Explore how hedge funds are emerging as vital tools for investors seeking stability and smoother returns amidst market volatility, as experts discuss the emotional impact of market fluctuations on investment decisions.
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After years of market shocks, geopolitical tension, and unpredictable economic cycles, investment professionals are increasingly looking beyond traditional portfolio strategies to help investors manage volatility and stay invested for the long term.
That is driving renewed interest in hedge funds, which are increasingly being positioned not simply as high-risk alternatives for sophisticated investors, but as tools that can help smooth investment journeys during uncertain times.
Speaking at the Money Maestros Workshop, a platform for financial advisers focused on the intersection of technical investment expertise and investor behaviour, Amplify Investment Partners investment specialist Chris Hall said investors are becoming more concerned about volatile returns and the emotional strain that accompanies market swings.
Hall argued that many traditional investment discussions still focus too heavily on annualised returns, benchmark outperformance and peer rankings, while ignoring the lived experience of investors during periods of market stress.
“But what they often ignore is how volatile the path was, how much capital was lost along the way, and whether investors could realistically stay invested,” he says.
According to Hall, investors do not experience markets through long-term performance averages alone. Instead, they experience sharp declines, lengthy recovery periods and the behavioural pressure that often leads to poor investment decisions.
“Investors, in practice, don’t experience annualised numbers – they experience drawdowns, recovery periods, and behavioural stress,” Hall says.
This behavioural response to market volatility has become an increasingly important focus area in global investment research. A long-running annual study by US-based asset manager Dalbar consistently finds that emotional decision-making during periods of market turbulence erodes investor returns. Its Quantitative Analysis of Investor Behaviour report has repeatedly shown that many investors underperform the funds they invest in because they buy and sell at the wrong times, he says.
Hall says investors are typically focused on achieving specific financial outcomes over defined periods, such as inflation plus a targeted return over five years, rather than simply outperforming a market index.
That creates pressure on advisers to manage not only portfolios, but also investor emotions.
According to Hall, advisers generally define risk as failing to meet a client’s long-term financial goals, while asset managers often focus on protecting capital and generating growth through long-only market exposure. However, traditional asset management strategies can struggle during prolonged periods of market weakness because they remain heavily exposed to broader market cycles.
“Hedge strategies act as a behaviour stabiliser, leading to less client switching and improved long-term goal adherence,” Hall says.
Unlike traditional long-only portfolios, hedge funds typically employ a broader set of tools, including short-selling, derivatives and flexible asset allocation strategies, allowing managers to potentially generate returns in both rising and falling markets.
Hall says this flexibility can help investors experience a more stable return profile over time.
“Portfolio construction that includes hedge funds facilitates the generation of consistent positive returns across varying market conditions and helps achieve goals more consistently,” he says.
The growing focus on downside protection also reflects broader industry concerns around sequence risk, the danger that significant market losses early in an investment journey can permanently damage long-term outcomes, particularly for retirees and investors drawing income from their portfolios.
Research by global investment firms, including BlackRock and J.P. Morgan Asset Management, has increasingly highlighted the importance of diversification strategies that reduce volatility and improve consistency of returns, particularly during periods of elevated market uncertainty.
Hall says the industry is increasingly recognising that strong long-term investment outcomes depend not only on portfolio performance, but also on whether investors are emotionally able to remain invested through difficult periods.
“Ignoring the client experience and fixating on returns often leads to a disconnect between asset management and financial planning. Our experience has proved that hedge funds are bridging this gap,” Hall concludes.
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