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Shifts coming at the portfolio construction and market levels mean allocators need to stay focused on their goals.

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Dulari Pancholi, a partner in and the head of marketable credit and multi-asset investments at NEPC, says it is important to remember that even though there is significant activity focused on hedge funds and active management, a significant portion is cautious restart, rather than a high-conviction move.

“What we’re seeing is people increasing from 0% to 5% of the portfolio,” she says. “Or they are already at 5%, so it’s going a bit higher, but we’re not in a time where hedge funds are going to be 20% of the portfolio like they might have been 10 or 15 years ago.”

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Pancholi says shifts are happening both at the portfolio construction level and at the market level. The slowdowns in private equity distributions and in private credit are pushing more investors to increase allocations to hedge funds and active management overall, even if only on the margins, to rebalance their portfolios.

“Allocators are at the point where they need to find other sources of return in their private markets portfolios,” Pancholi says.

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Pancholi says investors looking at portable alpha now are taking a more measured approach: They are using providers with which they already have an existing relationship, so that they are not taking on additional counterparty risk and beta risk at the same time.

“I don’t think we’re going to see the kind of growth we saw in these programs the first time. … Everyone was offering portable alpha,” Pancholi says. “Investors are very focused on liquidity. They’re focused on making the most efficient use of capital. They are also being more intentional about the sources of alpha and aren’t just using swaps. Their lived experience is influencing how those programs are constructed now.”