2026 Hedge Fund Outlook: Environment Strongly Favors Alpha/Active Over Beta/Passive

We begin this year’s annual Hedge Fund Outlook with a paradox: “… markets appear orderly on the surface while underlying dynamics grow ever more complex and fragmented.”

In this year’s report, we lay out our belief that this environment strongly favors active management over passive—extracting value from dispersion and identifying specific pockets of dislocation rather than riding broad market beta. All four of the major hedge fund strategies—long/short equity, event driven, global macro and relative value—offer distinct pathways to generate alpha while providing crucial portfolio diversification.

Following is a strategy-by-strategy summary drawn from the full Evanston Capital 2026 Hedge Fund Outlook.

LONG/SHORT EQUITY

Several factors are converging to create a stock-picker’s market:

Dispersion between stocks, traditionally a harbinger for alpha potential, has expanded meaningfully.
The continued dominance of passive vehicles and short-term trading strategies create opportunities for stock-pickers that have the luxury of investing with time horizons longer than one month or quarter.
Interest rates remain well above zero, enhancing the return profile of long/short equity strategies directly through higher short rebates and indirectly by contributing to the rise in dispersion.

We believe managers who develop differentiated multi-quarter or multi-year views based upon rigorous research face less competition today than in years past. Whereas long positions were the dominant source of 2025’s alpha generation for the long/short equity industry, we expect the source of value-add to become more balanced in 2026.

We also expect:

Skilled stock-pickers to identify mispriced winners and losers in AI’s next phase.
Healthcare to present a particularly compelling opportunity after several years of significant underperformance.
International equity markets to offer alpha opportunity.

As always, we prefer accessing individual sectors and regions through specialist managers who possess deep knowledge of their investment universe, particularly where language skills or scientific expertise create informational advantages. We also believe liquidity and trading flexibility will be key advantages amid market conditions that can create an illusion of liquidity.

EVENT DRIVEN

Some corporate activity was stalled by tariff uncertainty, but we believe recent event momentum will carry into 2026. Although macroeconomic indicators are mixed, circumstances are conducive for corporate events, at least through the first half of 2026.

Credit—We see individual opportunities driven by credit-rating dispersion. At the index-level, high-yield credit spreads are below their five-year average and approaching historic tights. However, there is ample dispersion by credit rating, with lower-rated issues still trading reasonably wide on a comparative basis. The difference is even more stark in the leveraged loan market.
Leveraged loans—We anticipate more stressed opportunities, driven by weaker credit quality and technical factors. A combination of deteriorating loan quality and concentrated ownership among CLOs can lead to large price corrections and forced selling. There are fewer natural buyers that can step into these situations apart from distressed debt specialists, and we believe some of those experts have shifted attention toward performing and private credit in recent years.
Defaults—We believe defaults could pick up modestly even in the absence of an economic slowdown. We believe a “K-shaped” economic environment will lead to more winners and losers for their own distinctive reasons. The number of bankruptcies has been rising and distressed exchanges have reached a new peak.

We expect a wider distribution in the performance of credit managers in 2026. A lot of capital has been put to work in credit in recent years, and eventually, credit selection does matter. In our opinion, underwriting integrity and adept risk management, including the ability to hedge and short individual names, will matter much more to individual manager results going forward. We also favor investing with a mix of larger and smaller credit managers in the current environment, as each offers distinct sources of alpha.

GLOBAL MACRO

We believe deglobalization is a structural trend that will lead to more varied economic conditions across countries, and correspondingly, a richer set of prospective trades for skilled macro managers—especially those that can optimize trade expressions across directional, relative value, and volatility dimensions. This is substantially different from previous environments characterized by globally coordinated monetary policies, which led to a smaller set of more correlated trades.

We also expect:

Inflation and interest-rate trading opportunities to be particularly attractive.
The potential disinflationary impact of AI to add another layer of complexity.
Policy uncertainty and potentially sharper policy swings (due to K-shaped economic dynamics) to favor discretionary, research-based macro approaches over systematic trend-following strategies.

We also see less stable correlations presenting challenges and opportunities. Less stable relationships among traditional asset classes means diminished portfolio-diversification reliability. However, this dynamic also creates opportunity for macro managers that can invest nimbly across asset classes and their derivatives, with more tools at their disposal to both hedge risk and exploit dislocations.

Similarly, we believe managers that emphasize forward-looking and scenario-based analyses in their approach to risk management will be better equipped to mitigate potential tail risks and may even be able to benefit from seemingly low-probability (but high-impact) outcomes via long-volatility positioning.

RELATIVE VALUE

We maintain our preference for relative value managers with specialized, capacity-constrained strategies, modest asset bases, and disciplined use of financial leverage.

Convertible bond arbitrage—We are cautiously optimistic. Today’s opportunity set emphasizes traditional volatility trading and new issues, which were remarkably robust in 2025. In addition, we could see some potential richening in the secondary market if new issue supply ebbs in early 2026.
Catastrophe reinsurance—We still see a compelling source of returns and diversification despite lower premiums. Premiums have eroded modestly—but with terms and conditions intact.
Systematic strategies—We favor systematic managers that leverage distinctive signals and data sources as well as those that prioritize sustainable alpha generation over asset-gathering. AI may democratize quantitative investing by enabling managers on the leading edge to achieve more with leaner operations—while managers with more proprietary data may have an extra layer of defense from AI-related competition.
Volatility markets—We see attractive, uncorrelated return potential in capacity-constrained volatility markets subject to significant supply/demand imbalance, such as commodity options markets.

ACROSS ALL STRATEGIES

We believe the environment we have described in this brief summary strongly favors active management over passive—extracting value from dispersion and identifying specific pockets of dislocation rather than riding broad market beta.

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