(Bloomberg) — Stocks and bonds are out, and oil is in. That’s the playbook for hedge funds trying to navigate persistent inflation, rising interest rates and a slumping tech-heavy equity market.

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Federal Reserve tightening cycles have historically spurred rallies in cyclical stocks. The problem is, for that to happen without tech requires strong gains in value sectors, and it’s usually accompanied by breadth, meaning small-cap stocks would be gaining too. But investors remain less optimistic around the Russell 2000, which is down 3.7% since the start of the year. That could be why hedge funds seem unwilling to bet on a reversal of the 15-year downtrend in value. Instead, they’re once again turning to commodities in search of returns.

Oil prices have been buoyed by increasing demand as the global pandemic gradually recedes, and rising geopolitical tensions. Drone strikes on the United Arab Emirates from Houthi rebels in Yemen has created risk in a critical oil-exporting region. On top of that, prices are getting support from concerns that Russia may only meet half of its scheduled output over the next six months, despite calls to hike output faster. Add in expectations that energy prices will be an ongoing driver of persistent inflation, and there’s little mystery to why hedge funds are pulling out of collapsing stocks and bonds — and turning instead to commodities in search of precious returns.

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