Through the Hedge Fund Lens

KEY TAKEAWAY:

For investors seeking to build resilient, all-weather portfolios, the case for hedge funds is not tactical; it is structural. The benefits of drawdown protection, correlation diversification, and asymmetric return capture compound over time, ultimately contributing to a smoother and more sustainable long-term wealth creation trajectory. 

Volatility and the benefit of hedge funds in navigating market turbulence   

The first four months of 2026 have served as a clear reminder that volatility is not an anomaly, but a structural feature of financial markets. Over time, returns are rarely generated in smooth, linear paths. Instead, they are shaped by periods of disruption, uncertainty, and rapid repricing. 

During this recent period, a confluence of macroeconomic uncertainty, shifting monetary policy expectations, and geopolitical tensions drove sharp movements across global asset classes. For investors, the period reinforced a timeless principle: while volatility is unavoidable, the real risk to portfolios lies in the permanent impairment of capital during periods of stress. This edition of Through the Hedge Fund Lens examines the role of hedge funds during periods of heightened market volatility, with a specific focus on how hedge funds navigated the turbulent conditions experienced during the start of 2026. 

Graphic 1: Hedge fund strategies – Relative returns (%) (Returns longer than one year are annualised.) 

Source: Strategic Capital – Hedge Fund Report, Q1 2026

Among the broad universe of hedge fund strategies, multi-strategy hedge funds are particularly well positioned during volatile environments. Their flexibility across asset classes and access to multiple independent return streams allow them to adapt more dynamically than traditional long-only portfolios. This flexibility becomes especially valuable during periods when traditional diversification frameworks come under pressure.

The Fairtree Wild Fig Multi Strategy FR QI and RI hedge funds aim to generate consistent returns across different market environments while seeking to protect capital during periods of market stress. The strategy blends a diversified range of predominantly low-directional proprietary strategies and uses the broad toolkit available to hedge fund managers to access multiple sources of return. Over time, by limiting drawdowns during volatile periods, the funds aim to outperform traditional equity markets on a risk-adjusted basis.

Table 1: Fund performance

Source: Fairtree, Bloomberg. Data as at 31 March 2026. Reported fund performance throughout refers to the Fairtree Wild Fig Multi Strategy FR RI Hedge Fund (unless otherwise stated). All returns are net of all fees. As the funds are managed in a similar manner, despite the regulatory differences between the two ZAR funds (QIHF and RIHF), over the fullness of time, we expect that the two funds will produce similar net returns. US dollar investors can access the strategy via the Cayman-domiciled Fairtree Wild Fig Multi-Strategy USD fund.

Importantly, it is not just the level of return that matters, but how those returns are generated. A well-constructed multi-strategy hedge fund allocation can act as a portfolio stabiliser during periods of market stress, due to its lower correlation to traditional asset classes. This provides meaningful downside protection at precisely the point when traditional portfolios are most vulnerable.

Graph 1: 12-month rolling correlation

Source: Fairtree, Bloomberg. As at 30 April 2026. Fairtree Wild Fig Multi Strategy FR QIHF long-dated track record since launch Aug 2010. Fairtree Wild Fig Multi Strategy FR RIHF launched in June 2023.  

Setting the scene: A period of elevated volatility 

Q1 2026 was characterised by a significant resurgence in market volatility, which affected global equity markets, as well as local market performance (read the Wild Fig Q1 2026 quarterly commentary here). The CBOE Volatility Index (VIX), often referred to as the market’s “fear gauge,” spiked above 30 during the quarter, levels typically associated with periods of market stress, and remained persistently elevated relative to its long-term average of approximately 19.5. 

 Graph 2: CBOE volatility index (January 2020 – April 2026)  

Source: CBOE Global Markets, Fairtree

This environment reflected a combination of macroeconomic uncertainty, shifting monetary policy expectations, and rising geopolitical tensions. Volatility was further exacerbated toward the latter part of the quarter by escalating geopolitical risks, including and especially by the emergence of conflict in the Middle East, which introduced additional tail risks around global energy supply and trade routes.

As a result, risk assets sold off broadly. Notably, the traditional diversification benefit of holding bonds alongside equities was again called into question, as correlations between asset classes converged. Critically, the breadth of the sell-off highlights a key limitation of traditional diversification frameworks: during periods of systemic stress, correlations across asset classes tend to rise, reinforcing the need for portfolio diversifiers and alternative sources of return.

Graph 3: Wild Fig vs major market performance indicators (YTD %)

Source: Bloomberg, Morningstar, as at 30 April 2026, Fairtree

March 2026 proved particularly punishing, with nearly every major asset class delivering negative returns. In many cases, losses erased all gains accumulated earlier in the quarter. The breadth and magnitude of the sell-off underscored a key reality: during genuine risk-off environments, there are very few places to hide within traditional portfolios. Notably, Emerging Markets declined approximately 13%, the JSE similarly fell around 12%, SA Property dropped c.12%, and the Resources Index (RESI) declined c.17%.

The structural case for hedge funds in volatile markets

The case for hedge funds is most compelling during periods of market stress, when their structural advantages become increasingly evident. There are three key reasons this holds true.

First, drawdown mitigation: As demonstrated above, a well-diversified multi-strategy hedge fund significantly reduces the magnitude of portfolio drawdowns relative to traditional equity and bond allocations. This matters not only for investor comfort but for the mathematics of compounding; a portfolio that falls 14% must subsequently rise approximately 16% just to recover to its starting point, whereas one that falls 5% requires only a 5.3% gain to recover (read Asymmetry of Returns for more insight).

Second, correlation diversification: During Q1 2026, the correlation between equities and bonds increased, reducing the effectiveness of traditional balanced portfolios. Hedge funds, by design, seek to generate returns that are uncorrelated or lowly correlated with traditional asset classes. This diversification benefit is most valuable precisely when traditional diversification breaks down. 

Third, asymmetric return capture: Multi-strategy hedge funds have the ability to profit from both rising and falling markets through their use of long and short positions. This asymmetry means that periods of volatility, rather than being purely destructive, can be sources of return generation.

Conclusion 

Q1 2026 reinforced a message that is often overlooked during periods of market calm: volatility is inevitable, but its impact on portfolios is not. The portfolios best equipped to navigate it are those that incorporate genuine sources of uncorrelated return. The Wild Fig delivered on its mandate during the quarter, generating a positive return while equity and bond benchmarks declined, and doing so with a fraction of the drawdown experienced by major indices. 

For investors seeking to build resilient, all-weather portfolios, the case for hedge funds is not tactical; it is structural. The benefits of drawdown protection, correlation diversification, and asymmetric return capture compound over time, ultimately contributing to a smoother and more sustainable long-term wealth creation trajectory. 

We look forward to continuing this conversation in future editions of the Through the Hedge Fund Lens series.