Why Diversification Is Back at the Top of the Agenda
The assumptions that once underpinned diversified portfolios are increasingly being tested. Equity markets remain highly concentrated, correlations between traditional asset classes have become less reliable, and macroeconomic uncertainty continues to complicate asset allocation decisions. As a result, diversification — long treated as a by-product of mixing equities and bonds — is being re-examined as a deliberate portfolio objective in its own right.
In its 2026 Outlook for Liquid Alternatives, Apollo Multi Asset Management points to an environment defined less by outright recession risk and more by persistent imbalance. Consensus forecasts place global GDP growth at just under 3% in 2026, with moderating momentum in the US, fragile conditions in Europe and a mixed outlook across China and emerging markets. Inflation, meanwhile, is expected to settle at levels above the post-financial-crisis norm, increasing the likelihood that equities and bonds remain more positively correlated — a dynamic that undermines the effectiveness of the traditional 60/40 portfolio framework.
Concentration risk and persistent volatility
Beyond the macro outlook, market structure itself has become a growing source of concern. As several reports show, the ten largest US companies now represent more than 20% of total global equity market exposure, while a small group of mega-cap stocks dominates major indices. Such levels of concentration increase portfolio fragility, leaving portfolios more exposed to shifts in market leadership or abrupt changes in sentiment.
At the same time, volatility is expected to remain a persistent feature of markets in 2026. Uncertainty around the timing and scale of interest-rate cuts, geopolitical fragmentation, credit events and the ongoing investment cycle linked to artificial intelligence all contribute to a more complex investment backdrop. In this context, investors are increasingly focused on how to diversify across return drivers rather than asset classes alone.
“The environment calls for greater resilience, broader sources of return, and risk management that goes beyond equity beta and duration,” says Steve Brann, Chief Investment Officer of Apollo Multi Asset Management.
Hedge funds and liquid alternatives regain a structural role
Against this background, hedge funds and liquid alternatives are increasingly viewed not as tactical allocations but as structural components of portfolios. Apollo points to research from Wellington Management, which has described hedge funds as a “missing ingredient” in diversified portfolios, citing their potential to help offset weakening bond diversification, reduce portfolio volatility and provide non-beta sources of return.
Industry data also point to a renewed institutional commitment to the space. According to research from S&P Global and With Intelligence, hedge fund assets are on track to reach approximately $5 tn by 2027, driven by increased allocations from pensions, endowments and insurers. Event-driven, macro and long/short equity strategies are among those attracting the strongest inflows. UBS and Goldman Sachs have similarly highlighted an environment in which dispersion between winners and losers is likely to increase, placing a premium on active selection and flexible mandates.
Why hedge fund strategies stand out in 2026
While some outlooks continue to highlight opportunities in private markets, the research cited by Apollo suggests that several alternative asset classes face meaningful constraints in the current environment. Private equity and private credit remain important components of institutional portfolios, but deal activity has been uneven, return expectations are moderating and liquidity remains constrained. Valuation uncertainty and slower capital distribution cycles further complicate portfolio planning, particularly at a time when flexibility is becoming more valuable.
Similar challenges apply to real assets and infrastructure investments. Although they can serve as long-term inflation hedges, access is often restricted, valuations can lag market conditions and transaction activity tends to be cyclical. For investors navigating a macro regime characterised by persistent volatility and shifting correlations, these structural limitations have become more difficult to ignore.
Apollo argues that hedge fund strategies and liquid alternatives stand out for a different set of characteristics when accessed through an appropriate investment structure. While many underlying hedge funds offer periodic rather than daily liquidity, Apollo’s approach uses a UCITS fund-of-funds framework designed to provide daily dealing at the portfolio level. This structure aims to combine exposure to hedge fund-style return drivers with greater flexibility, transparency and liquidity for investors.
In this context, the ability to exploit dispersion, relative value opportunities and volatility is increasingly seen as an advantage rather than a trade-off. Rather than relying on broad market beta, hedge fund strategies are designed to extract value from relative pricing inefficiencies, corporate actions and macro dislocations — features that Apollo expects to remain prevalent in the current market cycle.
How multi-strategy approaches are positioned for 2026
Taken together, the research highlighted by Apollo suggests that the investment challenge today is less about timing markets and more about constructing portfolios that can withstand a wider range of outcomes. Elevated concentration, unstable correlations and ongoing volatility have reduced the effectiveness of traditional diversification tools, placing greater emphasis on strategies that can operate independently of broad market direction.
In this environment, liquid alternatives and multi-strategy approaches are increasingly being assessed not as opportunistic additions but as structural components of portfolios. By combining multiple, differentiated return sources within a liquid framework, such strategies seek to address the growing gap between the diversification investors expect and what traditional asset allocations are able to deliver.
Apollo positions its diversified multi-strategy portfolios as a response to these challenges. The firm emphasises diversification across strategies and managers, a focus on risk control and active manager selection, and exposure to multiple independent return drivers — including macro, long/short equity, market-neutral, event-driven and credit-related strategies — in an effort to reduce reliance on any single source of return.
