Pictet's hedge funds are a portfolio diversifier and poised for growth following 'quiet summer'
The hedge fund industry has seen substantial inflow increases over the last few years. One reason is that investors are looking to diversify their holdings. They've enjoyed gains from equity markets that are constantly reaching all-time highs. "They are looking for ways to effectively bank the gains that they have made, and yet protect the capital that they have achieved in the move in equity markets," says Doc Horn, equity partner and head of total return at Pictet Asset Management.
Another reason, according to Horn, is the growing view that the traditional 60-40 portfolio allocation no longer holds. Under this classical investment strategy, investors allocate 60% of their holdings to equities, with an eye on potential upside, and 40% to fixed income for ballast.
However, another adage, "this time is different", seems to have gained greater credence. "More and more so, the bond and equity correlations are no longer inverse. You don't have the same level of protection in periods of equity stress that fixed income used to play in the overall portfolio construction context," says Horn, in an interview with The Edge Singapore.
Historically, in stressed periods for equities, capital would rotate into fixed income fairly quickly to provide ballast within a portfolio. "What we've noticed is in times of big equity sell-offs, including in March, you actually have fixed income correlated with equities, and so that correlation ticks up in the periods when it's meant to be providing the greatest protection," he adds.
As such, he believes investors should focus more on how their portfolio is constructed and what fixed income has historically been used for, relative to a more diversified portfolio, or at least an allocation to alternatives. Hedge funds, with total returns as a key strategy, have become an increasingly popular way for investors to seek out the protection they need for certain portfolios, he reasons. To this point, Pictet's total assets under management (AUM) for the total return business has grown by more than half over the past 30 months.
Same purpose, different flavours
From Horn's observation, the largest source of growth in hedge funds' AUM is high-net-worth individuals, private bank clients and the like, who are now better appreciating the diversification benefits of allocating part of their portfolio to hedge funds. This contrasts with traditional hedge fund clients such as institutions, pension funds and endowments.
At the same time, fixed-income yields in several major markets remain very low, such as Japan and, until very recently, Europe. Switzerland, another safe haven market, continues to have zero target rates. As a result, investors who want to lock in equity gains in capital-preserving fixed-income investments are understandably less enthusiastic. "Hedge funds provide a nice source of yield with that same downside protection that a lot of investors are looking for," says Horn.
To be sure, hedge funds come in many kinds, with different strategies. Some funds have a "high octane" flavour, applying leverage to a few big, sharp bets, which can therefore be successful at times. Of course, the reverse is often true as well. Just in July, a two-year-old US$45 billion ($57 billion) fund, Situational Awareness, with reported leverage of up to 400%, plunged to US$10 billion after bets on falling semiconductor and AI stocks went sour.
Some hedge fund strategies steer clear of either extreme: so-called "market-neutral" funds that provide the diversifier and yield replacement functions Horn has described. And, of course, fundamental equity long-short funds, with a bit less directionality than some of the higher-leveraged ones, can be good equity replacement candidates as well. Other funds focus on macro themes, or are event-driven, adds Horn
Minimal correlations
Horn, despite his job, is not advocating that investors be 100% in hedge funds. Rather, hedge funds should be seen as a "valuable" component in different market environments and co-exist as an asset class alongside equities, fixed income, commodities, real estate, and other alternatives.
"Our primary objective in the hedge fund strategies that we run is to find unique, differentiated alpha, generate consistent alpha that is uncorrelated, so it is not driven by market beta," says Horn. "Our funds should have minimal correlations to any market premia, and should be focused on alpha generation with good downside protection or capital preservation in a very liquid form.
Another critical attribute is liquidity. Horn says Pictet's hedge funds team ensures the assets underpinning the portfolios are "hyper liquid" so investors can withdraw their money with a day's notice for most funds. According to Horn, this attribute is not the industry norm and is "unique" to Pictet. Most of the hedge fund universe allows quarterly withdrawals, with some offering lock-ups of up to five years.
"Given how quickly the environment or the market changes, given how the use cases might change, your ability to flex your hedge fund portfolio up or down is something we like to provide our investors with," he says.
Multi strategies
Pictet's hedge funds, all managed in-house, began more than two decades ago, when the total returns business was created within the asset management side of the business.
The manager also has a multi-strategy fund that receives allocations from a variety of other internal strategies. Horn says this is the "nucleus" of what he and his team do. Effectively, the multi-strategy serves as an incubator for other hedge funds that Pictet has launched or plans to launch.
Other specific varieties that started life within the multi-strategy fund include a China long-short fund, a global equity directional fund, a European long-short fund, frontier fixed income, an Al-driven systematic long-short strategy, distressed debt, and even one focused on Asia special situations, as well as a merger arbitrage strategy. Regardless of the variety, Horn says the underlying goal is to deliver alpha while focusing on downside protection and maintaining overall liquidity.
Pictet, with hedge fund AUM of more than US$10 billion, expects inflows to continue over the next few years.
Interestingly, Pictet's private banking clients account for just a fifth of the AUM managed by its hedge funds. The remaining 80%, in fact, comes from external sources, including clients of other private banks, pension funds, and insurers.
Horn explains that this is because Pictet has maintained an open architecture, where clients are offered products best suited to them, regardless of origination, rather than whatever is available with Pictet departments. In fact, he says that the fact that most AUM came from outside validates what he is doing. "It shows that our products actually hold water by the fact that the majority of our assets are not from the private bank, that we're actually attracting independent external parties to own them," says Horn.
After the quiet summer
His optimism comes as the hedge fund industry enjoyed one of its strongest inflow years on record, reversing the outflow in the prior couple of years.
When pressed, Horn says he suspects that the outflow then was because investors that had allocations in hedge funds were obliged to take from other pockets of their portfolios to top up commitments made to private credit and private equity funds, which, because of a period of slumps in exits, caused quite a fair bit of extension in commitments.
Changes in AUM aside, Horn says the core multi-strategy fund has been "very strong" and 2026 has thus far been "very positive". And that is not just because the fund stayed put in the buoyant equity markets. In fact, in February, amid geopolitical clouds, the Pictet managers, concerned, reduced leverage to protect capital. That proved timely, given the sharp sell-off across major markets and asset classes in the following weeks.
The managers, according to Horn, adopted a more defensive posture and did not pile in, unlike many others in the Al infrastructure and AI supply chain plays, where valuations have reached new and lofty levels. Instead, Horn and his colleagues focused more on value-oriented or quality trades. Yet, as the AI theme continues unabated, Horn candidly admitted the Pictet funds had a "very quiet summer," with relatively flat performance, even though they achieved capital protection.
That said, Horn sees a "very rich" opportunity set, as the market is broadening out instead of concentrating in a few specific names. "You have far less crowdedness, far less concentration into the same trades. You've also had big corrections, and so names that you couldn't justify buying on a valuation basis, whether it's in the memory space, the semiconductor space, they are now at levels that make them more attractive, more interesting, and could have quite a bit of potential over the next several quarters," he says.
This article was published in The Edge Singapore, on Friday 18 September 2026. Reproduced by permission. ©2026, The Edge Publishing Pte Ltd. All Rights Reserved Worldwide.
