By Bob Elliott & Nathan Nangia November 13, 2025
Global Macro and Equity Long/Short hedge fund styles have excelled year to date. In Q3-2025, global macro returns (at equity volatility-levels net of 95 bps fees) were 9.1%, placing the quarterly returns in the 80th percentile. For equity long/short strategies, the Q3-2025 returns were approximately 14.2%, landing them in the 88th percentile.
Both managers and current investors in these styles have cause for celebration. However, for the experienced investor, strong performance can be accompanied by a nagging concern: will the performance persist, or will it revert to the mean?
Source: Hedge Fund Research Institute, Unlimited Calculations
In past posts we have spent a fair amount of time wrestling with whether individual managers exhibit outperformance persistence, ultimately concluding that an individual manager outperforming their institutional quality hedge fund peers, was no better than random chance. That’s because any one manager brings a lot of noise in their decision making relative to the 1000s of other managers either within the same strategy or across hedge fund styles.
But that doesn’t answer the question of whether a manager diversified index of a particular hedge fund style (like global macro, equity long/short, etc.) could exhibit outperformance persistence. If hedge fund styles exhibit short-term persistence – where strong quarters predict continued strength – then allocators could have a tool for forecasting in their arsenal. If true, tactically rotating between liquid hedge fund exposures during “hot streaks” could generate “style forecasting alpha”.
As depicted below, there appears to be compelling evidence that style forecasting alpha exists. Many hedge fund styles have historically demonstrated quarterly persistence rather than immediate mean reversion. Strong performance quarters have historically frequently been clustered together, particularly for global macro and equity long/short. Meanwhile some strategies, like managed futures, seem to have experienced quicker reversals, supporting the case that the momentum effect appears significant in hedge fund style strategies.
With liquid, manager diversified “Alpha Indexing” offerings becoming more common in recent years, it presents the opportunity for allocators to capture this style outperformance persistence to add value relative to static allocations.
Evidence Supporting Outperformance Persistence In Hedge Fund Styles
Outperformance persistence is characterized by a fairly simple idea: if returns in this quarter are “high” then they will be high in subsequent quarters. To demonstrate the trend, the methodology used was to identify quarters where returns were in the top quartile and calculate the average returns in subsequent quarters.
In the chart below, this average return is shown by the gold line. By itself, the average return statistic is insufficient; it’s critical to also assess statistical significance. For this reason, the distribution of strategy returns in subsequent quarters is depicted as the blue bars. If the distribution of returns is skewed and it matches the average return movement, there is evidence supporting a trend within that style. For those familiar with statistical time-series analysis, these charts should offer a more approachable visualization to plotting the autocorrelation functions of the return time series.
While the data present an array of interesting trends, the focus of this blog is limited to global macro and long/short equity. These charts are dense and packed with insight, so let’s break down three key takeaways:
- Both long/short equity and global macro styles generally perform above their average return (as represented by the gold line) for roughly three quarters following a “strong quarter,” defined as returns in the strategy’s top quartile. This indicates that that strong performance seems likely to persist for each style in the near-term. The distribution of returns (the blue bars) appears materially different from the gray lines (random chance), confirming that this trend has happened on multiple occasions.
- Both long/short equity and global macro hedge fund styles tend to mean-revert; however, they generally underperform their average roughly 1 year subsequent to the “strong quarter.” This can be validated by reviewing when the black bars exceed the 25% gray-line threshold.
- For the quarters more than 1 year after the “strong quarter”, the distribution of quarterly returns (i.e., the blue bars) returns to a roughly random distribution (i.e., it follows the gray lines), and it becomes difficult to substantiate a claim for or against a certain strategy based on this analysis.
Source: Hedge Fund Research Institute, Unlimited Calculations
Most other hedge fund styles showcase similar dynamics in their return time series. While the actual number of quarters varies, strong quarters tend to precede roughly 1 year of “above average returns” before notable mean reversion. Conversely, managed futures, or trend-following, strategies, tend to underperform in subsequent quarters after a strong quarter. To some extent, this trend divergence reflects the difference in the underlying investment philosophies of managed futures verses other strategies: managed futures managers aim to follow momentum while global macro, long-short equity and other styles aim to forecast underlying conditions or cycles.
Source: Hedge Fund Research Institute, Unlimited Calculations
Leveraging Style Outperformance Persistence Trend In Portfolio Construction
The charts above could offer a potential new alpha source for allocators: active hedge fund sub-strategy rebalancing or “style forecasting alpha.” Unlike manager selection “alpha,” this alpha source appears persistent.
By applying a straightforward rules-based strategy rotation approach you can assess the horsepower of this alpha source.
Rule 1) Select all the styles that had a “strong quarter” last quarter and equally weight them in the portfolio for this upcoming quarter.
Rule 2) If no strategies had a strong quarter, equally weight all strategies. For control purposes, exclude managed futures strategies given their observed tendency to mean-revert.
Source: Hedge Fund Research Institute, Unlimited Calculations
Note: These return metrics were calculated based on quarterly returns, which inherently lowers the observed strategy volatility
Given the relatively rudimentary approach taken, the simulated performance difference seems striking. This simulation exhibits a roughly 5% increase in the active portfolio’s risk-adjusted return (i.e., Sharpe ratio) which compounds to higher cumulative returns. It’s worth noting, the proposed active strategy would hold smaller, more concentrated portfolios and, consequently, erode some of the diversification benefits of the benchmark.
The charts above highlight the potential of style rotation approaches, however, to derive a “production-ready” investment strategy the investor should consider the portfolio return characteristics more closely.
However, identifying this trend is only half the battle. For many allocators, the practical challenges of tactically shifting capital between different hedge fund managers can be slow, costly, and operationally complex.
By utilizing low-cost, liquid, index-based hedge fund style strategy products, allocators can gain efficient exposure to these strategies while maintaining the agility to capture the performance persistence.
The question is no longer whether allocators should time their strategy exposures, but how.
Note: For optimal viewing of charts, we recommend using a tablet or computer.
For informational and educational purposes only and should not be construed as investment advice. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are our present opinions only. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages.