Changes in risk management approaches
In 2026, risk management no longer fits into classic textbook formulas as the world has become too unpredictable. Funds that continue to rely on static risk assessment models are regularly met with the unexpected. It's not only about isolated 'black swans' — but also involves a fundamental reorganisation of how risk emerges, builds up, and manifests under new circumstances.
Traditional tools like Value at Risk, stress tests using past data, and correlation matrices are still used, but their roles have changed. Instead of being the main decision-making tools, they are now just one part of a wider assessment process.
Geopolitical risks
Geopolitics is now a key operational risk. Five to seven years ago, most fund managers saw geopolitical events as short-term shocks that markets would quickly bounce back from. Now, conflicts, sanctions, and changes in supply chains have a lasting impact on asset values. Markets do not recover within three months after major geopolitical occurrences; instead, they are reorganising around these changes.
Major asset managers, such as BlackRock and the sovereign wealth funds of Norway and Singapore, have said they now include a separate geopolitical factor in their allocation models. This means they diversify across countries, avoid markets with high risks of asset freezes, and look more closely at the supply chains of their portfolio companies. Portfolios are now shorter in some Asian markets and longer in the US and India, since these regions are seen as more stable in terms of regulations and sanctions.
A major challenge is secondary sanctions liability, in which even investments that are not officially banned can still cause regulatory problems due to complex corporate structures or partnerships. Legal departments at funds have grown much larger, not because of bureaucracy, but because mistakes have become much more costly. One poorly structured deal can stop a whole business in the US or EU.
Currency instability
The dollar is still the main reserve currency, but its dominance is slowly fading. More countries are using the yuan for trade, central banks are talking about digital currencies, and they are also increasing their gold reserves. All these changes point to a slow shift in the global monetary system.
In practice, currency risk is now a bigger issue for any international portfolio. Funds are hedging their currency exposure more, especially in emerging markets. In 2026, it is common to hedge 50 to 70 per cent of a portfolio's currency risk, whereas three years ago, many funds did little or no hedging. The cost of hedging has risen alongside interest rates, as exposure to currency fluctuations has become too costly to ignore.
A new tendency is that volatility between major currency pairs has increased. Pairs like euro-dollar, pound-dollar, and yen-dollar now show swings that were once seen only in emerging-market currencies. This shift changes how investors who use the dollar or other major currencies assess risk when investing in euro- or yen-denominated assets.
Continuous monitoring instead of static analysis
Risk teams at the biggest funds now use continuous monitoring, checking key indicators daily or even several times a day. This is possible thanks to the greater use of artificial intelligence and automated dashboards. But this method also requires a new work culture in which analysts track signals in real time.
It's not only about technology; the way decisions are made has changed, too. Analysts and managers no longer rely on a single base case. Instead, they consider three or four possible scenarios, each with clear triggers and ready-made response plans. This requires more resources and effort, but it helps teams respond faster and remain calm during a crisis.
Liquidity management
The years 2022 and 2023 showed that liquidity can disappear much faster than people expect. UK pension funds faced margin calls due to LDI strategies, showing how even safe investments can cause significant problems when there is enough leverage. What seemed stable and predictable turned into a crisis in just a few days, and the central bank had to step in.
As a result, managers across the market have reviewed their liquidity buffers. Now, it is more common to hold assets that can be sold within one to five trading days. Private capital, which used to focus on illiquid private equity and real estate, is shifting by reducing these positions or picking assets with realistic exit timelines and options to sell on the secondary market.
A new trend is the rise of liquid alternatives—funds that invest in hedge fund or private credit strategies but let investors withdraw money monthly or quarterly. This balances returns and flexibility, and more investors are looking for these options.
Why are funds revising their approach to private equity?
Private equity has long been one of the most profitable ways to invest large amounts of money. But the model that worked in the 2010s—buying a company, adding lots of debt, cutting costs, and selling after four or five years—no longer works in 2026.
Interest rates are higher; it is harder to find good times to sell; buyers are pickier; and limited partners (LPs) now expect more transparency and real improvements in how companies are run.
The focus on creating operational value rather than financial engineering
The time of cheap money and classic leveraged buyouts is over. When debt costs more than 8 to 10 per cent, and deal multiples stay at 12 to 15 times EBITDA, it is hard to exit. Financial tricks alone cannot deliver returns when capital is expensive. Now, real business improvements—like growing revenue, improving operations, entering new markets, and building better technology—are needed to create value.
