Alternative paths to portfolio construction in 2026

As we head into 2026, investors face several challenges in traditional asset classes: short-term yields trending lower, positive correlations between bonds and equities, high stock valuations and U.S. equity markets increasingly dominated by a narrow set of AI-related companies.

With this backdrop, we believe the diversification attributes of alternative investment strategies could play a more beneficial role in portfolios. Their inherent differentiation and unique current opportunities may position them to complement traditional asset class exposures in the year ahead.

Hedge funds: Seeking uncorrelated returns

To complement fixed income, we focus our hedge fund allocation on strategies designed to extract returns that are unrelated to the performance of traditional asset classes. With front-end yields in fixed income moving lower amid Federal Reserve rate cuts—and bonds and stocks still positively correlated—we believe this approach may offer valuable diversification benefits.

Exhibit 1: Stocks and bonds offer limited diversification near peak correlation levels
Rolling 24-month correlation between MSCI ACWI and Bloomberg US Aggregate Indices

January 31, 1988 to October 31, 2025. Source: FactSet

Hedge funds pursue a wide spectrum of investment strategies, and in today’s environment, we see compelling opportunities in global macro, merger and convertible arbitrage and fixed income relative value strategies.

Divergent central bank policy paths across the globe—Japan potentially raising rates, the UK and EU holding steady, and the U.S. easing—create fertile ground for global macro managers. Those able to structure trades where the potential gains appear greater than the potential losses—and that benefit when market volatility rises—should be particularly well positioned.

Elsewhere, we see the resurgence in merger activity presenting opportunities in merger arbitrage. These strategies are based on assessments about a merger target company’s stock price and the likelihood that a deal will successfully close once it has been announced. Lower rates and a more favorable regulatory environment have revived deal activity, broadening the universe of attractive potential trades.

The uptick in merger activity is happening across sectors. For example, notable recent activity includes the announced $88 billion Union Pacific-Norfolk Southern railway merger; the $55 billion proposed take-private of video game maker Electronic Arts by a private equity consortium; or in the biotech sector, where a bidding war erupted between Pfizer and Novo Nordisk over weight-loss drug company Metsera.

Exhibit 2: Global M&A activity has picked up

Quarterly figures from 2015 through September 2025. Source: PitchBook

Secondaries: A maturing market

Within private equity, we also see a favorable environment for secondary transactions, which are the trading of stakes in existing funds. Activity has accelerated sharply—reaching a record $160 billion in 2024 and surpassing $100 billion in the first half of 2025 alone.¹

We expect this trend to continue as both limited partners (LPs) and general partners (GPs) use the secondary market for liquidity and portfolio management. For example, Ivy League schools such as Harvard and Yale have coordinated multi-billion-dollar secondary transactions to better balance their short-term funding needs against assets with longer maturity horizons.

With improving capital market access and easing credit conditions, exit activity has picked up, but secondaries still dominate by value, with large LP transactions and the growth of GP-led and continuation vehicles reflecting the market’s evolution.

Private real estate: Yield, inflation protection and a selective mindset

In private real estate, we see potential for stable yield and inflation protection, though achieving those goals requires selectivity across property types and geographies.

The office sector remains challenged. Even in cities with stronger return-to-office mandates, companies have reduced space through hybrid models. Vacancy rates remain high, as do delinquencies, and this structural shift appears unlikely to revert quickly.

By contrast, industrial real estate remains attractive given favorable supply and demand dynamics: the secular e-commerce growth theme remains strong, while new industrial builds have slowed, in part, due to the tariff-increased cost of steel, which can represent 10-to-20% of building cost.

We are also monitoring shifts in U.S. farmland values. After several years of strong price gains, farmers now face rising input costs, lower commodity prices and tariff-related demand softness. This combination could create a more favorable entry point for investors seeking yields that are attractive on an absolute basis while also functioning as a hedge against persistent inflation.

Farmland also offers upside potential from secular trends—reshoring and new factory builds, AI data centers and expanding renewable energy infrastructure. Each of these growth areas increases demand for strategically situated farmland, which could receive a healthy premium relative to its farmland value.

Building portfolio resilience through alternatives

In an environment of uncertainty and concentration risk, alternatives may serve as critical portfolio stabilizers. Their return streams generally have lower correlations to public markets, and we believe they offer an array of attractive opportunities today.

As 2026 unfolds, maintaining flexibility, focusing on manager quality and embracing diverse strategies will be key to making portfolios more resilient.

 

 

^{1. “H1 2025 Secondary Market Review” Evercore Private Capital Advisory, July 2025}