(MENAFN- ValueWalk) >BlackRock's Q4 2025 Hedge Fund Outlook, entitled“Adapting to the New Regime”, presents a collection of market views from the firm's hedge fund investors, and examines why traditional diversifiers have been less reliable in today's macro-driven environment. It also discusses how allocators are redeploying from cash and long-only sleeves into hedge funds - often via separately managed accounts (SMAs) and portable-alpha overlays. BlackRock's hedge fund platform manages approximately $90 billion as of September 30, 2025.

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• Excerpt From The Q4 Hedge Fund Outlook
• Systematic multi-strategy: Investing through reversals and extrapolations
  • Scale as the edge
  • Fragmentation as an alpha factory
  • Macro volatility: A feature, not a bug
  • How we're positioned
  • Implications for client portfolios
• An allocator's perspective: Uncertainty to action

Key highlights from the Q4 Hedge Fund Outlook:

• Macro anchors have shifted: Eroding fiscal and monetary anchors, along with the AI buildout, are widening the range of market outcomes. Government bonds have been less reliable as diversifiers, strengthening the case for hedge funds as alternative sources of return and diversification.
• Flows are turning: Hedge funds saw $37.3 billion in net inflows during the first half of 2025 - the strongest six-month period since 2015. BlackRock ranked fourth in industry inflows over that span.
• Systematic multi-strategy: In today's environment, markets are defined by sharp reversals, rapid extrapolations, and increased fragmentation. BlackRock's systematic multi-strategy team emphasizes adaptability - using scale in data, compute, and market access to dynamically reset portfolios and capture opportunities across asset classes. Rather than predicting every turn, the focus is on running a repeatable, adaptive process that compounds through volatility and evolves as the data evolves. This approach seeks to deliver differentiated returns and resilience in a regime where static exposures may be fragile.
• Allocation guidance is evolving: The BlackRock Investment Institute finds room for some investors to increase hedge fund allocations by up to 5 percentage points without raising portfolio risk.
• Allocator behavior: New hedge fund allocations are primarily funded from cash and long-only equity/ fixed income, with smaller rebalances from private assets. These allocations are often implemented via SMAs and portable-alpha overlays to preserve beta and improve transparency and fee efficiency. Where sidelined cash was redeployed into a diversified, high-quality mix of hedge funds, allocators observed alpha capture above the risk-free rate.

Excerpt From The Q4 Hedge Fund Outlook

Foreword

by Mike Pyle, Deputy Head of the Portfolio Management Group at BlackRock

Markets today are defined by macro risk - but not in the way investors grew accustomed to over the past decade. Long-term macro anchors like stable monetary and fiscal policy frameworks have eroded, while geopolitics and the AI revolution introduce new and unpredictable forces for growth and inflation.

This fall's macro picture reflects that dynamic: a weakening labor market, signs of renewed inflation picking up amid higher tariffs, widening U.S. fiscal deficits and a rapid buildout of AI infrastructure. The range of possible outcomes is unusually wide - scenarios from a productivity boom to an AI reversal all seem plausible.

In this environment, traditional portfolio diversifiers such as government bonds may be less reliable. Investors must look to alternative sources of return and diversification, and hedge fund strategies are well positioned to help. In the first half of this year, USD 37.3 billion flowed into hedge funds - the strongest six-month period since 2015. BlackRock ranked fourth in inflows, reflecting client trust in our ability to navigate this environment.

Our hedge fund platform seeks to help allocators address macro risk in two complementary ways: by targeting uncorrelated return streams, as discussed by our Systematic team, or by turning macro risk itself into alpha, as highlighted by our Global Tactical Asset Allocation team.

The 2020s, in many respects, look more like the 1990s and early 2000s than the 2010s. Alongside renewed dispersion, volatility and higher interest rates, this decade is also defined by an explosion of new technological advances that are reshaping industries and productivity - themes our Fundamental Equity and Event-Driven teams explore in the context of how they are positioning portfolios. Together, these forces are creating one of the most opportunity-rich environments for hedge funds in decades.

Recent research from the BlackRock Investment Institute shows room for some investors to boost hedge fund allocations by up to five percentage points without increasing portfolio risk. Investor surveys reinforce this trend, indicating hedge funds are set to receive the largest incremental allocations of capital this year, a shift our MultiAsset and Hedge Fund Solutions teams analyze.