The best-performing PE funds from 2024 to 2026 are those with real operational know-how in their sectors and strong financial teams. Technology funds are hiring former CTOs, CPOs, and product directors. Healthcare investors are bringing in medical directors and regulatory experts. Manufacturing funds are hiring COOs with experience in transformation. These hires help move from 12 times EBITDA at entry to 16 to 18 times at exit, thanks to real business growth.
The KPIs for portfolio companies have changed, too. In the past, EBITDA and debt covenants were the main focus. Now, managing partners often talk about Net Promoter Score (NPS), customer retention, repeat sales, and employee engagement.
Longer holding periods
The IPO market was almost closed to private equity exits from 2022 to 2024, and even in 2025 and 2026, it has only partly reopened. The chance to go public depends on market mood, volatility, and the sector. As a result, funds are now holding assets longer, sometimes by choice. The average holding period is now seven to eight years, up from the usual four to five. For LPs, this means their money is tied up longer and raises new questions about how to value funds with many unrealised assets.
Continuation funds have become common when a high-quality asset is not sold at fund close but moved to a new specialised fund with the same or new LPs. This avoids selling under adverse conditions and provides stability for company management. Still, it also makes it harder for LPs to assess the actual liquidity and IRR until the asset is fully sold. Some big institutional LPs have already set limits on how much they invest in these continuation vehicles.
At the same time, the PE secondary market—where investors buy and sell LP stakes in funds—is growing fast. In 2025, volumes topped $240 billion, a record for the industry. For LPs who need liquidity, this is now a real exit option, though usually at a discount to net asset value (NAV). For buyers, it is a chance to get an established portfolio with a shorter investment period and real assets.
The growing importance of operational excellence
Another growing trend is treating operational excellence as an ongoing process rather than a one-time project. This means using modern management systems like company-wide OKRs (Objectives and Key Results), real-time reporting, improving unit economics, focusing on customer and employee retention, and automating operations. The goal is to make the business sustainable and able to grow, no matter what the market is like, not just to make it look good for a sale.
Top-performing funds are now acting more like operational partners or consultants for their portfolio companies, not just as sources of money and financial oversight. They help connect companies with new clients and partners, assist in hiring senior managers, and share best practices across similar businesses. This is called 'platform value' in the industry, and it is what sets leading funds apart from the rest.
For management teams at portfolio companies, this also changes how they work with their PE sponsors. Instead of just sending quarterly EBITDA reports and discussing debt covenants, there is now regular discussion of operations and a yearly strategy session where the fund’s partners are truly involved in important decisions.
New requirements from LPs
Limited partners such as pension funds, family offices, university endowments, and sovereign wealth funds are now much more demanding in choosing funds and setting investment terms. Simple questions about IRR and TVPI are no longer enough. In 2026, LPs want to know: How much of your track record was built when debt was expensive, and exits were tough? Do you have your own operational team, or do you use outside consultants? What is your actual ESG reporting, and is there an independent auditor? What are your governance practices in portfolio companies?
There is also greater attention to fund terms such as lock-up periods, NAV credit lines, and co-investment rights in certain deals. LPs who used to accept standard terms are now negotiating, especially those investing $50 to $100 million or more. The gap between what large and small LPs get has widened: big investors get higher fees, first access to co-investments, and more detailed reports, while smaller investors end up subsidising the larger ones.
New strategies for hedge funds and institutional investors
The rise of algorithmic trading
In key stock markets, the share of algorithmic trading has exceeded 70% of total transaction volume — and this figure continues to rise. It is no longer solely confined to high-frequency trading, where milliseconds determine success and a competitive advantage requires investment in physical proximity to exchange servers. Algorithms are increasingly being used for medium-term strategies, such as sector rotation based on macro signals, dynamic hedging of option positions and real-time asset allocation.
For most hedge funds, this means an unrelenting technological and data arms race. Those with the best computing infrastructure and high-quality training data for their models gain a systematic advantage that only grows over time due to the learning effect. Smaller players attempting to compete in the same liquid markets face increasing margin pressure and are forced to seek out niche inefficiencies that large algorithmic systems have not yet reached.
