Mid-Year Market Color: What We’re Seeing Across Managers and Allocators
July 29, 2026
Twice a year we step back from the daily flow of NAVs, capital calls, and investor reporting to share what we’re seeing across the markets our clients trade and the asset classes our allocator clients underwrite. The first half of 2026 gave us plenty to talk about: a new Fed Chair, an oil shock, record equity highs, the strongest hedge fund flows in nearly two decades, a venture market swallowed whole by AI, and the first genuine stress test for private credit. Here’s our read.
US Equity Markets: A Strong Half, Narrowly Built
The S&P 500 returned just over 10% in the first half, crossing 7,600 for the first time, with the Nasdaq up roughly 12.5% and the Dow topping 52,000 — its best first half since 2021. The second quarter was the strongest for US equities in six years. Under the hood, however, this was not a broad rally. Leadership shifted decisively from the Mag7 — Meta and Tesla were both down for the half, and Microsoft fell more than 20% — to the AI infrastructure and memory complex. AI workloads consumed high-end DRAM capacity and repriced the entire semiconductor supply chain.
The half was hardly smooth. Brent traded above $113 at points, driving double-digit drawdowns in February and March and reintroducing an inflation impulse markets had spent two years trying to shake. Energy was among the best-performing sectors, and a rotation into financials, real estate, and quality consumer names began before leadership re-concentrated in a handful of AI names. Breadth — or the lack of it — remains the story to watch in the second half.
The Fed: The Warsh Era Begins Hawkish
Kevin Warsh chaired his first FOMC meeting in June and left the funds rate unchanged at 3.50%–3.75%, where it has sat since the Fed’s three cuts closed out 2025. Where March projected a cut, the June projections show half the committee expecting at least one hike before year-end, with headline PCE now forecast at 3.6%. May CPI printed 4.2% — the hottest in over three years — driven largely by energy.
Hedge Funds: The Asset Class of the Moment
It is hard to overstate how much sentiment has swung back toward hedge funds. Industry assets hit a record $5.22 trillion in Q1, the fourteenth consecutive quarterly gain, with roughly $90 billion of net inflows over the trailing two quarters — the strongest stretch in nearly two decades. This follows back-to-back years of double-digit industry returns (11.8% in 2025 after 11.9% in 2024), and allocator surveys show nearly half of institutional investors planning to add hedge fund exposure this year, the highest reading on record, with quant and discretionary macro leading the wish list.
Performance dispersion in the first half favored the specialists. Smaller, focused funds — event-driven, Asia-focused equity, concentrated opportunistic books — meaningfully outran the largest multi-strategy platforms, several of which posted respectable but pedestrian mid-single-digit returns while nimbler managers printed 25–60%+. The launch environment reflects the demand: new funds raised over $14 billion in just the first two months of the year, and the pipeline of funds in development is the deepest since COVID. For emerging managers, the window is as open as it has been in a decade — allocators are writing tickets, seeders are competing for pedigreed PMs, and day-one infrastructure decisions matter more than ever.
Venture Capital: A Record That Isn’t What It Looks Like
Global venture funding hit a record $510 billion in the first half — more than all of 2025 combined. But the headline conceals extreme concentration: OpenAI and Anthropic alone absorbed $217 billion, roughly 43% of every venture dollar raised worldwide, and AI companies overall captured 70–80% of deployed capital. Strip out the frontier labs and the market looks far more ordinary. Non-AI startups took under 20% of first-quarter capital, deal counts have fallen to decade lows, and five mega-managers captured over 70% of new LP commitments in Q1.
The genuinely constructive development is exits. The second quarter was one of the strongest for venture-backed liquidity in years, with two dozen $1 billion-plus acquisitions and a reopening IPO window — welcome relief for LPs who have waited years for distributions. The bifurcation, though, is structural: AI-native companies command roughly 4x the late-stage valuations of non-AI peers on comparable metrics, and founders outside the theme are fundraising in a very different market than the headlines suggest.
Private Equity: DPI Is the New IRR
Private equity’s half was defined by selectivity. Global fundraising fell roughly 30% year-over-year to $287 billion, with the pain concentrated among mid-sized and first-time managers, while sponsors with demonstrated realized returns raised quickly. That word — realized — is the theme. After years of thin distributions, LPs have stopped accepting paper marks as performance, and DPI has displaced IRR as the metric that determines whether the next fund gets raised.
The exit backlog remains the industry’s central challenge: over 31,000 portfolio companies valued near $3.7 trillion, with holding periods at historic highs. Exit activity is improving — Q1 saw nearly $307 billion of exit value, and jumbo processes are moving again — but it remains concentrated in premium assets. AI has entered every diligence checklist — both as a disruption risk to software-heavy portfolios and as the operational value-creation lever sponsors are increasingly expected to demonstrate.
Private Credit: The First Real Test
Private credit is having its first full-cycle examination, and the grading is public. The First Brands and Tricolor collapses — both now the subject of federal fraud charges — put underwriting standards, collateral verification, and double-pledging risk on every allocator’s agenda. Default indices have moved from under 2% to 2.7%+ in two quarters, and the true stress rate is meaningfully higher once PIK toggles and liability management exercises are counted. February brought the “SaaS scare,” as markets repriced software-heavy direct lending books (roughly a quarter of the asset class) against the possibility that AI erodes the recurring-revenue moats those loans were underwritten on. Several of the largest retail-facing evergreen vehicles gated or capped redemptions in the first quarter, and regulators — the Fed, Treasury, the Bank of England, the FSB — are all now actively studying the sector’s interconnections with banks and insurers.
What It Means From Where We Sit
Every theme above converges on the same point: scrutiny is up. Allocators are rewarding realized returns over marks, verifiable collateral over covenant-lite trust, and operational substance over narrative. In our operational due diligence work and across our administration clients, we see the same questions being asked with new intensity — valuation governance, cash controls, counterparty exposure, liquidity terms that match asset liquidity, and whether a manager’s infrastructure can actually withstand the growth its fundraising implies.
For managers, the message from the first half is straightforward. Capital is available — historically available, in the case of hedge funds — but it is flowing to firms that can prove their operations match their pedigree. Independent administration, clean audit trails, transparent investor reporting, and institutional-grade middle office are no longer differentiators; they are the price of admission.
HC Global Fund Services is a global fund administrator with offices in San Francisco, Los Angeles, Las Vegas, Denver, New York, Toronto, Mumbai and Manila servicing more than $51 billion in assets under administration and 500 clients in the Alternative investment space. This commentary is provided for informational purposes only and does not constitute investment, legal, or tax advice.
