March was the kind of month that makes allocators reach for the redemption form. The damage was broad and largely indiscriminate — and to add insult to injury, it came after a strong 2025 that had raised expectations across the board.
The mood in allocator conversations right now is cautious. For many, the instinct is to reduce exposure and revisit when things settle down. That instinct is understandable, but it's also wrong.
The case against hedge funds in volatile markets usually goes something like this: when things get rough, correlations go to one, diversification fails, and you end up paying two-and-twenty for beta you could have got for free. Last month looked, on the surface, like evidence for that argument.
It wasn't. The HFRX Global was down 2.95%, yes, but the dispersion within that number was enormous. Some managers were meaningfully up, others were down double digits. The range of outcomes across strategies and styles was wider than it had been in years. That kind of dispersion shows you, with unusual precision, whether your manager selection is actually working.
Volatile, dislocated markets are not the conditions that undermine the hedge fund case. They are the conditions that make it. When markets move in lockstep, skill gets swamped by beta and the active manager's edge disappears into the noise. When they diverge sharply, the gap between good managers and bad ones widens dramatically. That gap is where your return lives.
One of the more significant structural risks in hedge funds over the past few years has been crowding. Too many funds in the same trades, amplifying moves on the way up and accelerating unwinds on the way down. The multi-manager and multi-strategy platforms, which attracted enormous capital inflows during the good years, became vectors for exactly this kind of correlated exposure.
March was, therefore, partly a crowding event. The forced deleveraging that followed — equity selling continued at its fastest pace in over a decade — was painful in the moment, but it also cleared trades that had become dangerously consensus. The managers who came through March with clean books are now operating in a less crowded landscape, with more room to generate the kind of idiosyncratic returns that justify the fee structure. Arguably, the setup going forward is better than it was two months ago.
There's a deeper structural argument for hedge funds that March made more compelling, not less. Traditional defensive assets didn't behave as expected. Long-duration government bonds sold off as yields spiked on inflation concerns amplified by the oil rally. Gold, the reliable safe haven, was used by investors to offset losses elsewhere rather than acting as genuine protection.
If the assets you expected to protect your portfolio aren't reliably doing that job, the case for genuine diversification gets stronger. Not correlated-in-a-crisis diversification (the kind that looks good on a chart until markets move), but rather strategies that generate returns from sources structurally uncorrelated to equity and fixed income direction.
The question, then, is not whether to invest in hedge funds. It's whether you have the analytical infrastructure to identify the managers on the right side of that dispersion, and whether your due diligence is rigorous enough to tell the difference between a manager whose process held up in March and one who got lucky, or unlucky, in the noise.
Historically, the best vintages for hedge fund investment have followed periods of dislocation, not preceded them. All the conditions that make periods like this one painful — volatility, dispersion, dislocated valuations, forced selling creating opportunities — are the same conditions that generate the returns which justify the asset class in the first place. If anything, this is a time to look harder at your hedge fund allocation, not walk away from it.
Whether you're on the allocator side trying to make sense of manager performance, or on the manager side trying to explain your own, that conversation starts with having the right analytics underneath it. We can help with that. Let's talk.
