Steven Brod, CEO and CIO of Crystal Capital Partners, LLC, a portfolio-centric alternative investment platform for financial advisors.
Hedge funds aim to provide downside protection and returns less correlated with traditional markets, especially during market stress and downturns. As investors debate what the second half of the year will hold, one thing is clear: Hedge funds’ performance relative to the stock market in April has made it obvious why registered investment advisors (RIAs) must understand the role these funds can play in client portfolios.
In April, the market experienced frequent spikes, troughs and reversals. Extreme market reactions to U.S. President Trump’s tariff policy and geopolitical instability made it hard for investors to position themselves in the market. The Cboe Volatility Index (VIX), often referred to as investors’ “fear gauge,” hit its highest closing level in five years in early April, as noted by Reuters. Ray Dalio, founder of Bridgewater Associates and a predictor of the 2008 financial crisis, even went so far as to say he was “worried about something worse than a recession.”
While the S&P 500 declined 1.14% in April and was down over 5% year to date (as of April 30, 2025), many hedge fund strategies delivered on their core value proposition—diversification and risk mitigation. Market-neutral strategies, as measured by the HFRI EH: Equity Market Neutral Index, gained 1.41% for the month and 3.27% YTD. Notably, most multi-manager and multi-strategy funds posted positive returns, successfully navigating the heightened volatility in equity markets.
Macro strategies displayed notable performance dispersion. Discretionary directional macro funds, as measured by the HFRI Macro Discretionary Directional Index, delivered positive results—up 0.70% in April and 5.43% YTD—benefiting from their ability to tactically adjust to shifting market dynamics. In contrast, quantitative macro funds struggled, with the HFRI Macro Systematic Diversified Index declining 3.98% for the month and 6.89% YTD. This divergence highlights how differing approaches to macro investing—human discretion versus systematic models—responded variably to recent market volatility.
As investors look to position themselves against any subsequent periods of equity market volatility, hedge funds’ performance in April provides a strong supporting argument for why they should have an allocation in investors’ portfolios. In analyzing hedge fund performance, advisors should also look back at previous market disruptions and the hedge fund’s performance during that time period to better understand the potential hedge fund behavior during similar periods in the future.
In 2008, during the global financial crisis, the S&P 500 experienced a 38.5% pullback, and the average hedge fund lost 18%, a surprise to many investors who expected their hedge funds to generate positive returns regardless of market direction. However, several now well-known institutional hedge fund managers, such as John Paulson, successfully bet against the subprime mortgage market and demonstrated skill navigating market volatility, significantly enhancing their reputations and kick-starting the true institutionalization of the industry as pension funds started to take notice.
During the Covid-19 crash of 2020 (January–March), the S&P 500 experienced a pullback of 19.6%, and rapid market declines tested all strategies. However, macro (HFRI Macro (Total) Index -1.63%) and diversified multi-strategy funds (HFRI RV: Multi-Strategy Index -6.14% and HFRI ED: Multi-Strategy -7.42%) proved more resilient, highlighting how flexible and adaptive strategies can deliver superior downside protection in times of market stress. Macro and multi-strategy funds, despite facing losses, provided comparatively better downside protection during this period of market stress.
Given the increased investor interest, advisors must perform thorough due diligence on hedge funds. A recent survey from Barclays indicates that hedge funds are expected to receive the largest incremental allocation increase in 2025 compared to private or long-only options. Also, 30% more investors are expected to increase allocations to hedge funds in 2025 than decrease them.
As advisors consider whether, and how, to allocate client assets to these strategies, they should be aware of several recommended practices. First, typically, the optimal hedge fund allocation range is between 5% and 20%, to ensure that the funds can provide diversification and risk management benefits to a portfolio without being outweighed. Second, advisors should prioritize funds with proven alpha generation during crisis periods and experienced management teams. Some of the best-known managers still operating today performed well during previous market downturns. Choosing funds with diverse strategies can also help capture a range of risk and return profiles, further enhancing portfolio resilience.
As referenced above, periods of heightened volatility have historically served as a proving ground for hedge funds, and 2025 is no exception. As traditional markets react sharply to macroeconomic and geopolitical instability, hedge funds are again demonstrating their potential value as a tool for diversification, downside protection and uncorrelated returns.
Choosing the right hedge fund strategy for each client requires a blend of historical insight and forward-looking risk assessment. Advisors who take the time to carefully integrate a diversified set of hedge funds into client portfolios will be best positioned to protect and grow wealth through uncertain times.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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