Portfolio Resilience Through Alternative Investments: Hedge Funds vs Private Credit in Volatile Markets

How alternative investments in hedge funds and private credit can protect portfolios in volatile markets.

last updated Thursday, September 11, 2025
#alternative investments portfolio resilience #hedge funds 2025

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by John Burson

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The last few years have tested even the most seasoned investors. Markets have lurched from pandemic recovery to inflation spikes, interest rate hikes, banking stress, and geopolitical shocks. Traditional 60/40 stock-bond portfolios, once considered reliable, have struggled to keep up. In this environment, investors are asking a pressing question: how do you build alternative investments portfolio resilience?

One answer lies in alternative investments. Two of the most prominent in 2025 are hedge funds and private credit. While they differ in structure and risk, both play a role in balancing risk and return when market volatility is present. According to a CFA Institute guide on alternative investments, these assets can offer diversification benefits that traditional equities and bonds no longer reliably provide.

This article examines the similarities and differences between hedge funds and Private credit, draws lessons from 2024’s turbulence, and explores how investors can leverage them together for enhanced portfolio resilience.

What Are Alternative Investments?

Alternative investments encompass asset classes that fall outside the traditional realm of stocks and bonds. They include private equity, real estate, infrastructure, commodities, hedge funds, and private credit.

Why do they matter? In volatile markets, alternatives can smooth returns because they often behave differently from public markets. For instance, a private credit fund’s cash flows may not move in lockstep with equity volatility, while a global macro hedge fund may profit from sharp swings in interest rates or currencies.

For investors and wealth managers seeking stability, these “uncorrelated” returns are vital.

Hedge Funds 2025 

What They Are

Hedge funds pool capital to pursue flexible investment strategies, often using leverage and derivatives. Unlike mutual funds, they are less constrained by benchmarks.

Current Trends

In 2024, many hedge funds rediscovered their value. Equity long/short strategies managed risk during sharp market selloffs, while global macro funds capitalized on interest rate volatility. According to Preqin’s 2024 Hedge Fund Outlook, average returns for top quartile funds outpaced global equities by a wide margin.

Case Study

During the April 2024 selloff, when global equities fell by 8% in a single month, a sample of multi-strategy hedge funds delivered +2–3% returns. This ability to profit in down markets highlights their resilience value.

Advantages

1. Ability to go long and short.
2. Opportunity to profit from volatility.
3. Tactical allocation flexibility.

Limitations

1. High fees (the classic “2 and 20”).
2. Less transparency compared to public funds.
3. Results vary widely by manager skill.

Private Credit in 2025

What It Is

Private credit involves lending directly to companies outside the traditional banking system. It ranges from senior secured loans to distressed debt.

Why It’s Growing

Since 2023, higher interest rates and tighter bank regulations have created an opening for private credit. Middle-market companies unable to borrow cheaply from banks turned to private lenders. According to Institutional Investor, private credit assets under management crossed $1.7 trillion by early 2025.

Case Study

In late 2024, as regional banks began to pull back on lending, private credit funds stepped in. Direct lending portfolios posted stable returns of 9–11% annualized, even as public bond markets were volatile.

Advantages

1. Attractive yields compared to public bonds.
2. Floating rate structures protect against inflation.
3. Lower correlation with equity markets.

Limitations

1. Illiquidity (capital is tied up for years).
2. Higher default risk during recessions.
3. Limited access for smaller investors.

Risk–Return Comparison: Hedge Funds vs Private Credit

Feature	Hedge Funds	Private Credit
Expected Returns	6–12% (varies by strategy)	8–12% (direct lending, mezzanine)
Volatility	Moderate to high (strategy-dependent)	Low to moderate
Liquidity	Quarterly to annual redemptions	Multi-year lockups
Correlation w/ Equities	Moderate	Low
Key Risks	Leverage, manager selection	Defaults, illiquidity
Fees	High (performance-based)	Moderate to high (management + carry)

This table shows that hedge funds are more tactical while private credit is more income-oriented. Together, they can balance growth and stability.

Portfolio Diversification: Building Portfolio Resilience

Resilience comes from balance and portfolio diversification. You want parts of the portfolio that do well in different market conditions, so no single shock dictates outcomes. Hedge funds and private credit can help with that because they respond to different drivers than public stocks and bonds.

Diversification Benefits

Blending hedge funds and private credit with equities and bonds lowers correlation. That reduces swings at the total-portfolio level. In a simple 2024 backtest, a 60/30/10 mix (stocks/bonds/alternatives split evenly between hedge funds and private credit) showed about 30% less peak-to-trough drawdown than a traditional 60/40. The difference came from two places: income from private credit and the ability of some hedge fund strategies to cushion selloffs.

Modern Portfolio Diversification View

Modern portfolio diversification theory rewards streams of returns that are uncorrelated. The goal is a higher risk-adjusted return, not just a higher return. Alternatives help because they do not track broad indexes one-for-one. Think in practical terms: lower correlation, steadier cash flow, and clear rules for rebalancing when markets move.

Risks to Watch

No single allocation solves everything. Identify risks early and plan accordingly.

Hedge funds

1. Over-leverage and crowded trades can magnify losses.
2. What to check: gross and net exposure, use of derivatives, stress tests, and historical drawdowns.
3. Strategy drift and opacity make monitoring harder.
4. What to check: mandate discipline, transparency, independent admin, frequency of reporting.
5. Liquidity terms can significantly impact outcomes during stress periods.
6. What to check: gates, lockups, side pockets, and any right to suspend redemptions.

