The asset manager’s 2027 long-term assumptions put hedge funds among the biggest beneficiaries of higher rates, policy volatility and widening dispersion. Much of the upgrade rests on alpha rather than market beta.

JP Morgan Asset Management has lifted its 10 to 15-year return forecast for diversified hedge funds by 140bp to 6.7%. It is the largest upgrade to any alternative asset class in the firm’s 31st annual Long-Term Capital Market Assumptions. The authors describe the industry as one of the “winners from this new world”.

The upgrade runs across every strategy. Event-driven funds rise 190bp to 7.1% and equity long bias 180bp to 7.3%. Macro gains 150bp to 5.6%, while relative value edges up 40bp to 6.1%. For sterling-based investors, diversified funds hedged into GBP are now forecast to return 6.4%, up from 5.0%.

The striking detail is where the extra return comes from. JPMAM’s estimate of the alpha component for diversified funds jumps from 2.4% to 3.9%, while the beta component slips from 2.9% to 2.8%. In other words, the forecast now credits managers with more than half of the expected return.

The firm gives three reasons. Higher interest rates boost the carry earned on short positions. Governments hunting for new ways to fund growth are unlocking pools of capital and creating opportunities for uncorrelated returns. And a backdrop of more frequent macro and policy catalysts should make relative value dislocations more common.

There is a caveat. JPMAM acknowledges that part of the alpha boost reflects enhancements to its forecasting methodology this year, not solely a change in market view. Allocators will want to weigh how much of the 140bp represents a new view on markets and how much a new way of measuring.

A diversifier when bonds are less reliable

The upgrade matters most for portfolio construction. JPMAM expects inflation shocks to occur nearly twice as often as they have historically, and projects a positive stock-bond correlation of 0.34. That makes duration a less dependable hedge. Adding 30% of a blend of diversified hedge funds, gold, infrastructure and transport to a 60/40 portfolio lifts its Sharpe ratio by 22% while maintaining returns. An unconstrained mean-variance optimiser using the firm’s numbers overweights hedge funds and underweights private equity.

Macro stands out on correlation. The strategy’s projected correlation to US large cap equities is 0.15, and to the Bloomberg US Aggregate it is -0.09. That profile helps explain why the report expects allocations to gold and hedge funds to rise as stock-bond correlations become less stable.

Dispersion without a crisis

The upgrade comes with a warning on dispersion. JPMAM notes that global equity manager dispersion has stayed elevated through 2026 despite an economic expansion and strong earnings. Historically, such spikes were tied to recessions or abrupt shocks.

For systematic managers, AI tooling expands the feasible strategy set but raises crowding and model risk. Wider access from new allocator channels may lift demand, though the firm stresses that capacity discipline matters.

Its conclusion for investors is blunt: with alpha to play for, manager selection is vital. The median fund may be better placed than at any point in recent forecasts, but the gap between the best and the rest is set to widen.