Smart money is winning as tariff whiplash, AI grip Wall Street

[NEW YORK] A noisy, unsettled Wall Street is doing what years of simply owning the index rarely has: made the smart money look smart again.

In a market rattled by tariff whiplash, artificial intelligence disruption fears, a brewing Middle East conflict and stretched valuations, getting tactical has paid off in ways that a decade of devotion to buy and hold did not.

Hedge funds are outperforming. Active stock-pickers are beating benchmarks at rates not seen since 2007. Quantitative strategies, return-stacking strategies, risk-parity allocators – all ahead of mainstream indices.

Put simply, bond yields, credit spreads and the S&P 500 have been all but motionless for weeks. It’s a different story for the tactical trades beloved by the pros.

Their opportunity set has been rich. Software stocks have been routed on fears that AI agents could hollow out the subscription-revenue models on which entire software empires were built – a sell-off that spread fast into insurance, real estate, trucking and anywhere else a labour-intensive business model looked vulnerable.

Meanwhile, oil settled this week near its highest level since August after US President Donald Trump warned Iran it had as little as two weeks to reach a nuclear deal, backed by a military buildup in the region on a scale not seen since 2003. Gold has climbed back above US$5,000.

Friday (Feb 20) added another layer. The Supreme Court struck down the bulk of Trump’s global tariffs – his biggest legal defeat since returning to the White House – only for him to pledge a new 10 per cent global levy within hours. Stocks advanced. Bonds and the dollar held losses. Investors head into the weekend with no respite, with Trump weighing a limited strike on Iran.

“The majority of the policy uncertainty out of the administration is noise. Could this approach backfire? Yes,” said Jim Thorne, chief market strategist at Wellington-Altus.

Stress signals are hiding in plain sight, he argues: a weakening dollar, gold near records, and investors piling into Walmart at lofty valuations. “Trump needs to turn down the noise. Investors need to be more tactical.” 

It’s barely seven weeks into the year, and the history of active strategies sustainably beating passive is not an encouraging one. Markets that reward complexity have a habit of reverting before the lesson fully sinks in.

Yet Jordi Visser, who heads AI macro research at 22V Research, sees something bigger at work – a tech-driven disruption that’s making investing more complicated. 

“In a world of vibe coding, monthly model releases, China open-source competition, and agentic automation, a five-year moat can be drained in a weekend,” he wrote in a note. The traditional institutional response – wait for clarity, then re-risk – may be exactly the wrong instinct.

The ticket to outperformance may lie in active trading, position sizing and market timing, per Visser – not the simple buy-and-hold bets that made passive investing king. For now, at least, the smart money is collecting.

The Bloomberg All Hedge Index, which tracks hedge funds ranging from equity long-short to multi-strategies and distressed debt, last month gained almost 3 per cent – its best performance in more than two years. That doubled the S&P 500’s return and beat indices tracking Treasuries and corporate bonds.

Behind the gains: a rush into precious metals and bearish wagers that worked – exactly the kind of tactical positioning that thrives when mainstream indices go nowhere.

In the esoteric structured products realm, quant-powered trades – those designed by banks for wealthy clients and institutional investors to ride multi-asset waves including relative value and trend following – are up 1.1 per cent on average this year, according to data provider Premialab, which follows some 7,000 so-called quantitative investment strategies, or QIS. 

Among exchange-traded funds (ETF), complexity has paid off, too. An ETF that allocates assets based on volatility in a strategy known as risk parity (RPar) has jumped almost 10 per cent this year. Return-stacking funds that use derivatives to track long-only indices and then invest the excess cash in uncorrelated trades have seen gains with some exceeding 7 per cent.  

Meanwhile, stock pickers are finally having a moment after years of failing to keep up with a tech-driven rally. With computer and software giants retreating amid stretched valuations and concern over their AI spending, the loosening market grip has benefited active funds that are avoiding the industry. 

A listless S&P 500 is, of course, an easier benchmark to beat. Much harder is telling how long the fast-shifting backdrop will persist, providing opportunities for the nimble.

“The impulse to get tactical when things feel uncertain is what leads to poor outcomes,” said Corey Hoffstein, chief investment officer of Newfound Research. “What investors need is a portfolio structure that doesn’t require them to predict what’s coming next.” 

Stocks rose over the holiday-shortened week as the S&P 500 climbed 1 per cent. Trapped mostly in a 200-point band this year, the index has made little headway with momentum stalling at the 7,000 milestone.

Similarly, 10-year Treasury yields have held in a range, hovering near 4 per cent, as investors grapple with an upcoming new Federal Reserve chair and a heated debate over the path of monetary policy.  

Even if buying the market paid off handsomely in Trump’s first term thanks to strong economic growth, an investment shift is taking root, according to some market participants. White House-fuelled policy volatility – tariff shocks, geopolitical brinkmanship, fiscal whiplash – has changed the calculus for Paul Ticu, head of asset allocation at Calamos Investments. 

“This is a regime switch,” he said. “At some point the policy uncertainty and changes will be fully reflected in markets,” he added. “Whether that is going to be a sell-off or rotation remains to be seen.” BLOOMBERG