Advisors still using hedge funds despite Wall Street's PE push. Here's how.

With so much advisor conversation focused on adding private market assets to client portfolios, it’s been eerily quiet on the hedge fund front.

So what are wealth managers saying – and doing – with hedge funds during a volatile period where they might be both useful and profitable?

Dean Rubino, CEO of KPC Private Funds, says advisors are increasingly using hedge funds as portfolio stabilizers rather than return maximizers, and the current environment is a clear example of why. With elevated volatility and rising correlations across traditional assets, including commodities, they are looking for strategies that can dampen drawdowns and reduce overall portfolio volatility.

“While not all hedge funds ‘hedge’ in the traditional sense, they generally have flexible mandates that allow managers to adjust exposure; whether through hedging, reducing gross or net exposure, or raising cash. That flexibility stands in contrast to long-only portfolios, which remain inherently directionally exposed,” Rubino said.

As a result, he believes hedge funds are progressively being used as a complement to traditional allocations, helping improve risk-adjusted outcomes rather than simply chasing absolute returns.  

Rubino adds that there is a common perception that traditional hedge fund strategies—such as market neutral equity, relative value, and event-driven—are inherently uncorrelated because they rely on security selection and structural inefficiencies rather than market direction. While he believes there is some truth to that, in practice he’s found that sector-focused managers within these strategies are often better positioned to consistently exploit those inefficiencies and deliver true diversification.

“Not all hedge funds are truly uncorrelated. Many carry implicit beta or factor exposures that only become apparent during periods of stress. The key is rigorous diligence, distinguishing between true alpha generation and strategies that are simply repackaged market exposure,” Rubino said.

Elsewhere, Frank Burke, chief investment officer with PPB Capital Partners, says disciplined hedge fund managers have traditionally been able to navigate market volatility by staying true to their target net exposures throughout periods of market dislocation.  Given how quickly risk has come on and off, keeping a consistent net exposure helps prevent hedge fund managers from getting whipsawed when the market moves against them.

“Funds that target market neutrality are especially effective by employing relative value and arbitrage trades across similar securities. Targeting hedge funds with low market correlations is key,” Burke said.

Burke adds that prudent use of leverage enables hedge funds to deliver meaningful returns regardless of the market environment. 

“These types of funds are best positioned in IRA accounts for investors due to the high frequency of trading and their generation of short-term gains. The market has been rewarding fundamentals and so disciplined long-short equity sector specialist managers can also produce better risk-adjusted returns,” Burke said.

Rami Sarafa, CEO of Cordoba Advisory Partners (CAP), meanwhile, says talented hedge fund managers can help financial advisors by treating market volatility as a ‘source of return’ rather than a source of risk.

“Successful managers like CAP can ‘mine’ volatility, meaning we’re structurally positioned to benefit from price dispersion, dislocations, and frequent repricing instead of just capturing beta. From an investment perspective, this turns short‑term noise into a repeatable return stream and can improve long‑term compounding while reducing reliance on the direction of broad indices,” Sarafa said.

However, Sarafa notes that traditional long‑short equity and macro models often struggle to deliver this outcome because they tend to rely on timing markets or factor exposures.

“They are frequently not nimble enough, become directional ‘disguised beta,’ and end up in a losing battle of trying to predict short‑term moves rather than monetizing volatility itself. This can amplify drawdowns instead of cushioning them, which is precisely what advisors like CAP avoid in volatile regimes,” Sarafa said

WHAT ABOUT THE RISKS?

As for risks that financial advisors should be aware of when selecting a hedge fund in the current environment, Rubino believes that the primary risk is overgeneralization, often driven by “checkbox-style diligence.” In his view, generic diligence can provide confidence in the quality of a fund, but it often falls short in explaining the true drivers of risk and return and how a strategy fits within a broader portfolio.

“Not all alternatives are the same, yet they’re frequently grouped together based on surface-level characteristics like liquidity or stated strategy. In reality, there are as many, if not more, private funds than publicly listed equities, and navigating that universe requires more than standardized screens,” Rubino said.

When volatility spikes, advisors must be cognizant of liquidity risks across all their positions, according to PPB’s Burke. In his opinion, many hedge funds deliberately employ limitations on liquidity to avoid excess redemptions at the most inopportune time and that protects all their longer-term investors. Accordingly, he believes advisors should educate their clients on their true need for liquidity first and foremost before allocating to any alternative investments like hedge funds.

“Many of these funds are structured in a way to prosper in times of market uncertainty and so education is paramount to keep clients from trying to redeem at the worst possible time for them and the other fund investors,” Burke said.

Finally, Sarafa says one red flag is managers who overpromise on stock selection by selling a story that they can consistently “pick winners” through cycles. This often leads to portfolios that are, in practice, imperfectly correlated to upside beta yet vulnerable to the same drawdowns that clients are trying to mitigate.

Another concern, says Sarafa, is managers who express views without real conviction or proper portfolio construction.

“When position sizing, hedging, and risk limits are not tightly aligned with a manager’s core thesis, you end up with portfolios that are either overly timid, like closet indexers, or unintentionally concentrated in hidden factors, both of which backfire when volatility spikes,” Sarafa said.