Main asset classes Hedge funds 46 | 47 Improving return prospects In 2023, hedge funds will likely deliver a better performance relative to tradi- tional asset classes than in the past. Selectivity is key, and we highlight market neutral, relative value multi-strategy and private yield alternatives as potential alternative return solutions within traditional portfolios. In 2022, hedge funds (HFs), and low-beta strate- Additionally, higher interest rates and a lackluster gies in particular, delivered the largest outperfor- growth environment should result in a higher return mance compared to global equities and bonds since potential from alternative return factors, such as the inception of HF indices in the 1990s. In an carry and mean-reversion, benefiting multi-strategy environment of higher interest rates and volatility, relative value strategies. A high-inflation environment slowing economic growth and still elevated inflation, is also supportive of yield alternative strategies such we expect hedge fund excess returns vs. traditional as private credit and infrastructure. Key areas in equities and bonds to remain higher compared to focus are assets such as clean energy and transpor- the past decade, with improving return potential tation, which benefit from higher fiscal spending on from active management and alternative return energy-transition efforts. However, large differences factors. between the best and worst performers underscore the importance of selection and due diligence. Strategies benefiting from Hedge funds outperform in tough environments rising rates and inflation Risk-adjusted performance of different asset classes during strong/weak purchasing managers indices (PMIs): Since 2000 HF managers should be able to capitalize on the large performance dispersion between companies arising from their sensitivity to inflation, pricing 1.2 power and financial leverage. Market neutral strategies are likely to provide an asymmetric return profile, with greater upside potential and limited downside in fundamentally stronger companies. 0.8 0.4 0.0 PMI above average PMI below average Equities Bonds Broad hedge funds Low-beta hedge funds Last data point 10/2022 Source Bloomberg, Credit Suisse