What's clear is that investors need to adapt. Long-term asset allocation and diversification frameworks designed for the last decade are not fit for purpose in this new moment. Hedge funds can play a central role in that adaptation.

Systematic multi-strategy: Investing through reversals and extrapolations

by Raffaele Savi, Global head of BlackRock Systematic

2025 has reminded us that markets rarely move in straight lines - they lurch, pivot and accelerate in unexpected ways. The year's rhythm has been defined by sharp reversals and rapid extrapolations. A Q2 tariff shock sparked a swift selloff, only to be followed by violent rebounds as crowded positioning unwound and risk appetite surged. Reversals forced shorts to cover in a rush, sending even unprofitable stocks soaring. Extrapolations quickly followed, pulling investors into the next narrative - from AI to deregulation to retail-driven rallies.

This new tempo is more than noise; it's a regime shift. The old anchors of steady growth, contained inflation and fiscal discipline have loosened. Static exposures are fragile when cycles reset overnight. Resilience now comes from adaptability - the ability to reset portfolios dynamically, capture opportunities on both sides of the cycle and thrive in the churn.

Far from being a headwind, this regime may prove richer for alpha than the decade of post-GFC stability. Hedge funds can be not just diversifiers, they can be active engines of differentiated returns, built exactly for this kind of market environment.

Scale as the edge

AI has delivered a blunt but powerful truth: Scale beats cleverness. The same can apply to investing. In a faster, fragmented regime, scale in data, compute and market access can be what separates those who react from those who lead.

• Data scale means going beyond prices and fundamentals to text, images and alternative sources that reveal shifting corporate and policy dynamics.
• Compute scale enables real time stresstesting, nonlinear risk modeling and faster pivots when shocks hit.
• Implementation scale unlocks trading efficiency and deeper market access, opening new frontiers of alpha.

Scale doesn't erase volatility - it seeks to magnify opportunity. It broadens the ways we can implement ideas across asset classes, in a cost-efficient manner, aiming to deliver differentiated returns with consistency.

Fragmentation as an alpha factory

Global markets no longer move in lockstep. Policy paths are diverging, trade flows are being redrawn and AI adoption curves look very different across regions. This fragmentation fuels dispersion - creating more leaders and laggards across equity, rates, credit and volatility.

The opportunity is not just spotting these gaps, but exploiting them systematically at scale. With AI-driven text analysis, we can process torrents of information - from policy speeches and corporate filings to market chatter - and separate sentiment from substance. Our tools recalibrate exposures in near-real time, allowing us to fade overextended narratives and lean into underappreciated ones. Navigated with breadth, speed and discipline, fragmentation can become a repeatable source of alpha.

Macro volatility: A feature, not a bug

Volatility is no longer the exception; it is the baseline. Rallies in“story” stocks, abrupt swings in rate expectations and sudden reversals are now defining features of markets. For hedge funds, these cycles are not risks to endure - they are return streams to harness.

Our edge lies in proprietary tools that let us adapt quickly. They parse data in real time, model nonlinear shocks and identify when narratives are shifting beneath the surface. These tools allow us the ability to reduce risk as reversals build, press advantages when dispersion pays and reposition before markets fully reprice. In a world defined by reversals and extrapolations, resilience comes not from riding out volatility, but from staying ahead of it.

How we're positioned

Today's signals point to persistent inflation pressures beneath the surface, a labor market that's softening outside the top quartile of wage earners, and tariff risks that, while easing, still cloud earnings in exposed sectors. At the same time, the AI cycle is proving resilient - fueled by real investment and adoption, not speculation.

In Europe, we are positioned for curve steepening, expressed as long value over growth and long banks versus bond proxies. In equities, we remain overweight information technology with a contrarian focus on second-order AI adopters - firms leveraging AI within products and operations rather than building foundational models - where valuations are more compelling than the crowded enabler segment. We're long fiscal-stimulus beneficiaries in defense and energy independence, while retaining shorts in tariff-sensitive sectors such as food, beverages and metals, where risks remain underpriced.

Implications for client portfolios

If the last two years were a beta sprint, the next phase is a relay - and alpha carries the baton. In a world of fragmented cycles and constant macro resets, strategies that are scale-enabled, cross-asset and risk-engineered seek to deliver what 60/40 alone cannot: persistence, adaptability and differentiated returns.