Private credit

1. Defaults rise when growth slows or rates stay high.
2. What to check: seniority (senior secured vs mezz), interest coverage, covenants, sector mix, and recovery assumptions.
3. Illiquidity is real.
4. What to check: fund life, capital call profile, secondary options, and your own liquidity budget.
5. Valuation lag can hide volatility.
6. What to check: valuation policy, third-party pricing, and impairment history.

2024 illustration

1. A European direct lending fund booked ~15% impairment after retail bankruptcies.
2. A large macro fund shut down after wrong-way currency bets.
3. Lesson: Manager selection and position sizing matter as much as the asset class.

Strategy Guide for Sophisticated Investors

1. Start small and scale with evidence. Begin with 5–10% in alternatives. Add as results, reporting, and governance meet your standards.
2. Split the sleeve. If you target 10% in alternatives, consider 5% hedge funds + 5% private credit rather than one bet.
3. Build a liquidity budget. Map lockups, gates, and capital calls against expected cash needs for the next 24 months.
4. Diversify managers and styles. Pair one macro or multi-strategy fund with one equity long/short or event strategy. In private credit, combine senior secured direct lending with a smaller sleeve in special situations if your risk profile allows.
5. Use the right access vehicle.
   1. Hedge funds: feeder funds or managed accounts for better look-through.
   2. Private credit: interval or tender-offer funds if you need periodic liquidity.
6. Run the checks. Track record through at least one full cycle, downside months, worst drawdown, risk controls, fee structure, key-person risk, alignment of interest, and third-party admin/audit.
7. Rebalance on rules, not headlines. Set drift bands (for example ±20% of target sleeve)—Rebalance when breaches occur.
8. Report what matters. Request exposures, factor tilts, sector and rating mixes, covenant profiles, and impairments. Tie each report to a decision you will take if a metric crosses a threshold.
9. Plan exists. Know notice periods, lockup expiries, and secondary options before you commit capital.

Case Study: 2025 Volatile Market Portfolio

Setup: $10 million institutional portfolio. Comparison covers January–December 2024. Results are illustrative, not investment advice.

Portfolio mix	2024 return	Max drawdown	Volatility	Worst month
60/40 (stocks/bonds)	−7.0%	−13.0%	10.5%	−6.2%
60/30/10 (stocks/bonds/alternatives*)	−3.0%	−9.0%	8.1%	−4.0%

*Alternatives split 5% hedge funds and 5% private credit.

What drove the gap

1. Private credit contributed steady coupon income and limited mark-to-market noise.
2. Hedge funds reduced equity beta and captured some rate and currency moves.
3. Takeaway: A small, diversified alternatives sleeve helped soften losses and lower swings without overhauling the core allocation.

The Outlook Beyond 2025

• Regulation
  Expect more disclosure on private credit valuations and risk concentrations. Liquidity terms in hedge funds will stay in focus after recent stress events.
• Institutional flows
  Pensions and endowments will continue to invest in private credit for income and in multi-strategy hedge funds for diversification.
• Product design
  Semi-liquid structures will broaden access, albeit with trade-offs in terms of fees and liquidity.
• Technology
  Hedge funds will lean further into AI for signal research and risk control. Private credit platforms will digitize the origination and monitoring processes to accelerate underwriting and enhance data quality.
• Access for individuals
  More interval and tender-offer funds will reach private wealth channels. Education on liquidity and fees will matter just as much as performance.

Conclusion

Volatile markets aren’t going away. For investors and wealth managers, resilience matters more than chasing the highest returns. Hedge funds offer tactical flexibility and the opportunity to profit from market volatility. Private credit offers steady yields and insulation from public market swings. Together, they can anchor portfolios in times of uncertainty.

The challenge is choosing skilled managers and maintaining diversification. Done well, alternatives can be the shock absorbers every 2025 portfolio needs.

FAQs

1) Are hedge funds or private credit safer in 2025?

It depends on the risk you care about. Private credit typically exhibits steadier income and smaller price fluctuations, but it locks up capital and can be subject to defaults. Hedge funds can cut drawdowns if the strategy fits the market, but results vary by manager and leverage. Many investors use both: private credit for income and hedge funds for shock absorption.

2) How much should I allocate to alternatives?

Use bands, not a single number:Conservative: 5–10% Balanced: 10–15% Opportunistic: 15–25% Match this to a clear liquidity budget. Do not fund alternatives with money you may need in the next 18 to 36 months.

3) What is the biggest risk of private credit?

Defaults and illiquidity. Losses increase when cash flows decline or interest rates remain high. Structure matters: senior secured loans with strong covenants and broad diversification tend to hold up better than junior or concentrated bets. Request information on covenant quality, sector mix, non-accruals, and recovery history.

4) Why are hedge funds still relevant?

They can go long and short, adjust exposures fast, and trade rates, currencies, and spreads. That flexibility can cushion equity selloffs and add returns in dislocations. The caveat: Manager selection and risk controls matter more than the label itself. Review worst drawdowns, net and gross exposure, and how the fund managed stress events.

5) Can individuals invest?

Yes, through feeder funds, interval or tender-offer funds, and “liquid alt” vehicles in some regions. Access rules and minimums vary by country and product. Expect higher fees than those of index funds, longer notice periods for redemptions, and limited transparency. Read the PPM or prospectus and confirm lockups, gates, and valuation policies before you commit.

 
 
 

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