Investors hunting for uncorrelated returns faced a clear question at the third panel of the HKMA Investment Forum in Hong Kong on 4 November 2026: where does genuine alpha still exist, and how should risk be managed when dispersion is high and correlations are shifting. Moderated by Kenneth Ho, chief investment officer for external managers at the Exchange Fund Investment Office of the Hong Kong Monetary Authority, the discussion brought together Nicolas Giauque of Farallon, Tony Yoseloff of Davidson Kempner, John Aylward of Sona Asset Management and Michael J. Sacks of GCM Grosvenor.
Nicolas Giauque described Farallon’s approach as centred on single-name, idiosyncratic positions rather than broad strategy bets. The firm seeks situations in which more than 70 per cent of the risk is company-specific and uncorrelated with other holdings. Corporate engagement in Japan remains a significant activity, alongside biotech and other bottom-up opportunities. The aim is a portfolio of uncorrelated bets so that good and bad news do not arrive simultaneously.
Giauque noted that credit has regained prominence in the firm’s allocation after several years of decline. Two drivers stand out. First, the scale of AI-related capital expenditure (cited as two trillion dollars next year) is creating a wide range of financing opportunities, from senior project financing to junior unsecured risk and contracts backed by investment-grade counterparties. The key caveat is that current returns on compute reflect supply shortages that will not last indefinitely. Second, higher US rates have improved the opportunity set in lower-rated and distressed credit, particularly among rate-sensitive and smaller-capitalisation names.
Tony Yoseloff characterised the opportunity set as opportunistic credit rather than pure distress. Davidson Kempner typically runs a global book with roughly half its assets in the United States and half outside. The firm is finding performing credit names that offer mid-teens returns with clear cash-flow or amortisation paths and meaningful downside protection. Examples include lending opportunities in India and selected US mortgage exposures. These are often barbelled with more special-situation positions that can deliver equity-like returns while retaining downside protection.
Pure distress remains a very tough place. Many of the weakest companies could not be refinanced by private credit and have already been through one or more liability-management exercises, reducing liquidity and leaving stories that are hard to underwrite. US look-through default rates in both public markets and private credit have been running at roughly five to six per cent over the last three years and are expected to continue to accelerate. Yoseloff also highlighted converts and Asia. Higher rates and elevated single-stock volatility have been supportive for converts, and the firm currently holds more liquid multi-strategy exposure in Asia than in Europe.
The moves in equity markets in particular have been way more dramatic at the sector level than they’ve been at the index level.
Nicolas Giauque, Farallon
John Aylward, speaking from a European base with a global credit mandate, agreed that it is a strong environment for credit. Capital has moved from surplus to scarcity across AI, infrastructure, defence and energy transition. He pointed to a notable credit-equity disconnect in a large, well-understood US company with a five-trillion-dollar market capitalisation whose equity sits near all-time highs while its credit spread is the widest for a double-A US corporate in twenty years. In Europe, structural complexity continues to create opportunities for flexible capital. Aylward sees better risk-adjusted returns in the eight to twelve per cent range for high-quality companies. Selected hierarchical distressed situations can still offer twenty to thirty per cent returns, but these are more selective.
Michael J. Sacks noted that a diversified portfolio of hedge-fund strategies (approximately 30 per cent of GCM Grosvenor’s business) has performed well for several years and, in light of ongoing volatility, is likely to generate alpha. He also noted that October had been challenging. The firm is increasing capital allocation to credit secondaries. Where private-credit assets can be purchased at a discount to marks, the combination of the underlying opportunity and the discount capture is compelling.
Both Yoseloff and Aylward expressed greater concern about existing exposures than about new excess credit creation. A large wave of private-equity capital raised in the late 2010s and early 2020s was heavily directed toward software businesses; private credit followed. That concentration now faces higher rates, slower growth and multiple compression. Distributions from private-equity funds have dropped in half, from the previous range of 20 to 25 per cent a year to roughly 10 to 13 per cent. Public markets look relatively cleaner by comparison. High yield has migrated up in quality, while leveraged loans and private credit have moved in the opposite direction. Aylward observed that cumulative default rates in the broadly syndicated loan market on a five-year basis have already exceeded Global Financial Crisis levels.
Sacks said a broadly diversified portfolio across private markets and hedge-fund strategies allows him to sleep pretty well, provided one stays awake enough to respond and react. Giauque said he also sleeps well, but remains concerned about portfolio construction. Sector-level moves have been far more dramatic than index-level moves. Geographic diversification is less effective when the same AI-related exposures appear across markets. In a true shock, correlations can rise sharply. The response is to emphasise position-level idiosyncratic risk and to ensure that tail hedges are designed to pay off when those correlations shift.
The discussion underscores several practical points for asset owner portfolios: idiosyncratic, bottom-up risk remains a primary source of uncorrelated return; opportunistic and performing credit currently offer a wider set of opportunities than pure distress; private-credit exposures carry unresolved legacy risks that will play out over several years; and traditional diversification may provide less protection than many models assume when the same thematic risks appear across regions and asset classes.