Q3 | Portfolio Managers’ Insights

What shaped markets during the quarter, and what did it mean for hedge fund strategies?

Geopolitical tensions drove energy and rates higher

Geopolitical tensions have driven higher energy and commodity prices, increasing inflationary pressures and contributing to a higher interest-rate environment. At the same time, volatility and dispersion across markets have increased, making the investment landscape more difficult to predict.

Equity indices remained resilient during the quarter, supported by strong earnings, low index volatility, and continued confidence in the AI theme.

Bond markets, however, have become less orderly. Yields have moved higher globally, volatility has picked up considerably, and market liquidity has weakened as investors question the path of central bank policy, the persistence of inflation, and the scale of government funding needs.

This dynamic was well illustrated by developments surrounding the Strait of Hormuz, which demonstrated how a geopolitical crisis can trigger sharp spikes in energy and commodity prices, reshape inflation and interest-rate expectations, and rapidly alter market conditions across asset classes.

Taken together, the environment remains opportunity-rich for hedge funds, as competition for capital has intensified. The real winners and losers among hedge funds have been determined by their ability to navigate uncertainty, capitalize on market dispersion, and adapt to rapidly changing market conditions. While some traditional macro, relative value and fixed income strategies have struggled with sudden shifts in inflation and interest-rate dynamics, certain systematic macro and CTA strategies have been better positioned to capture opportunities across rates, currencies and commodities.

Market expectations for the 30-day Federal Funds Rate at year-end remained highly volatile throughout Q3. At times, investors expected rate pressures to ease, but expectations rose sharply again in September.

Figure 1: Q3 market expectations for the 30-day Federal Funds Rate at year-end

Source: CME Group ZQZ6 as of 24.09.2026

U.S. 10-year Treasury yields have risen to levels not seen since 2007. While several factors continued to influence rates, one notable development during the quarter was yen-related Treasury selling, which added upward pressure to long-term U.S. yields.

Figure 2:10-year goverment bond yields comparison: France, Germany, U.S. and Japan

Source: Bloomberg as of 24.09.2026.

AI theme remained in focus

AI has remained the main growth driver in the markets, providing a range of unusually attractive opportunities. At the same time, increasingly concentrated positioning around the AI theme has heightened risk, and these opportunities can change very quickly.

AI has become an increasingly crowded trade, creating conditions for sharp and volatile market movements. At the same time, elevated single-stock volatility and high dispersion across equities have created favourable conditions for hedge fund managers, particularly those focused on equity long/short and technology-focused strategies. For investors, this has meant opportunities to access diversified, low-correlation return streams from different market movements.

However, the margin for error has narrowed for crowded themes. The concentration risk became evident in July, when sharp rotations away from AI-related stocks led to significant losses and position unwinds at the highly leveraged, AI-focused Situational Awareness hedge fund.