Hedge fund manager Sculptor Capital Management has reduced risk across most of its investment strategies after delivering a net return of 7.9% for the year to date, citing growing signs of stress in financial markets despite retaining confidence in long-term investment themes, according to a report by Bloomberg.
The report cites the firm’s portfolio committee as saying in a recent investor letter that it had taken profits and lowered leverage, net exposure and beta-adjusted equity exposure to their lowest levels in the past 12 months as market conditions became increasingly challenging.
While Sculptor continues to back structural themes including artificial intelligence and real assets over the medium term, it said a combination of warning signals had prompted a more defensive stance.
Among the concerns highlighted were signs of tightening conditions in funding markets at the end of the second quarter, including reduced credit availability and wider financing spreads. The committee also pointed to elevated market volatility, persistent inflationary pressures and a heavy pipeline of equity, credit and convertible debt issuance, arguing that capital demands are rising at a time when investor positioning appears stretched.
To help protect portfolios, the firm said it has increased hedging alongside the reduction in overall risk exposure.
The hedge fund also noted that policy uncertainty remains a key consideration. It highlighted the more hawkish tone adopted by Federal Reserve Chair Kevin Warsh on inflation, warning that renewed geopolitical tensions involving Iran could reignite price pressures and increase the likelihood of higher interest rates.
Despite those concerns, Sculptor said credit markets have remained receptive to borrowers this year, with strong demand helping fuel substantial debt issuance linked to artificial intelligence investment. Tight high-yield credit spreads have enabled lower-rated companies to refinance on attractive terms, while improving conditions have also encouraged banks to bring more leveraged loan transactions to market.
Within its portfolio, Sculptor said its global credit and convertible arbitrage strategies continued to benefit from AI-related investments, particularly infrastructure financing transactions featuring contracted cash flows, rapid debt amortisation and parent company guarantees.
The firm reported that each of its investment strategies generated positive returns during the first half of 2026, even as it adopted a more cautious positioning heading into the second half of the year.