The goal isn't to predict every turn. It's to run a repeatable, adaptive process that compounds through volatility and evolves as the data evolves. In 2025's accelerated rhythm of reversals and extrapolations, adaptability is the difference between keeping pace - and setting the pace.

An allocator's perspective: Uncertainty to action

By Adam Ryan, CIO, Multi-Alternatives at BlackRock, and Albert Matriotti, Co-CIO for Hedge Fund Solutions at BlackRock

In the previous Hedge Fund Outlook, we argued that persistent uncertainty is a defining feature of the current market regime. That view still holds and has broadened the opportunity set for skilled hedge fund managers. The environment has become increasingly conducive to the core drivers of hedge fund returns: dispersion, liquidity provision and corporate activity. Unsurprisingly, investor demand has strengthened as well, with allocators leaning into hedge funds as sources of alpha and diversified return streams.

In recent years, hedge funds have re-established themselves as key portfolio building blocks. Across alternative and traditional investment strategies alike, investor surveys indicate that hedge funds are poised to receive the largest incremental allocations of capital this year. As illustrated below, the primary funding sources are cash and traditional long-only equity and fixed income sleeves, with a smaller portion reallocated from private market assets. This shift reflects a growing preference for more tactical, complementary alpha engines that sit alongside private market exposures. In parallel, allocators are making greater use of portable-alpha overlays and separately managed accounts (SMAs) to implement hedge fund exposures. These structures free capacity and preserve strategic beta, while enhancing transparency, control and fee efficiency.

In many cases, investors have been rewarded for adding more capital to hedge funds this year. In cases where sidelined cash has been redeployed into a diversified, high-quality mix of hedge funds, we have observed strong alpha capture well beyond the risk-free rate. At the individual strategy level, fundamental long/short equity managers have generated alpha that has materially outpaced the excess returns of their active long-only counterparts. Fundamental equity market-neutral funds have benefited from elevated dispersion, whereas active long-only equity managers have been more challenged to outperform increasingly concentrated benchmarks dominated by a handful of names.

Hedge fund performance across strategies has generally been strong in recent years, as higher yields have raised the floor, elevated dispersion has persisted and pockets of volatility have created market inefficiencies for skilled managers to exploit. While most hedge fund strategies have sustained solid results through 2025, the range of manager outcomes remains wide. Many relative-value, event-driven and fundamental long/short strategies have logged strong gains, yet systematic approaches have faced intermittent challenges. Trend followers, for example, struggled with sharp reversals in March-April as policy uncertainty whipsawed markets; and the quantitative equity hedge fund universe endured one of its most difficult and prolonged performance stretches of the past decade during the June-July rally in lowquality stocks - a reminder that even durable premia are cyclical.

This underscores the need to diversify across hedge fund styles while staying anchored in process and discipline. It's tempting to redeem from recent laggards and add to the latest winners. However, short-sighted moves untethered from underwritten theses can crystallize unnecessary losses instead of leaning into price dislocations. The priority should be a disciplined, process-oriented approach designed for long-term success. When a manager experiences a meaningful performance shock, it calls for a structured post-mortem to assess:

• Sources of weakness: Is it market-related or manager-specific?
• Risk behavior: Did risk systems and drawdown controls operate as designed?
• Process evolution: Have portfolio construction and research adapted appropriately?
• Opportunity set: Does the dislocation create a buying opportunity, especially in capacity-constrained strategies where re-entry may be uncertain?

Our current positioning reflects those conclusions. We remain constructive on skilled, systematic hedge fund managers with durable edges that add value within a diversified hedge fund portfolio, alongside fundamental long/short, relative-value and event-driven strategies. The correlations among quants are among the lowest across strategies, from one manager to another, which is one reason we maintain a diverse mix in portfolios. Together, their different techniques help stabilize alpha across varied market environments. More broadly, we favor managers who pair data and technology with fundamental insight, capture market inefficiencies rather than market betas and demonstrate the ability to deliver top-quartile performance consistently over the long run.

As we look ahead, the playbook is unchanged. Hedge funds remain an essential portfolio construction tool, but success still hinges on being selective, diversifying and staying disciplined. With thoughtful manager selection and patience through cycles, hedge fund allocations can enhance resilience and improve portfolio outcomes in a regime where unconstrained, alpha-seeking strategies have room to run.

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