Hedge funds
With elevated geopolitical tensions, shifting US tariff policies, economic risks, and stretched valuations, adding hedge funds as alternative diversifiers may make sense. Their ability to go long and short, adjust exposures dynamically, and target specific dislocations—rather than purely chase market directionality or beta—positions them well for current conditions, in our view. If policy shocks and cross-asset volatility persist, hedge funds should continue to benefit from a rich environment for active management and alpha generation. Strategies such as global macro, low-net equity long/short, and multi-strategy funds can further enhance resilience and improve risk-adjusted returns.
Private credit
Similar to private equity, recently announced tariffs by the US administration are likely to impact the operating environment for private lenders, particularly in import/export-sensitive sectors, while more domestic and less-growth-sensitive sectors should be more shielded, in our view. We anticipate borrower credit risk and spreads to moderately increase from here.
Risk metrics may deteriorate, especially in the weaker segments of the market. Entering 2025, direct lending benefited from low defaults, below average leverage levels, and moderate non-accrual rates. We do not anticipate a surge in risk as our revised GDP outlook continues to point to positive growth. Yet, we acknowledge that lower-middle market firms and companies with limited pricing power, weak balance sheets, or those operating in tariff-sensitive sectors could experience a deterioration in their financials.
Overall lending activity is likely to slow as broad market uncertainty starts affecting deal volumes and banks’ appetite to lend. This should reinforce the role of direct lenders as a funding source in periods of scarce capital. Alternative lenders may capture a bigger share of overall lending volumes moving forward.
Direct lending is short duration, generally senior, and less sensitive to market volatility given its non-listed nature. In turbulent times, lenders have several strategies at their disposal to support borrowers and manage risk effectively. But the current environment is likely to exacerbate the dispersion of outcomes across borrowers and lenders.
We prefer managers with a focus on sponsor-backed, upper-middle-market and large-cap deals in sectors more isolated from cyclical pressure. We also see European direct lending as attractive for cash flow geographic and currency diversification.
Private equity
While uncertainty and broader economic risks may pressure private company fundamentals, many private equity assets are domestically focused and less exposed to trade-dependent sectors, providing some resilience. Valuations are less concerning, as entry multiples have stayed relatively stable despite the sharp rally in public markets. Lower interest rates and the prospect of the Trump administration lessening the regulatory burden later this year also support the asset class. We favor managers with a strong track record in value creation, especially in complex transactions such as carveouts and divestitures, and see continued appeal in secondaries, which may offer renewed discounts as investors seek liquidity.
Real assets
We focus on diversified exposure to assets with strong fundamentals and inflation-linked or GDP-resilient cash flows. In real estate, valuations have adjusted downward since late 2022, but demand for high-quality, stable assets should persist, supported by easing funding costs and limited new supply.
We favor core and core-plus strategies in logistics, data centers, and living sectors. In infrastructure, high barriers to entry, resilient cash flows, and structural scarcity—driven by trends like deglobalization and decarbonization—make core and core-plus segments attractive.
We also identify private markets tools to offer access to real assets underpinning CIO's Transformational Innovation Opportunity, examples being assets linked to the energy transition and digitalization. Their investments, often illiquid, can range from assets in renewables, storage facilities, electric grid infrastructure, and digital assets. These vehicles tend to target stable, inflation-linked cash flows and value creation through active management. Private infrastructure investments have historically demonstrated resilience, with annualized returns of 7.6% in 2024 and 10.6% over the five years to end 2024, based on Cambridge Associates data.
However, investing in private markets comes with unique risks, including but not limited to illiquidity, lock-in periods for capital, and the need for careful due diligence of unlisted assets.
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