French asset manager Lyxor expects 2017 to provide a rich but volatile set of opportunities to hedge funds after disappointing returns in recent years. 

Analysts at the firm, a subsidiary of Societe Generale,  predict less monetary accommodation, more fiscal push and policy ruptures to support an inflection in rates and inflation - boosting alternative managers.

At the same time, Lyxor's experts have identified a higher risk from policy disappointment and trade conflicts. 

High profile investors have voiced concerns about disappointing performance and high fees from hedge funds in recent years.

In 2015, hedge funds returned just +2%, the worst result since 2011.

Average performance in 2016 is expected to be around the +5% mark, according to November data from HFRI and Preqin.

“2016 was a difficult year for hedge funds, which ended better than it started,” said Jean-Baptiste Berthon, a senior strategist at Lyxor.

“They navigated a V-shaped selloff until February, a monetary turn and a surprise Brexit by the summer, a regime shift unleashed by the Trump election.”

Berthon expects global macro funds, US equity long/short, small cap managers and merger funds to perform well in 2017. 

However, the analyst warned that certain strategies will remain constrained by elevated political uncertainty, which is replacing monetary uncertainty

"Managers would either endure higher return volatility or miss rallies due to low or hedged exposures," Berthon added.

In a recent market outlook, Ulrich Keller, alternative funds solutions, Credit Suisse, said hedge funds overall disappointed in 2016.

However, he added that the underperformance masks the fact that some strategies have done relatively well, such as relative value and tactical strategies.

"In 2017, we expect hedge funds to produce modest single-digit returns, supported by an environment of benign volatility and moderate but robust growth," Keller wrote in a note to clients.

"Moreover, events such as a shift in monetary policy or the Brexit negotiations are likely to provide opportunities for managers."