ALTERNATIVE MARKETS UPDATE – MID MAY 2026

​The Middle East war remains one of the central macro risks for institutional investors, with the Strait of Hormuz acting as the key transmission channel from geopolitical escalation into global inflation, rates and risk assets. While recent reports of potential US-Iran de-escalation have helped oil prices move back below their recent highs, the situation remains fragile, particularly as shipping disruptions, insurance constraints and uncertainty around safe passage through Hormuz continue to weigh on energy markets. The strategic importance of the Strait is difficult to overstate: the World Bank estimates that it handles around 35% of global seaborne crude oil trade, while recent market commentary also highlights its importance for LNG flows. For investors, the key issue is therefore not only whether a formal escalation occurs, but whether tanker traffic, insurance availability and regional energy infrastructure can normalise quickly enough to prevent a persistent supply shock. Against this backdrop, oil has already repriced materially higher in 2026, with WTI and Brent up around 55–58% YTD as shown in Figure 1. WTI now stands at roughly $91 per barrel, while Brent trades around $94 per barrel, underscoring that even after recent de-escalation hopes, the geopolitical risk premium in energy markets remains substantial.

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RESEARCH PERSPECTIVE VOL. 275 May 2026 Alternative Markets Update The Middle East war remains one of the central macro risks for institutional investors, with the Strait of Hormuz acting as the key transmission channel from geopolitical escalation into global inflation, rates and risk assets. While recent reports of potential US-Iran de-escalation have helped oil prices move back below their recent highs, the situation remains fragile, particularly as shipping disruptions, insurance constraints and uncertainty around safe passage through Hormuz continue to weigh on energy markets. The strategic importance of the Strait is difficult to overstate: the World Bank estimates that it handles around 35% of global seaborne crude oil trade, while recent market commentary also highlights its importance for LNG flows. For investors, the key issue is therefore not only whether a formal escalation occurs, but whether tanker traffic, insurance availability and regional energy infrastructure can normalise quickly enough to prevent a persistent supply shock. Against this backdrop, oil has already repriced materially higher in 2026, with WTI and Brent up around 55–58% YTD as shown in Figure 1. WTI now stands at roughly $91 per barrel, while Brent trades around $94 per barrel, underscoring that even after recent de-escalation hopes, the geopolitical risk premium in energy markets remains substantial. Figure 1: Indexed Crude Oil Since the Beginning of 2026, Source: Investing.com, May 2026 Equity markets initially reacted sharply to the escalation of the war in Iran, with March seeing a broad risk-off move as investors priced in higher energy costs, supply-chain disruption and renewed inflation pressure. Global equities recorded their weakest monthly performance in several years, while Europe and Asia were particularly exposed given their greater dependence on imported energy. However, despite the conflict remaining unresolved, equities have rallied strongly since the end of March, supported by resilient earnings expectations, hopes of de-escalation around the Strait of Hormuz and renewed confidence that central banks may avoid a materially more restrictive policy path if oil prices stabilise. As shown in Figure 2, since the lows, the S&P 500 has risen more than 12%, while Europe and China have each gained around 10%. Japan has seen the steepest recovery, rising nearly 30%, reflecting both its earlier sensitivity to the oil shock and the powerful rebound in risk appetite as crude prices eased from their highs. The rally therefore highlights a key market tension: Investors are not ignoring the war, but are increasingly treating it as a manageable macro shock unless it leads to a sustained closure of Hormuz or a renewed spike in oil prices. Figure 2: Global Equities Performance Since January 2026, Source: Investing.com, May 2026 US government bond yields have become an important proxy for the broader repricing of global rates since the start of the Iran war, with Treasury yields rising by roughly 50bps despite no formal rate hikes having taken place. The move reflects a meaningful shift in investor expectations. Whereas markets previously anticipated that slowing growth would allow central banks to cut rates, the oil shock has revived concerns that inflation could remain stickier for longer. Recent market commentary has highlighted that mounting inflation fears have pushed the long end of the US Treasury curve higher, with 10-year yields reaching their