Higher for longer: The case for hedge funds in endowment and foundation portfolios 

As institutions revisit portfolio construction, liquidity, and risk management, hedge funds may warrant renewed attention for their potential to provide diversification, downside resilience, and differentiated sources of return. In this paper, we explore how a higher-for-longer environment may strengthen the strategic case for hedge funds within long-term portfolios.

For years, many institutional investors operated in an environment where low rates and abundant liquidity shaped portfolio construction decisions. Today, elevated rates, tighter financial conditions, and greater macro uncertainty are changing that equation.

For endowments and foundations, this shift raises important questions about the role each allocation plays in supporting long-term objectives. In this environment, hedge funds may offer a different set of benefits than in the past — particularly for investors seeking greater flexibility, broader diversification, and more resilient return streams across changing market conditions.

As institutions balance spending needs, inflation pressures, and risk management priorities, the conversation is no longer just about return potential. It is also about portfolio durability.

• Greater dispersion across markets: Higher rates and shifting economic conditions may create more opportunities for active managers to identify relative value and security selection alpha.
• More attractive opportunity sets: Macro, relative value, event-driven, and multi-strategy approaches may benefit from increased volatility and less synchronized market behavior.
• Potential downside resilience: Hedge funds may help reduce overall portfolio volatility and improve resilience during periods of market stress.
• Diversification beyond traditional stock and bond exposures: For institutions reassessing the limits of conventional diversification, hedge funds may offer differentiated sources of return.
• Liquidity advantages relative to some private market exposures: In some cases, hedge funds may offer a useful complement to less liquid alternatives within broader portfolio design.

• Portfolio construction: Does the current allocation appropriately balance growth, liquidity, and downside mitigation?
• Risk management: Could hedge funds help improve resilience in a more uncertain macro and market environment?
• Liquidity planning: How should institutions think about hedge funds relative to private markets and spending needs?
• Manager selection: Which hedge fund strategies may be best aligned to today’s opportunity set?
• Governance: Is the investment framework equipped to evaluate hedge funds in a more strategic, less tactical way?