Michael Zeuner (00:10)
Hi everyone, this is Michael Zeuner, one of the Managing Partners at WE Family Offices. Thanks for listening to the Wealth Enterprise Briefing.
I’m joined today by Matt Farrell, a familiar voice to our regular listeners. Matt is the Head of our Investment Team and Deputy CIO. I’m also joined by Andre Westin, a new voice for many of our listeners and a member of Matt’s team.
Today, we’re discussing a topic we haven’t covered in some time: hedge funds.
Recently, we’ve spent a lot of time talking about macroeconomics, geopolitics, market volatility, and private credit. But when we look at portfolio performance in the first quarter of 2026, hedge funds have been a particularly relevant area.
Hedge funds have a mixed reputation. Investors often worry about tax implications, fees, and limited liquidity due to quarterly notice requirements. At the same time, hedge funds can provide meaningful diversification and portfolio benefits.
Matt, let’s start broadly. How do you think about the role of hedge funds in a portfolio? Where do they make sense, and what value can they add?
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Matt Farrell (01:54)
Thanks for having me again.
First, it’s important to define what hedge funds are. A hedge fund is a structure, not a single strategy. Within that structure, there can be many different strategies — some exchange-traded and some not.
That flexibility is part of what attracts investors because it can provide diversification. Different hedge fund strategies have unique pros and cons, but generally they may help diversify a portfolio, provide downside protection during market declines, and access return streams unavailable in traditional public markets.
For example, some hedge funds may use derivatives or over-the-counter instruments that investors can’t easily access elsewhere.
The key takeaway is that hedge funds need to be tailored to the specific investor.
They are not appropriate for everyone. If an investor prioritizes low taxes, low fees, and passive investing, hedge funds may not be the right fit. However, for investors concerned about drawdowns, volatility, funding liabilities, or simply those who are more risk-averse, hedge funds can play a valuable role.
Even within hedge funds, portfolio construction matters. Different sub-strategies can be combined to pursue specific goals.
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Michael Zeuner (03:32)
You raised an important point: hedge funds are not right for every investor.
Much depends on the investor’s goals, risk tolerance, and how they define risk.
Broadly speaking, 2025 was a muted year for hedge funds and reinforced some common investor concerns. Yet in the first four months of 2026, certain hedge fund categories added significant value amid volatility and geopolitical uncertainty.
Help us understand that dynamic. When should investors expect hedge funds to add value, when might performance be muted, and why is it important to stay invested through those cycles?
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Matt Farrell (04:55)
That’s a major part of both our underwriting process and ongoing risk management.
It’s critical to understand the macro environment in which a strategy should succeed and when it may struggle.
For example, in environments with muted credit spreads or low rate volatility, some strategies may only generate mediocre returns. In other environments, opportunity sets become much richer.
When investors see muted performance, it’s important to step back and evaluate whether the environment was actually favorable for that strategy.
Take software investing as an example. Public software stocks have traded down significantly at times. If a hedge fund has meaningful software exposure, you would expect it to struggle alongside the broader sector. Short positions may offset some losses, but difficult environments still matter.
Understanding context is essential.
Andre has done substantial work evaluating hedge fund performance in 2025 and identifying what worked and what didn’t.
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Michael Zeuner (06:21)
Andre, share some high-level observations about what worked in 2025, what didn’t, and why.
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Andre Westin (06:32)
Thanks for having me on.
I’ll touch on a few key hedge fund strategies, including some that have been prominent in recent headlines.
Let’s start with trend following.
2025 was a difficult environment for trend-following strategies because markets experienced disruptions in asset correlations and significant volatility. Trend followers are quantitative hedge funds that use algorithms to trade momentum across commodities and other markets.
Trend-following funds were down slightly in 2025, but in the first quarter of 2026 they were up nearly 6%.
These strategies generally perform best in environments with steady, directional, persistent trends, which we’ve seen more consistently in 2026.
We also saw improvement in global quantitative macro strategies. In 2025, global quant macro was up less than 5% for the full year, while in the first quarter of 2026 it gained nearly 4%.
These strategies have added value during abrupt market shifts.
One important principle is maintaining an asset allocation framework within hedge fund portfolios. Balanced strategy exposure helps preserve diversification benefits.
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Michael Zeuner (08:09)
That highlights an important point: investors need to evaluate hedge funds at a granular level and understand each category individually.
Some strategies are designed to perform well in specific environments and less well in others. Since it’s impossible to predict future market conditions consistently, diversification across hedge fund strategies becomes especially important.
Looking at 2026 specifically, are there other areas within hedge funds that look attractive today? Are there strategies that may struggle in the current environment?
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Andre Westin (09:27)
That’s a great question.
I see several areas with expanding opportunity sets, including merger arbitrage and biotechnology-focused strategies.
Merger arbitrage strategies seek to profit from acquisitions and corporate transactions. The regulatory backdrop has become more predictable, resulting in stronger deal flow and fewer failed mergers and acquisitions.
As a result, spreads between acquisition prices and current trading prices have compressed, creating a positive environment for merger arbitrage managers.
Biotechnology is another interesting area.
Early in 2025, development-stage biotech companies lost roughly 50% of their value following the nomination of RFK Jr. However, the FDA has since created a more constructive environment for investors.
When drugs are rejected, the FDA now publishes letters explaining the reasons. That transparency allows companies and investors to learn from prior mistakes.
At the same time, large pharmaceutical companies continue pursuing acquisitions because many patents are expiring and drug pipelines need replenishment.
Healthcare hedge funds were up roughly 38% in 2025 and gained another 6.1% in the first quarter of 2026.
Quantitative equity strategies also look interesting today because of elevated equity dispersion.
Equity dispersion refers to stocks within the same index moving in very different directions. Historically, high dispersion environments have benefited quantitative equity hedge funds because their algorithms can better identify and capitalize on those differences to generate alpha.
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Michael Zeuner (11:55)
Let me summarize a few key themes.
First, hedge funds are not appropriate for every investor. Investors need to evaluate whether hedge funds align with their goals, liquidity needs, fee tolerance, and investment style.
Second, investors must be willing to remain patient through market cycles.
Within a hedge fund allocation, best practices include diversifying across strategies, setting realistic expectations for manager performance, and evaluating managers based on whether they performed as expected in a given environment.
If they do, investors should remain disciplined. If not, reassessment may be warranted.
Hedge funds occupy a middle ground between public equities and private markets. They generally offer less liquidity than public markets but more liquidity than traditional private investments.
Anything either of you would add before we wrap up?
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Andre Westin (13:31)
Patience is critical.
During strong equity bull markets, hedge funds may lag traditional equity indexes. However, history shows that hedge funds can provide significant value during periods when traditional assets stagnate.
For example, during the so-called “lost decade” for equities — roughly from December 1999 through August 2012 — the S&P 500 was essentially flat over nearly 12 years.
During that same period, the PivotalPath Hedge Fund Index generated approximately 11.6% annually.
So while hedge funds may underperform during strong bull markets, they can provide meaningful diversification and returns when traditional assets struggle.
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Michael Zeuner (14:15)
Great. Thank you, Andre. Thank you, Matt. Appreciate the conversation, and we look forward to continuing it in future episodes.
