In our Q1 2025 hedge fund analysis, we use a basket of top hedge fund equity holdings to examine portfolio risk, performance drivers, and mitigation strategies. We find that a version of that portfolio with higher idiosyncratic volatility was more resilient during a period of heightened style factor volatility, delivering stronger results than the simple market-hedged portfolio. Optimizing for higher “Idio %” proved effective in reducing unintended factor exposures and improving returns.
Key Takeaways
• Factor risk drove volatility and underperformance, especially from Momentum and Minimum Volatility.
• Optimising for higher idiosyncratic risk delivered outperformance and lower drawdowns.
• Factor exposures and risk spiked during the period shows that a proactive approach to portfolio construction helps mitigating hidden risks.
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