At the same time, reinforcement learning and adaptive algorithms that learn in real time are becoming more important. Unlike traditional strategies, which are optimised using historical data, adaptive systems can adjust their behaviour to ongoing market conditions. This partly explains why leading quantitative funds such as Two Sigma, Renaissance and D.E. Shaw continue to deliver results even in challenging conditions.
The use of alternative data
Alternative data is one of the most dynamic yet least transparent areas of modern investment. It refers to any non-financial data containing information about future financial results before they become publicly available. Examples include satellite images of retail chain car parks to assess footfall ahead of quarterly reports, aggregated credit card transaction data to track consumption trends, and data on job vacancies and hiring to gauge a company’s business activity.
In 2026, this practice evolved further: large language models analysed millions of documents, including patent applications, court records, regulatory filings and scientific and technical publications, to identify trends long before they became apparent in financial metrics. Sentiment analysis based on social media, news feeds, and even the tone of corporate calls with analysts has long since evolved from a novelty to the norm.
This also poses a challenge for regulators: where does the line lie between the legitimate analysis of publicly available information and insider trading? The legal framework in most jurisdictions currently lags behind practice. The SEC and ESMA are actively studying the alternative data market, so clearer rules are only a matter of time.
Diversification beyond shares
The classic 60/40 portfolio — comprising 60% shares and 40% bonds — underperformed in 2022, with both components posting losses of around 16%. This dealt a seismic blow to the basic axiom of diversification, whereby shares and bonds traditionally move in opposite directions to provide mutual balance. However, under inflationary shock and simultaneous rate hikes, the correlation between the two rises sharply, meaning that the 'protective' part of the portfolio not only fails to protect but also actively drags the portfolio down.
Large institutional investors are responding by significantly broadening diversification across real asset classes and sources of return. For instance, they are investing in raw materials and commodities as a hedge against inflationary shocks rather than as a speculative position. Real infrastructure, such as roads, airports and utility companies, generates stable and partially indexed cash flows. Insurance instruments, particularly catastrophe bonds, are completely uncorrelated with financial markets and depend solely on natural or artificial disasters. This genuine diversification means that assets react differently to macroeconomic shocks.
At the same time, interest in private credit — direct lending to companies outside the banking system — is growing. Following a significant reduction in banks' lending to medium-sized businesses due to tighter capital requirements, private lenders have filled the gap. The floating rate on most private credit instruments means that yields automatically rise when base rates increase — something that traditional bond portfolios lacked in 2022.
The growth of private market allocation
Despite the challenges surrounding liquidity and exits, large institutional investors, primarily pension funds and university endowments, are continuing to increase their exposure to private markets. On average, large pension funds allocate 20–30% of their portfolios to private markets — including private equity, private credit, real estate and infrastructure — and this figure continues to grow in most cases. For the endowments of top universities, where the investment horizon is effectively infinite, this figure can exceed 50%.
The logic is simple: public markets are becoming increasingly correlated with one another and with global macro factors. When everything falls at once — from US equities to Eurobonds and emerging market equities — diversification across public assets does not provide a solution.
Provided you choose the right fund and entry point, private markets offer returns that are partly decoupled from day-to-day volatility and depend on the operating results of a specific business or asset. The illusion of net asset value (NAV) stability in private funds is partly an artefact of infrequent revaluation and partly a true reflection of the nature of returns.
How is the behaviour of retail investors changing?
While large funds and institutions shape the market architecture, it is often the behaviour of millions of retail investors that drives trends at the retail level. This influences asset valuations and creates both opportunities and systemic risks. Several distinct shifts in the behaviour of private capital are expected in the years 2025–2026 that differ from patterns of the previous decade, and these transformations warrant detailed consideration.
Growing interest in AI and tech assets
Artificial intelligence is not just a technology; it is a new central investment narrative that is channelling capital flows at all levels of the market. Retail investors are overwhelmingly reallocating their portfolios towards companies associated with AI infrastructure, semiconductors, cloud services, and enterprise AI platforms.
One nuance that many retail investors overlook is the difference between companies that build AI infrastructure and those that use AI in their business.
The former — Nvidia, TSMC and ASML, as well as leading cloud providers — control the physical and software infrastructure essential to the AI revolution. These companies will benefit regardless of which specific AI applications prevail in the competitive race. The latter — virtually any traditional business implementing automation or ChatGPT in its operations — can improve efficiency but will not necessarily receive a higher market valuation.