highest levels in more than a year and 30-year yields approaching levels not seen in almost two decades. As shown in Figure 3, 30-year US Treasuries have reclaimed the 5.0% mark, with an earlier trend of moving towards the 4.5% level. Similarly, US 10-year yields have risen from 4% to more than 4.5%. This matters because the longer oil prices remain elevated, the more likely it becomes that energy costs feed into transport, production, wages and inflation expectations, eventually forcing central banks to maintain restrictive policy or even consider further tightening. As a result, the debate has shifted from when rates will fall to whether yields will stay higher for longer or rise further if the geopolitical shock proves persistent. Figure 3: US Government Yields across Different Maturities, Source: Investing.com, May 2026 The appointment of Kevin Warsh as the new Federal Reserve Chair adds another layer of uncertainty to an already fragile rates environment. Warsh, who was confirmed by the Senate on 13 May 2026 and sworn in on 22 May, takes over at a time when inflation risks have re-emerged, oil prices remain elevated and markets are reassessing the likelihood of rate cuts. While Warsh has historically been viewed as relatively hawkish on inflation and critical of overly accommodative monetary policy, his appointment under President Trump also raises questions around the future balance between Fed independence, political pressure for lower rates and the need to anchor inflation expectations. For investors, the key uncertainty is therefore not simply whether the Fed cuts or hikes next, but whether the reaction function itself changes under new leadership. In this environment, the leadership transition may contribute to higher term premia and greater volatility in US government yields, particularly if markets perceive any inconsistency between the Fed’s inflation mandate and political pressure to support growth. Hedge funds were not immune to the March market shock, as the escalation of the Iran war, the spike in oil prices, falling equities and rising bond yields created a difficult environment for risk assets. Equity hedge strategies were particularly exposed, with HFR reporting that the HFRI Equity Hedge Index fell 4.3% in March, its sharpest monthly decline since March 2020. However, the April recovery was powerful. The HFRI Fund Weighted Composite Index gained 4.8% in April, its strongest month since November 2020 and second-largest monthly gain since May 2009, led by equity hedge and emerging markets-focused funds. This suggests that, while hedge funds suffered during the initial risk-off phase, many were able to participate meaningfully in the subsequent rebound as volatility normalised and equity markets recovered from their lows. The broader environment remains supportive for hedge fund allocations, particularly as institutional investors continue to seek strategies that can navigate higher volatility, geopolitical risk, shifting inflation expectations and more dispersed market outcomes. Importantly, hedge fund demand had already improved before the April rebound. HFR reported nearly $45bn of net inflows in Q1 2026, with almost $90bn of inflows over the last two quarters, the strongest two-quarter inflow period since 2007. This reinforces the view that investors are increasingly using hedge funds not only as return-seeking vehicles, but also as tools for portfolio diversification, downside management and tactical exposure to macro dislocations. In an environment where oil prices, rates and equity leadership can shift quickly, flexible mandates and active risk management remain particularly valuable. At the strategy level, performance dispersion is likely to remain significant. Macro strategies are well placed to benefit from volatility in oil, rates, currencies and commodities, although sharp reversals in geopolitical risk premia can also create positioning risk. Equity hedge funds have benefited from the April recovery and renewed appetite for technology and AI-related equities, with Goldman Sachs data cited by Reuters indicating that hedge fund technology exposure has moved close to record highs, supported by optimism around AI and semiconductors. Relative value and event-driven strategies may also benefit from wider spreads, higher dispersion and corporate activity, but their returns are likely to depend less on broad market direction and more on execution, liquidity and catalyst timing. Overall, the post-April environment appears favourable for hedge funds, but increasingly rewards managers with disciplined risk control rather than simple directional exposure. STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Tallinn in Estonia and Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 14th June 2025, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 62.9 billion. 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