The era that rewarded passive patience is over. For nearly two decades following the global financial crisis, quantitative easing, falling interest rates, and suppressed volatility created a near-frictionless environment for long-only portfolios. Hedge funds, by contrast, struggled to justify their fees and complexity against a rising tide that lifted every index boat. Goldman Sachs Asset Management's Osman Ali and Collin Bell argue1, plainly and with data, that this dynamic has reversed. The regime has shifted. And the investment implications are significant.
The 60/40 Problem
At the core of Ali and Bell's argument is a structural deterioration in the traditional balanced portfolio. Two forces are converging to undermine the 60/40 framework simultaneously: lower forward return expectations across most long-only asset classes, and rising correlations between equities and fixed income.
The second point deserves emphasis. The diversification logic of the 60/40 portfolio has always rested on the assumption that bonds provide ballast when equities sell off. That ballast is becoming unreliable. Equity-to-fixed-income correlation, which sat at 0.34 as recently as 2009, had climbed to 0.59 by May 2026. When stocks and bonds move together, fixed income is no longer a hedge. It is simply a lower-returning version of the same risk.
Ali and Bell are direct about the consequence: "uncorrelated hedge fund return streams, driven by manager skill and the ability to generate alpha, have become a portfolio imperative rather than an optional allocation." That is not a marketing claim. It is a structural diagnosis.
Volatility as Opportunity
The very conditions that are creating headaches for traditional allocators are creating tailwinds for skilled active management. Macro uncertainty, divergent central bank policies across major economies, geopolitical fragmentation, and structurally higher interest rates have widened performance dispersion both within and across markets.
Dispersion is the raw material of alpha. When all assets move together, there is little for an active manager to exploit. When they diverge, skilled managers can identify mispricings, express directional views, and construct portfolios that are genuinely differentiated from the index. Ali and Bell note that this environment has not only made uncorrelated hedge fund returns "more valuable" but also "potentially more achievable."
The performance record since quantitative easing ended in 2022 supports the argument. Hedge funds have outperformed a traditional 60/40 portfolio over that period with cumulative returns of approximately 38% versus 33%, and critically, at a fraction of the volatility: 3.6% annualized for hedge funds versus 9.0% for the blended index. Less drawdown, similar or superior return. That is a meaningful improvement in the risk-adjusted picture.
An Industry That Has Also Evolved
Ali and Bell are careful to note that the improved market backdrop is not the only factor. The hedge fund industry itself has matured. Risk management, portfolio construction, business practices, and talent acquisition have all improved. The result is a more consistent capacity to deliver "frequent, uncorrelated alpha" than the industry demonstrated in the decade following the GFC.
The allocator community appears to have noticed. The industry attracted $116 billion in net inflows in 2025, the highest since the pre-GFC era, with approximately 49% of surveyed allocators planning to increase their exposure. That figure leads all asset classes, including private equity at 35% and fixed income at 11%.
New Structures, New Access
One of the more consequential observations in the piece concerns who is now allocating to hedge funds and how. The traditional hedge fund investor was an endowment, a pension plan, or a family office with sufficient scale and patience for complex, illiquid structures. That profile is broadening.
Long-only allocators are increasingly accessing hedge fund-style alpha through active extension and portable alpha solutions: long/short beta-1 structures that maintain full market exposure while layering in uncorrelated return streams. These structures allow investors to "blur the lines between traditional hedge fund structures and long-only allocations." The practical implication is that hedge fund exposure is no longer exclusively available through classic fund-of-fund or single-manager vehicles. Separately managed accounts and co-investments are expanding the access toolkit.
Five Key Takeaways for Advisors and Investors
- The 60/40 portfolio faces structural headwinds that are not cyclical. Rising equity-to-fixed-income correlations have reduced fixed income's effectiveness as a diversifier. Advisors should revisit whether the blended benchmark is still doing the job it was designed to do.
- Volatility and dispersion are not simply risks to be managed. They are the conditions that make active, long/short management productive. A volatile market is a hedge fund's operating environment, not its enemy.
- Hedge funds have outperformed a 60/40 blend since 2022 with significantly lower volatility. The risk-adjusted case for the allocation has become quantitatively demonstrable, not merely theoretical.
- Allocator demand is at a multi-decade high, and access to top managers is becoming more constrained. Advisors who have not yet sized a hedge fund allocation may find the opportunity set narrowing.
- The implementation options are wider than many advisors realize. Active extension, portable alpha, SMAs, and co-investments allow hedge fund alpha to be accessed through structures compatible with long-only mandates.
Footnote:
Ali, Osman, and Collin Bell. "Hedge Funds' Role in Today's Market Environment." Goldman Sachs Asset Management, 2 July 2026, am.gs.com/en-us/advisors/insights/article/2026/hedge-funds-role-in-todays-market-environment. Accessed 22 July 2026.
