Topic: Diversifying Strategies

In a recent Top1000funds.com article on emerging markets, Zhe Shen, Managing Director, Head of Diversifying Strategies at TIFF Investment Management, discussed how the rise of AI is contributing to Asia’s evolving role in global manufacturing and why accessing this opportunity can benefit from active managers with deep local insight.

Read the full article here

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• Corporate activity contracted materially in 2022 as rising interest rates, valuation uncertainty, and heightened regulatory scrutiny made deal execution prohibitively difficult and often unattractive.
• By late 2025, those constraints began to ease; financing conditions stabilized, market confidence improved, and long-deferred strategic expansion began moving back onto boardroom agendas. M&A and IPO activity began to recover.
• We view 2025 as the early phase of a broader normalization, supported by a strong pipeline of deferred transactions and increasingly favorable market and regulatory conditions.
• Historically, such environments have favored event-driven strategies, particularly merger arbitrage and equity capital markets managers.
• Recognizing these dynamics, TIFF increased exposure to event-driven strategies through allocations to merger arbitrage and equity capital markets managers.

“We are optimistic about the outlook for equity and debt underwriting, particularly amid the resurgence in the IPO market and higher acquisition finance-related activity.”
— David Solomon, Goldman Sachs CEO at Q4 2025 earnings period

A Shift in Corporate Sentiment

During the Q4 2025 earnings season, corporate commentary shifted meaningfully with renewed enthusiasm around M&A and equity capital markets: a dealmaking renaissance. After several years of constrained activity, corporates are now eager to act. We see early signs of recovery in 2025 across mergers and equity capital market issuance, creating conditions that have historically favored event-driven strategies. To understand the significance of this shift, it is helpful to revisit what caused the slowdown.

The 2022 Reversal

Prior to 2022, deals were elevated across both M&A and equity capital markets. Following the initial COVID shock, extraordinary monetary and fiscal stimulus drove interest rates to historic lows and sharply reduced the cost of capital. IPO issuance and M&A reached record levels in 2021, supported by strong equity markets and abundant financing. For event-driven managers, the opportunity sets were broad with low closing risk. According to HFRI, event-driven strategies were among the best-performing hedge fund categories in 2021.

Conditions changed abruptly in 2022. Inflation surged, prompting one of the fastest monetary tightening cycles in decades. At the same time, heightened regulatory scrutiny extended review timelines and increased deal uncertainty. This deadly combination materially weakened business confidence and reduced corporate willingness to pursue transactions.

Global IPO issuance fell by roughly 70–80%,1 while M&A volumes declined 40–50% from prior peaks.2 As transaction activity slowed, opportunity sets narrowed and event-driven strategies faced a challenging backdrop.

Early Signs of Recovery

After several years of limited IPO and M&A activity, material pressure began to build beneath the surface, and a substantial backlog of high potential transactions accumulated. As of late 2025, more than 1,300 unicorns3 remained held within private equity and venture capital portfolios.4 Prolonged holding periods increased pressure on private equity sponsors to unlock capital and realize IRRs, while venture-backed companies faced growing urgency to secure long-delayed liquidity events.

By 2025, several headwinds that froze corporate activity began to ease:

• Interest rates stabilized, reducing uncertainty around financing costs.
• Equity markets recovered, restoring confidence in public market exits.
• Corporate balance sheets strengthened, supporting renewed management confidence in strategic decision-making.
• Regulatory review processes became more predictable, improving visibility around deal execution timelines.

Boards and sponsors shifted from “wait-and-see mode” to careful execution with optimism. In 2025, both M&A and equity capital markets rose ~40% year-over-year in dollar terms5 6 with broad-based recovery across sectors and geographies. Strategic transactions led the rebound as companies repositioned for growth, with artificial intelligence serving as an additional catalyst for large-scale deals.

As transaction flow resumed, event-driven opportunity sets expanded accordingly. Event-driven performance recovered alongside activity, with the HFRI Event-Driven Index returning approximately 11% in 2025.

We view 2025 not as a short-term rebound, but as the early phase of a broader normalization. Financing conditions have stabilized, business confidence is restoring, regulatory review processes have become more predictable, and the backlog of deferred transactions remains substantial. In our view, the recovery reflects a return toward the long-term growth trajectory that preceded the disruption.

Why This Matters for Event-Driven Strategies

Event-driven strategies are designed to capitalize on corporate activity. As transaction volumes expand, opportunity sets broaden meaningfully. Recognizing these dynamics, TIFF increased exposure to event-driven strategies through allocations to merger arbitrage and equity capital markets managers.

Merger Arbitrage Strategies

Merger arbitrage strategies seek to capture the spread between a target company’s trading price and the offered price in a merger transaction (deal spread).

Higher deal volumes expand the investable universe, allowing managers to be more selective and better diversified across deals. Improving confidence in deal completion and more predictable regulatory timelines can reduce downside risk and shorten holding periods.

