As an industry, when we talk about alpha, we often use terms like “generate”, “produce” and “create,” as if alpha were something that can arbitrarily be conjured at will. In our view, this language is misleading.

Alpha is neither produced nor generated — it is captured. (Reminder: “Alpha” refers to the difference in return for an investment compared to a relevant benchmark. Higher alpha is preferred.)

This is an important concept to bear in mind in terms of hedge strategy investing — or any active investment for that matter. Alpha is not something readily available for the taking in all environments and all conditions. In some market circumstances, it may be easier and more readily captured, while in others it can be much more elusive.

So where are we today? We believe the potential for alpha capture is improving. Following the market low in February of this year, we have seen a significant and broad recovery in equity markets. The rally, however, has been somewhat indiscriminate across sectors, geographies and market capitalisations.

There has been little in the way of differentiation between a good company or a bad company, a good sector or a bad one. The rising tide has lifted all boats, so to speak. Going forward we anticipate this will likely change.

Today, economic uncertainty is high. There is uncertainty surrounding the aftermath of Brexit and the potential for contagion to other countries in the European Union (EU). There is uncertainty surrounding the Federal Reserve’s actions and interest rates globally.

There is political uncertainty in developed economies, and geopolitical unrest in many emerging nations. At the beginning of the third quarter of 2016, S&P 500 earnings were showing negative growth, and price-earnings (P/E) ratios were near a 12-year peak. Given these conditions, we anticipate choppy markets for the remainder of 2016.

The resulting volatility and dispersion should lead to a more attractive environment for stock picking — and hence for the capture of elusive alpha as well.

For managers pursuing strategies in the global macro space, in our view emerging markets continue to present a favourable environment. The recent recovery in commodity prices has relieved some of the emerging economies’ economic pressures that had been evident during 2015. We believe valuations of select emerging-country equity and sovereign bond investments remain attractive relative to those available in developed markets.

When we look at strategies, long-short equity specifically, we anticipate the market will be more discerning with regard to fundamentals like revenue growth and valuations. This could potentially separate the weaker companies and sectors from the strong.

In this way, equity long-short managers may continue to own the companies they like, but they may also “go short” — that is sell short the companies that they feel are mediocre and may come under pressure going forward.

If we consider the energy and raw materials sector as an example, we have seen some very weak performance over the last five quarters. But when you look at the forward earnings estimates and some of the valuations on energy and raw material equities, they are quite compelling. Many of the strategy managers we use are mentioning that those might be good long positions, a good sector and area to buy securities.

Conversely, if you look at health care and technology stocks, they have had a very nice run. But the sector may be considered by some hedge fund managers to be overvalued, or showing slowing revenue and earnings growth.

In this circumstance, hedge strategies have the ability to make money independent of market trends. While they can still buy in pockets of value, they can also short — or hedge out market risk using companies they feel have deteriorating fundamentals.

Lastly, merger arbitrage remains another attractive strategy. Last quarter, high corporate cash levels, low interest rates, and merger deal spreads remaining at healthy levels served as a good tailwind to merger arbitrage.

These factors are all still in play, and the fundamentals may have strengthened following the Brexit vote. Because of the UK’s decision to leave the EU, we believe it is less likely the Fed and other central banks globally will look to hike interest rates in the near term.

Low interest rates have historically been very positive for merger arbitrage strategies.

The writer is Founding Managing Director of K2 Advisors.