outlook Hedge Funds
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Hedge Fund Outlook
June, 2026
Dancap has a long track record of investing in hedge funds across a wide variety of strategies, utilizing both third-party managers and separately managed accounts. This market overview aims to provide an update on the broader hedge fund industry, including current market dynamics, outlook, and risks. Dancap’s hedge fund portfolio is strategy-agnostic, partnering with managers who possess deep track records and expertise across various market cycles. Dancap favors hedge funds that offer competitive liquidity terms, often with quarterly redemption or better, and we generally avoid funds with hard lockups and side pockets.
Hedge Fund Strategy
Wider stock dispersion is supposedly creating a more attractive backdrop for hedge funds focused on fundamental research, stock selection and long/short positioning. Today’s stock market environment is said to be different from the post-2008, low interest rate era, when high stock correlations made it more difficult for stock pickers to add value and generate alpha. Today, S&P 500 dispersion remains above its 5-, 10- and 30-year averages, while implied correlation is low, improving the opportunity set for long/short alpha generation.
With equity markets facing higher valuations, concentration, and more frequent corrections, company fundamentals are playing a larger role in stock performance. This should benefit hedge fund managers with strong research capabilities, disciplined risk management and the ability to identify winners and losers. Relative value and equity long/short strategies can generate returns through alpha rather than broad market exposure, while sector specialists in areas such as TMT and healthcare may benefit from deeper dispersion and more idiosyncratic opportunities.
Source: Morgan Stanley 2026 GIMA Alternatives Investment Themes
Allocator interest in hedge funds has increased meaningfully. According to Goldman Sachs’ 2026 survey, 49% of allocators plan to raise hedge fund exposure this year, versus 37% last year, while only 4% expect to reduce their hedge fund allocations. The net 45% of respondents planning to add exposure represents the highest level in Goldman’s survey history going back to 2017. The strongest demand is for strategies with lower correlation to traditional assets. Quantitative strategies ranked first, with 25% of respondents planning to increase exposure, while 21% expect to add to discretionary macro strategies.
Source: Goldman Sachs: Hedge Funds Have Momentum After Posting Double-Digit Returns Last Year; Feb 12, 2026
Goldman also noted that demand for quant strategies is exceeding available capacity from managers. Interest in quant strategies was particularly strong among endowments, foundations and family offices, which is notable given their historical preference for equity long/short and other more directional hedge fund strategies.
Hedge Funds Outlook
In 2025, hedge funds continued to deliver strong performance, generating average annual net returns of 11.5% and annualized alpha of 3.2%. This compares with 2024 returns of 10.1% net and 2.1% alpha, and represents the industry’s strongest annual performance since before the Global Financial Crisis. By comparison, from 2010 to 2019, when interest rates were low and equity markets were generally less volatile, hedge funds generated average net returns of only 4.0% and less than 1.0% alpha.
Performance in 2025 was broad-based. Discretionary equity was the strongest-performing category, generating returns of 17.1% and alpha of 5.7%. Results were supported by a range of managers, including healthcare sector specialists and Asia-Pacific-focused equity long/short funds. At the sub-strategy level, market-neutral and low-beta discretionary equity managers were particularly strong, producing more than 8.5% of alpha for the year. Quant equity also performed well, leading all strategies in alpha generation at 5.8% for the year, in line with its annualized alpha since 2020.
Source: Barclays 2026 Hedge Fund Outlook: Positive momentum
To see the Dancap Hedge Fund Investment Criteria and Portfolio, please click here.