At the same time, interest in venture capital opportunities is growing through crowdfunding platforms and special purpose vehicles (SPVs), which allow private individuals to participate in early-stage funding rounds for AI startups. While this has lowered the entry threshold to $5,000–$25,000, it has not reduced the specific risks associated with venture capital investment.
The move towards long-term strategies
The volatility of recent years has prompted many experienced retail investors to adopt a more measured, disciplined, long-term approach, rather than engaging in speculation. Research into the behaviour of users of leading self-directed investment platforms, such as Fidelity, Vanguard and Interactive Brokers, shows that investors with over three years' experience have increased their average holding period and decreased the frequency of their transactions. The market corrections they have weathered have taught them more than any textbook could.
The maths confirms the intuition: Dalbar studies show that the average retail investor in the US consistently underperforms the index by 8.48 percentage points, solely due to behavioural errors such as panic selling, delayed re-entry after a recovery, and excessive trading. Disciplined dollar-cost averaging across the broad market during a crisis — without attempting to time the bottom — has produced better outcomes for the majority of private investors than active management over any ten years.
The investment horizon is lengthening, which is perhaps the healthiest structural shift in retail investors' behaviour over the last decade. It is important to understand that a long-term approach requires psychological resilience, which cannot be achieved through intellectual means alone.
Practical mechanisms such as investment automation, predefined rebalancing rules, and limits on the frequency of portfolio reviews during periods of crisis help maintain discipline, even when disaster is being reported everywhere.
The popularity of ETFs and passive investing
The ETF industry continues to break records, and 2026 is no exception. Global assets under management in exchange-traded funds have now surpassed $21.9 trillion. Monthly inflows into passive strategies consistently exceed outflows from active funds. This is because most active managers fail to outperform the relevant index over long time horizons after accounting for fees and expenses.
However, passive investing also has its pitfalls, which are discussed less frequently. Firstly, there is excessive concentration: the S&P 500 is now so heavily weighted towards the top 10 mega-companies that a passive index fund effectively represents a relatively concentrated bet on a few tech giants. Secondly, there is the illusion of diversification across several ETFs: if you hold four different ETFs, all of which include the same ten largest companies, the actual diversification is significantly less than expected. Thirdly, there are behavioural errors: a passive strategy requires iron discipline to avoid selling at the height of fear.
The most modern approach, which is becoming increasingly popular among sophisticated private investors, is neither passive nor active, but a combination of the two: a diversified passive foundation comprising 60–70% of the portfolio, plus narrow active positions where there is a genuine understanding of an advantage or where the market is structurally inefficient. These could be small-cap stocks, specific geographical markets, or particular thematic niches where analysis truly adds value.
Alternative assets
Alternative assets have moved beyond being the exclusive domain of the ultra-wealthy and are gradually becoming accessible to a broader spectrum of private investors, albeit with notable caveats. Examples include property via REITs or fractional investment in specific properties, precious metals via ETFs or physical gold, and private lending via fixed-income peer-to-peer lending platforms. These are now technically accessible with relatively small sums and do not require a qualified investor status in most jurisdictions.
Crypto assets are a separate and still controversial category which is becoming less of a fringe phenomenon with each passing year. Following the approval of a Bitcoin ETF in the US in 2024 and the market's gradual institutionalisation, Fidelity, BlackRock, and other major asset managers have launched their own crypto products. This has somewhat shifted attitudes towards crypto as an asset class in private portfolios.
However, volatility remains extreme: Bitcoin regularly experiences drawdowns of 50–70% from peak levels. Most independent financial advisers therefore recommend limiting the crypto allocation to an amount that an investor could lose entirely without catastrophic consequences for their overall financial well-being.
Another layer of alternative assets is emerging: art, wine, classic cars, and sports cards, whose accessibility is growing thanks to fractional platforms and tokenisation. However, a critical factor is often underestimated: the liquidity of these markets is extremely limited. Most such assets cannot be sold quickly without a significant discount to fair value.
During a crisis, the market for wine or art shrinks dramatically — an investor who suddenly needs capital may find that an asset worth $100,000 is selling for just $60,000–$70,000 in the following weeks. For a portfolio where a significant portion of funds is tied up in such assets, this could cause serious problems at the most unexpected moment.
