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Man Group expects another positive year for hedge fund alpha, as volatility in markets and geopolitics persists.
“Three forces will define 2026 for hedge funds: geopolitics, the next Federal Reserve chair and AI,” said Adam Singleton, CIO of external alpha at the London firm.
Ripe for alpha generation
“Rather than making directional calls, we see these forces creating a volatile backdrop, ripe for alpha generation in single-stock selection over thematic bets.”
That has led the $213.9bn firm to upgrade three hedge fund strategies from neutral to positive: long-biased equity long/short, market-neutral equity long/short and merger arbitrage.
“Markets remain complacent about tail risks: from Greenland to potential politically motivated liquidity floods ahead of midterm elections, investors are treating these risks as too difficult to price – a stance we believe creates opportunity for significant volatility,” he said in a new research note.
He believes the biggest point of focus in monetary policy will be the announcement of the next Fed chair in early 2026. “The path that concerns us most is the imposition of a Trump-friendly chair in the second quarter, leading to accommodative policy that will flood the market with liquidity in a politically motivated move ahead of the midterm elections,” he added.
“Any analysis of the term premium in longer-dated US debt suggests that government bond markets are complacent about these risks. A material steepening of US yield curves, with a commensurate pickup in inflation expectations, would presage continued policy volatility for the next few years.”
Pivotal year for AI
He sees AI, however, as the most market-sensitive factor give “it is both highly impactful and highly unpredictable.”
He added: “The rate of change in AI is so rapid that we think 2026 will be a pivotal year… The key point is that it doesn’t really matter what one’s view is on AI in 2026 when considering the environment for alpha generation.
“Whether you are an AI bull or bear, it feels that any path from here will produce significant single-stock winners and losers, driving material index volatility. Instead of taking a directional view on the unstable broader picture around AI, we are more comfortable playing the alpha angle rather than betting on thematic beta.”
Strategy upgrades
| Strategy upgraded | Opportunities | Risks |
| Long/short equity | Global equities continue to be marked by higher dispersion and lower single-stock correlations while technological innovation and government policy shifts have created volatility; both are generally constructive for alpha generation. | Growing amount of capital invested in multi-manager structures and heightened separately managed account (SMA) usage have both reduced barriers to entry in Equity Long/Short (ELS) and contributed to an uptick in crowding. |
| “ | Policies (e.g., tariffs, One Big Beautiful Bill Act), fiscal reform, and diverging rates may lead to favourable opportunities for alpha versus beta, depending on region and/or sector. | Increased concentration in crowded names may intensify the severity of reversals, particularly if these are driven by a pullback in common themes or sectors. |
| “ | Elevated gross leverage levels suggest managers are comfortable deploying risk in this environment, although this is not historically a strong leading indicator of alpha generation. | In particular, the AI theme is likely to continue driving markets in the short term, and managers may find it difficult to diversify away from this risk. |
| “ | Earnings continue to be key events with stocks being punished severely for missing; however, price movement outside of this continues to be largely theme-driven. | |
| Merger arb | M&A activity continues to increase dramatically, with announced deals up over 65% on a year-on-year basis. The US looks particularly strong, with an increased urgency for firms to contemplate more aggressive deals under the current Trump administration. | Merger Arbitrage spreads remain tight, with managers also focusing on shorter and safer deals which can exhibit the worst degree of skew in periods of stress. |
| “ | The global antitrust environment is also broadly supportive beyond just the US. The UK has been more supportive of cross-border deals than previously, and Japanese M&A continues to increase. | Managers are also generally increasing leverage levels to enhance overall returns, which again raises questions around the size of possible drawdowns in periods of market shock. |
| “ | Most transactions globally have been strategic deals with acquiring companies paying a premium (rather than divestments from existing corporate structures). | Continental European M&A activity remains somewhat subdued, and cross-border activity between Europe and the US remains at risk of political interference more than other regions. |