In the last decade, the market regime has been defined by rising beta tides and cross-asset currents. Now as the next great rotation takes shape, hedge funds are back on the agenda. In 2025, they gathered the most investor capital since the Global Financial Crisis.
But allocators will have seen this movie before. Now they are no longer simply asking for returns from hedge funds; they are asking a more demanding question: where are the uncorrelated returns? As correlations between traditional asset classes periodically spike and then break down, and as macro forces drive sharp rotations beneath the surface, genuine diversification has become harder to source.
From our perspective, generating uncorrelated returns is not mainly driven by centralised management of factor exposure or thoughtful portfolio construction. Portfolio manager talent is key. Our philosophy has always been that reliable diversified returns come from talented portfolio managers with differentiated perspectives seeking alpha in separate and distinct opportunity sets.
Finding an independent edge
There is a tendency in parts of the industry to talk about diversification while running portfolios that are, in reality, variations on a theme. Genuine uncorrelated return requires genuine independence of thought. That can be difficult to achieve in a highly centralised organisation. We have deliberately chosen not to operate with an over-arching CIO dictating top-down positioning. We hire experienced, specialist portfolio managers because we believe in their edge.
We have a dedicated portfolio manager origination team leading a selection process that undertakes extensive due diligence on prospective portfolio managers. We maintain rigorous risk oversight, but what we don’t do is tell them how to manage money. The result is a collection of autonomous investment engines operating within a robust institutional framework. For investors, that autonomy provides with the expectation of strong risk-adjusted returns with inherent diversification both to traditional market bets and between the complementary strategies themselves.
The reality is that uncorrelated returns are rarely produced by short-termism. They require patience, discipline and authentic independence. That, in turn, requires proper alignment. This means portfolio managers are incentivised with entrepreneurial, equity-like long-term incentives.
By generating sustainable performance, our portfolio managers participate meaningfully in the economics of our strategies, alongside their investors. This alignment fosters stability. Managers are building businesses, not just running portfolios. In volatile markets, where dispersion increases and opportunities become more nuanced, that long-term mindset becomes even more valuable.
Reducing hidden correlation
One underappreciated source of correlation in the hedge fund world is business pressure. Managers running their own start-ups often face capital constraints, operational burdens and commercial stress. By underwriting working capital and providing institutional infrastructure from day one, this risk can be mitigated. Governance, compliance and operations are embedded at firm level.
Economies of scale allow high-quality infrastructure to be shared across complementary strategies. Managers are freed to focus entirely on managing capital. Investors gain comfort that performance is not being shaped by external business pressures.
Importantly, we do not see hedge funds as a homogenous asset class. They are a collection of specialist strategies, each with its own drivers of return. The more differentiated those drivers, the more powerful the diversification. By assembling experienced managers with distinct approaches, and giving them ownership, independence and institutional support. Uncorrelated returns are not engineered artificially but generated organically.
As markets become more complex and traditional correlations prove unreliable, the premium on true diversification will only increase. This becomes acutely important in Risk-off markets – delivering uncorrelated returns when they are needed most.
In our view, the path to achieving this is through talent acquisition: selecting elite portfolio managers carefully, aligning properly, supporting with the right infrastructure. Our role is to create the conditions in which the qualities of conviction, independence and alignment can flourish: for the benefit of both managers at the top of their game, and the investors who back them.
By Donald Pepper, co-CEO, head of multi-strategy at Trium Capital
