Absolute Return: Picking Our Relative Value Spots

Like most other asset classes, absolute return strategies were forced to contend with significant policy risk associated with the U.S. administration in 2025. This was true even for managers like us who take a relative value approach that is not dependent on the direction of financial markets, but on our ability to try and exploit mispriced securities in them. Indeed, the chaotic rollout and fickle execution of President Donald Trump’s tariff policy created a level of uncertainty that was difficult to underwrite and led us to avoid certain investments. This included investments in global commodities, that under normal circumstances of heightened volatility may have offered good opportunities for gains. Moreover, it wasn’t until later in the year, when policy initiatives emanating from the White House became more narrow and more focused, that we became more comfortable taking selectively more risk.

So, will absolute return strategies face the same degree of policy uncertainty in 2026? Not when it comes to tariffs, perhaps. On that front, it seems the worst may be over, even as ongoing frictions between the U.S. and some of its major trading partners remain a threat. But we do believe politics will still play a large role in financial markets this year, and we are focused on several major political events that could have implications for our multi-strategy portfolios over the next 12 months.

Politics as unusual?

The most immediate of these concerns may be the Trump administration’s ongoing public feud with U.S. Federal Reserve (“the Fed”) chairman Jerome Powell and some of the central bank’s governors, all of which has called into question the Fed’s independence and whether monetary policy will become more tied to fiscal policy objectives. The possibility of a new era of political involvement in the Fed could pose longer-term existential threats to the U.S. economy. We continue to monitor our interest rate exposures at both the individual strategy and overall portfolio levels to identify any unintentional tilts that may arise.

Beyond that, we are also mindful of the U.S. midterm elections in November, which could have a significant impact on policy-sensitive industries like renewable energy, healthcare services and defence—particularly if the Democrats win the day and are able to delay some of the Trump administration’s initiatives on these fronts. That said, even with the plethora of polling data now at our disposal, predicting election outcomes has proven difficult in recent years, and we are generally shy about making big aggregate bets that are particularly biased towards a certain election result. For example, we think investments related to the potential privatization of Fannie Mae and Freddie Mac (currently government-sponsored housing finance enterprises) are extremely sensitive to the election outcome and carry too much downside risk potential for us to justify right now. That doesn’t mean we won’t make investments based on polling expectations. In fact, we may seize on opportunities to do so as we move closer to election day, but only if the potential upside relative to downside is very compelling and justifies taking this binary risk.

Clearly, then, politics will play a role in how we manage our multi-strategy portfolios in 2026, yet it’s not the only catalyst that could determine how we construct portfolios going forward or how investors may end up allocating money to absolute return strategies more broadly.

Themes to watch

To that end, the artificial intelligence (AI) investment theme is hard to ignore. After all, AI has dominated headlines and driven such significant appreciation in the share of some companies that investors are now divided on valuations, with many of them pointing to potential overexuberance that could challenge current pricing. From our perspective, we agree that many risky assets, particularly related to AI, are fully priced right now. However, we don’t have a strong view on the medium-term trajectory of markets or the global economy, and given our market-neutral multi-strategy approach, we do not need to make such a judgment to generate returns from the investment. Instead, we can actively monitor relative value opportunities that emerge during periods of significant volatility and then manifest, for example, in related securities pricing in different medium-term forecasts.

We also believe that certain industry trends within the absolute return complex could have an equally important role in how we differentiate ourselves in 2026. In particular, the war for hedge fund talent remains intense, and we are starting to see some firms struggle to generate attractive returns amidst rising costs associated with “paying up” for personnel. There was already one major closure in 2025, and we would not be surprised to see other firms shutter or merge with larger competitors over the coming years. Our strategy, however, is to largely sidestep this competition in part by offering a different value proposition to portfolio managers (PMs) than just trying to maximize their near-term compensation. Most of our new PMs are coming from other multi-strategy firms or proprietary trading firms and have become disillusioned with their culture and rigidity. Our PMs are generally looking to have more autonomy over their strategies and to build equity in a franchise of their own.

Ultimately, whether it’s policy risks courtesy of the U.S. administration, all-encompassing investment themes like AI, or the industry-specific talent war just described, we feel well positioned to capitalize on opportunities that may arise in 2026—even if this year proves more difficult for risk assets like stocks. Then again, that’s what absolute return strategies like ours are designed to do. By picking our spots and tactically allocating to whatever sub-strategies become attractive over time, we can mitigate the risk of elevated volatility but also potentially profit from it by providing our investors with uncorrelated returns.