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U.S. equity markets rebounded sharply during 2Q26, more than offsetting the first-quarter decline, as resilient corporate earnings and continued enthusiasm surrounding AI-related investment drove broad-based gains across risk assets. Investor sentiment improved meaningfully as geopolitical tensions in the Middle East stabilized following elevated volatility in 1Q, allowing market participants to refocus on corporate fundamentals and earnings growth. The 10-year Treasury yield rose from 4.3% to 4.5%, while the 2-year jumped from 3.8% to 4.2%, its largest move around a single meeting in years, while the 30-year was roughly unchanged near 4.9%, flattening the curve.
The S&P 500 Index experienced one of its strongest quarters in years, as Technology led the market higher, with semiconductors posting extraordinary gains as the AI capital spending cycle reaccelerated on the back of hyperscaler capex raises announced with 1Q earnings, while Energy was the weakest sector as oil reversed.
2Q26 Hedge Funds in Perspective
Serving as a proxy for large, broadly diversified hedge funds with low beta exposure to the equity market, the median manager in the Callan Institutional Hedge Fund Peer Group rose 3.2%. Within this style group of 50 peers, the average Callan hedged equity manager gained 8.2%, as AI-related investment themes continued to broaden beyond semiconductor manufacturers into software, infrastructure, industrials, power, and data center beneficiaries, expanding the opportunity set for equity hedge managers. The average Callan hedged cross-asset manager gained 5.3%, as equity positioning drove performance during the quarter.
Within the HFRI Indices, the best-performing strategy was equity hedge, which had a strong quarter and gained 10.2%, as AI, technology, and stock selection drove returns. Event-driven strategies finished up 7.8%, as merger activity remained healthy and the highly anticipated SpaceX IPO created meaningful trading opportunities across IPO allocations, suppliers, and related securities. Relative value strategies ended up 2.0%, as fixed income arbitrage and yield-oriented strategies benefited from stable credit markets and improving interest rate expectations. Macro strategies closed up 1.3%, as discretionary managers benefited from opportunities across global interest rates, currencies, and sovereign debt amid evolving central bank expectations and geopolitical developments, while commodity and systematic trend-following managers were challenged by sharp reversals in energy prices and cross-asset market trends.
Across the Callan Hedge Fund-of-Funds (FOF) database, the median Callan long/short equity FOF was up 10.1%, as managers were able to profit from the rise in AI-related companies during the quarter. The Callan Core Diversied FOF index ended up 8.5%, as both equity hedge and discretionary macro managers drove performance higher. Meanwhile, the Callan Absolute Return FOF index gained 3.5%, as relative value strategies in addition to equity hedge strategies drove performance higher.
Since the Global Financial Crisis, liquid alternatives to hedge funds have become popular among investors for their attractive risk-adjusted returns that are similarly uncorrelated with traditional stock and bond investments but offered at a lower cost. Much of that interest is focused on rules-based, long-short strategies that isolate known risk premia such as value, momentum, and carry found across the various capital markets. These alternative risk premia are often embedded, to varying degrees, in hedge funds as well as other actively managed investment products
Within Callan’s database of liquid alternative solutions, the median Callan MAC Long Biased manager rose 10.3%, as strength came from AI-related enthusiasm. The median Callan Risk Parity MAC manager increased 4.4%, as positioning to equities pushed performance higher, while commodities offset some of that performance as oil moved lower during the quarter.
The opportunity set for hedge funds for the second half of 2026 remains constructive. Elevated stock dispersion, normalizing interest rates, and ongoing macro uncertainty continue to create opportunities for security selection and relative value trading, supporting the outlook for hedge fund alpha generation. While AI-related companies continue to drive earnings growth, market leadership has expanded beyond the largest technology companies into industrials, utilities, power infrastructure, financials, and select cyclical sectors. This broadening of the market should improve both long and short opportunities for fundamental equity managers. The current environment appears increasingly supportive of differentiated, idiosyncratic return generation rather than broad market beta.
Disclosures
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