While increased competition has narrowed spreads in parts of the market, disciplined managers with strong deal selection, risk management, and portfolio construction remain well positioned to participate across a broader and more active opportunity set.

Equity Capital Markets Strategies

Equity capital markets (ECM) strategies seek to capture deal-specific alpha by providing liquidity across primary and secondary issuance, including IPOs, follow-ons, block trades, and convertible securities.

ECM managers are positioned to benefit from a growing pipeline of transactions and increased issuance frequency. Experienced managers often engage with issuers well ahead of market reopening, working alongside management teams and underwriters on positioning, investor messaging, and deal structuring. These long-standing relationships and preparation can translate into improved access and more attractive allocations as issuance resumes.

Portfolio Diversification Benefits

Importantly, both strategies tend to exhibit low correlation to broader hedge fund strategies. Returns are driven less by market direction and more by deal structure, execution, and corporate decision-making, offering meaningful diversification benefits within a multi-strategy portfolio.

Positioning for a Multi-Year Normalization

Our objective was not to time a short-term rebound, but to position the portfolio for a sustained reopening of corporate activity.

We believe the recovery that began in 2025, supported by stabilizing financing environments, a more predictable regulatory backdrop, and a substantial pipeline of deferred transactions, represents the early stages of a multi-year normalization.

As transaction flow continues to rebuild, event-driven strategies are positioned to benefit from an expanding opportunity set across mergers and equity capital markets.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

FIN News recently covered TIFF’s newly published white paper, Can AI Outperform Human Investors? The Hedge Fund Perspective. The article discusses some of the key ways AI is changing the investment process for hedge funds, particularly with large-scale data summaries that can be used to generate predictive signals. However, Tiff Managing Director and Head of Diversifying Strategies Zhe Shen, who authored the whitepaper and is quoted in FIN News, also cautions against overemphasizing the role of technology; ultimately, human assessments remain an essential component of fund success.

To learn more about the whitepaper’s findings, read the full article here.
Disclaimer: To access this article, a subscription is necessary. Please note that TIFF does not possess the rights to distribute this content.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• The hedge fund industry is no stranger to AI, but recent advancements have improved the way hedge funds invest.
• Data is a key competitive advantage for hedge funds leveraging AI. However, investors should understand how that data is sourced, processed, and interpreted.
• Key impediments to broader AI adoption include the high cost of computing power and difficulty attracting top-tier talent.
• Despite AI’s growing role, human judgment remains a critical component of investment decision-making.

Introduction

Leopold Aschenbrenner, a 23-year-old former OpenAI engineer and founder of the $1.5 billion hedge fund Situational Awareness, wrote recently that “Everyone is talking about AI, but few have the faintest glimmer of what is about to hit them.”1

For an industry that hires some of the smartest people in the world and prides itself on innovative investment approaches, how vulnerable is the hedge fund industry to an AI invasion?

In reality, hedge funds have been incorporating forms of AI for decades. Large systematic (quantitative) funds have existed since the 1980s. Even more recent funds like Numerai, which relies on public tournaments to crowdsource quantitative trading signals, have been around for over a decade.2

Let’s explore how hedge funds are deploying AI today, along with the challenges that still exist.

Data and Delusion

Put simply, AI models take large amounts of data and aim to predict the future of market movements based on this data (Figure 1). Yet we often hear the question: “Isn’t data just data? Can’t everyone just buy the same data?”

Not so. In practice, we have found that access to proprietary, well-structured data has become one of the key differentiators in determining which hedge funds have an edge in the AI race.

Systematic funds represent some of the earliest and most prominent adopters of AI in the hedge fund industry. They utilize vast quantities of data to identify patterns and generate predictive signals. Investors often assume these funds have pristine data and can forecast with precision. In reality, many predictions are based on small tidbits of information. The process can sometimes be like trying to guess a picture of a dog when all you are given is 5 pixels. Many systematic funds operate with hit rates slightly over 50%, but small gains with enough repetition can lead to large gains. Unsurprisingly, systematic funds have invested heavily in their data capabilities in recent years.

Ben Wellington from Two Sigma highlighted this point on a recent podcast, emphasizing the importance of being present at the moment data is created to ensure proper categorization.4 In this podcast, he shared an example from the post-financial crisis era: after 2008, a major newspaper retroactively labeled articles from 2006 and 2007 as “subprime.” A researcher relying only on these labels might mistakenly conclude that the sudden rise in “subprime” mentions was a powerful predictive signal. In reality, it reflected backfill bias—a postmortem reclassification rather than a true early warning.

One area within hedge funds where data aggregation has shown its worth is in the event-driven space. Long-tenured Equity Capital Markets (ECM) funds investing in deals such as IPOs, M&A, and issuances have been able to accumulate a treasure trove of data on past transactions, which in turn helps make surprisingly accurate predictions about outcomes of future events.

