Key Takeaways
- • Don Steinbrugge, Founder and CEO of Agecroft Partners, says higher short-term interest rates are now adding a return source for insurance-linked securities (ILS) and other cash-heavy strategies.
- • As of September 2026, the Federal Reserve's target range for the federal funds rate was 3.75% to 4.00%, with further rate increases expected, according to Steinbrugge.
- • Quantitative, low-net relative-value and ILS strategies that hold substantial cash or collateral are earning additional income on those holdings.
- • Highly leveraged hedge fund strategies face mounting pressure from elevated financing costs, which can materially reduce returns.
- • Steinbrugge argues that the source of a strategy's return now matters as much as its headline performance, a point of particular importance for institutional investors.
Summary
Higher short-term interest rates are providing an additional source of return for insurance-linked securities (ILS) and are reshaping how returns are attributed across the hedge fund industry, according to Don Steinbrugge, Founder and CEO of Agecroft Partners. As macroeconomic conditions shift which management styles deliver relative performance, Steinbrugge argues that the underlying source of an investment's return now matters as much as its headline figure.
Steinbrugge said the environment has changed significantly after more than a decade of near-zero short-term rates. "Investors can once again earn a meaningful return on cash and short-term Treasury securities," he said. As of September 2026, the Federal Reserve's target range for the federal funds rate stood at 3.75% to 4.00%, with further increases expected. He noted that inflation has declined significantly from its 2022 peak but remains above the Fed's 2% target.
According to Steinbrugge, strategies that hold substantial cash or collateral are benefiting from income on those short-term holdings. He named quantitative funds, low-net relative-value strategies and ILS as examples. Highly leveraged strategies, by contrast, face rising financing costs that can erode returns.
Steinbrugge cautions that investors often associate rising rates with falling asset values, but the effect on hedge fund strategies is more nuanced. Some strategies gain from higher short-term rates, while others absorb higher financing costs that can materially reduce performance. He stressed that this distinction is particularly important for institutional investors evaluating manager returns.
Steinbrugge said the environment has changed significantly after more than a decade of near-zero short-term rates. "Investors can once again earn a meaningful return on cash and short-term Treasury securities," he said. As of September 2026, the Federal Reserve's target range for the federal funds rate stood at 3.75% to 4.00%, with further increases expected. He noted that inflation has declined significantly from its 2022 peak but remains above the Fed's 2% target.
According to Steinbrugge, strategies that hold substantial cash or collateral are benefiting from income on those short-term holdings. He named quantitative funds, low-net relative-value strategies and ILS as examples. Highly leveraged strategies, by contrast, face rising financing costs that can erode returns.
Steinbrugge cautions that investors often associate rising rates with falling asset values, but the effect on hedge fund strategies is more nuanced. Some strategies gain from higher short-term rates, while others absorb higher financing costs that can materially reduce performance. He stressed that this distinction is particularly important for institutional investors evaluating manager returns.
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