The Case for Hedge Funds Under a New Administration

Steven Brod

Steven Brod, CEO and CIO of Crystal Capital Partners, LLC, the portfolio-centric alternative investment platform for financial advisors.

Alternative investments have long been essential to a modern, diversified portfolio, offering a stabilizing force during times of market volatility. Hedge funds, a subset of alternatives, have demonstrated remarkable performance in navigating the complexities of election cycles. With November’s post-election market performance reinforcing their value, now is the time for financial advisors and investors to evaluate the role hedge funds can play in their strategies.

Hedge Funds and Election Year Volatility

Investment markets during election years are often marked by heightened uncertainty. Shifts in policy, leadership changes, and geopolitical developments can create significant market fluctuations. Historically, this has been reflected in the Cboe Volatility Index (VIX), which rises on average by 25% between July and November during election years.¹ This pattern held true in the recent cycle, with the VIX reaching its fourth-highest trading level on November 4 among election years since 1990 (Bespoke Investment Group).²

Hedge funds have become an increasingly vital tool in addressing this volatility. According to HFR, total global hedge fund capital achieved a record $4.46 trillion by the close of Q3, driven by $148 billion in new investor inflows and performance-based gains. Strategies such as equity hedge, relative value arbitrage, and event-driven approaches have particularly attracted investors, highlighting hedge funds' adaptability in managing risk and finding opportunity amidst uncertainty.³

November 2024 Performance—Key Metrics⁴

November’s market performance further underscores hedge funds’ potential. The HFRI Fund Weighted Composite Index (FWC) surged +2.6%, while the HFRI Asset Weighted Composite Index rose by +2.1%. Leading the gains were Equity Hedge (EH) and Directional Event-Driven (ED) strategies, which posted the strongest monthly returns for 2024. Specifically:

Equity Hedge Strategies: The HFRI Equity Hedge (Total) Index advanced +3.4%, fueled by specialized sub-strategies like the HFRI EH: Technology Index (+6.7%), marking its best month since inception. Quantitative Directional strategies also shone with a +6.1% return, bringing their YTD gains to +21.5%.
Event-Driven Strategies: The HFRI Event-Driven (Total) Index jumped +3.3%, supported by strong performance from the HFRI ED: Activist Index (+4.85%) and Multi-Strategy Index (+4.5%). These results stemmed from robust M&A activity and post-election positioning.
Macro Strategies: The HFRI Macro (Total) Index rose +1.9%, its best month since March, driven by trading activity in the Active Trading (+2.7%) and Multi-Strategy (+2.35%) sub-indices.
Cryptocurrency Strategies: The HFRI Cryptocurrency Index skyrocketed +46.0% in November, as favorable policy expectations drove optimism in this emerging asset class, bringing YTD gains to an astounding +76.2%.

Dispersion among hedge fund managers widened as well, with top-performing funds achieving an average gain of +12.3% while the bottom decile experienced a -4.9% decline, reflecting the importance of investing with managers that have navigated prior election cycles.

Why Hedge Funds Matter Now

November concluded with strong market momentum, supported by optimism surrounding the incoming U.S. administration’s pro-business priorities, including lower taxes, reduced regulation, and a predicted surge in M&A activity into 2025. Hedge funds played a critical role in helping investors capitalize on these shifts while managing uncertainties that may emerge from new policy directions.

Hedge funds possess unique tools, including leverage, shorting, and derivatives, which allow them to hedge downside risks while pursuing concentrated opportunities. Their ability to adapt to macroeconomic and geopolitical shifts makes them especially valuable during periods of change, such as election cycles.

Additionally, hedge funds are appealing for their diversification benefits, offering returns often uncorrelated with traditional stocks and bonds. For instance, while fixed income investments remained steady in November (with the HFRI Relative Value Index gaining +1.05%), commodities and other alternatives, like crypto funds, exhibited distinct yet complementary performance patterns.

Best Practices for Advisors

Investors are taking notice of hedge funds, but financial advisors must exercise caution to ensure the selected strategies align with individual goals and risk tolerances. While offering promising opportunities, hedge funds also carry unique risks, including higher fees, limited transparency, and complexity due to their use of derivatives and leverage.

Given the significant dispersion in returns—highlighted by a 17.2% top/bottom gap in November—advisor due diligence is paramount. Advisors can leverage a myriad of available tools to identify experienced managers capable of navigating periods of heightened market uncertainty effectively.

Looking Forward

The November surge in hedge fund performance signals a growing recognition of their value as a versatile investment tool. With expectations for continued risk-on sentiment and economic acceleration under the incoming administration, hedge funds are well-positioned to deliver both opportunistic and defensive benefits in diversified portfolios. Simply put, financial advisors and investors alike must apply a rigorous lens in their due diligence and evaluate hedge fund strategies to ensure their portfolios are diversified and equipped to thrive in today’s dynamic market environment.