For example, by identifying situations that are likely to lead to a deal break, an M&A fund could limit its exposure to left-tail events, thereby enhancing its overall return profile of the fund.

Moving forward, we believe those funds with the deepest, richest, and most proprietary data will retain a significant edge. More recent entrants will need to demonstrate more creativity in how they use available data to leapfrog incumbents.

Talent and Technology

Nvidia’s staggering ~1,200% performance5 over the past five years has demonstrated the importance of computing power to AI development. More processing power means faster hypothesis testing and portfolio optimization which may lead to faster and better signal development. For systematic funds, this could translate directly into alpha. The downside is that processing power is expensive and difficult to scale. Leasing costs for data centers for a large systematic fund can run into hundreds of millions of dollars per year, thus limiting the amount of AI a smaller hedge fund can realistically deploy.

More important than processing costs is the ability to attract talent. It is often said that 20% of researchers generate 80% of the successful signals in a given year, though the challenge is that no one knows in advance which 20%. For this reason, it is important to keep a wide cast of highly talented (and highly paid) staff on the payroll. Hedge funds are competing with technology firms for top AI talent, with pay packages now exceeding $1 million per year.  What’s more, each AI developer needs to have a supporting cast of data engineers and developers to help turn theory into reality.

That said, we have seen increasing success rate among more entrepreneurial managers who strike out on their own with assistance from AI, particularly those focused on a specific niche.

Judgement and Justification

For all of AI’s capabilities, there remain areas of investing where human judgment is difficult to replicate. Manager discretion is one of the most significant. Fundamental strategies retain an edge in situations where decision-making depends on conviction, contrarian thinking, or nuanced human interactions. For example, when a portfolio manager chooses to concentrate on a handful of high-conviction positions, or makes a contrarian trade based on direct engagement with company management, the driver is individual judgment rather than an algorithmic signal.

Management meetings underscore this distinction. Whether investors are receptively learning or seeking to influence outcomes through activism, these activities remain firmly in the fundamental toolkit, not the quantitative one. Human relationships and qualitative assessments are central to investment due diligence, and AI has not yet shown an ability to replicate these dynamics. Many of the top-performing fundamental hedge funds demonstrate a proclivity to execute judgment calls that may rest on nothing more than pattern recognition honed over years of experience in a particular market segment.

This is not to say AI cannot aid the traditional investment process. We often find that today’s fundamental investors are using AI to help them summarize information and build a baseline understanding. Tools capable of reading decades of company filings in minutes, updating financial models post earnings in seconds, and distilling real-time company news into bullet points have given these managers much greater efficiency in their decision-making.

Conclusion

We remain optimistic about AI’s potential and believe it will continue to reshape the landscape of the hedge fund industry. However, managers should be cautious not to rely so heavily on AI that they lose their judgment.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Kane Brenan, CEO, and Anne Duggan, Managing Director, Client CIO Group, at TIFF Investment Management, join host Bill Kelly on the Educational Alpha podcast for a comprehensive conversation about TIFF’s mission, investment philosophy, and role in today’s evolving market landscape.

The conversation explores:
• TIFF’s origin story and 30+ year mission of delivering institutional-quality investment management to endowments and foundations.
• How TIFF continues to evolve—expanding from small institutions to larger, more complex organizations requiring customized portfolios.
• The firm’s access to what it believes to be top-tier private equity and hedge fund managers, driven by its longstanding industry relationships.
• TIFF’s investment philosophy and macro views, including strategic asset allocation, short-duration positioning, and perspectives on the U.S. dollar and long-term debt.
• The implications of the newly expanded endowment tax tiers, and how institutions may adapt portfolio strategies in response.
• Why liquidity is top of mind for nonprofit investors, and how private market exposure, secondary sales, and tax strategies are being re-evaluated.
• Why TIFF believes private equity remains compelling—even as many institutions pull back—and how current market sentiment may present attractive entry points.
• How TIFF approaches hedge funds as diversifying strategies requiring disciplined manager selection, risk management, and thoughtful portfolio construction.

Listen on Spotify→
Listen on Apple→

Disclaimer: Kane Brenan is the CEO, and Anne Duggan is the Managing Director, Client CIO Group at TIFF Investment Management. All views expressed by them on this podcast are solely their opinions and do not reflect the opinions of TIFF. You should not treat any opinions expressed by Kane or Anne as a specific endorsement to make a particular investment. References to any securities are for informational purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Any past performance discussed is not indicative of future results. Please keep in mind that investment in a fund entails a high degree of risk, including the risk of loss. Please note that the ads featured in this podcast are not endorsed by TIFF, and TIFF is not a sponsor of these ads.

Educational Alpha is a podcast hosted by Bill Kelly, Founder and Managing Member of Educational Alpha, LLC. The show features candid conversations with senior leaders on capital allocation, investment innovation, and long-term thinking in finance.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.