Unified Global Alternatives – Hedge Fund Bulletin

Market and hedge fund update in a nutshell

Risk assets were mixed in February on the back of a less certain geopolitical landscape, prospects for a trade war as well as forecasts for slowing economic growth. Furthermore, the US Federal Reserve signaled that monetary policy was likely to be on hold over the medium term. In Equity Hedged, US Equity Hedged strategies had mixed returns in February, with long positions outperforming short positions but facing challenges in alpha generation due to momentum factor headwinds. European Equity Hedged strategies generally produced positive returns, with fundamental long / short managers underperforming due to negative alpha from UK exposure and volatility. Asian Equity Hedged strategies had mixed returns, with funds having more directional long technology exposure in China faring better, while US exposure faced challenges from the risk-off dynamic. In Relative Value, Fixed income relative value strategies had mixed returns in February, with gains across various strategies but losses from asset swaps and US basis and bond RV strategies. Capital structure/volatility arbitrage strategies generally produced positive performance, benefiting from high equity volatility and trading volumes, despite some losses in interest rate hedges. Merger arbitrage and event-driven strategies produced positive returns, with tighter spreads and strong performance from closed deals, despite a light deal flow. Agency MBS strategies had mixed returns, with manager dispersion and negative performance from mortgage derivatives due to market volatility and faster prepayment speeds. Quantitative equity strategies had mixed returns, with weakness in US fundamental equity long/short strategies and pressure from beta losses, while diversified quant franchises and macro approaches fared better. In Credit / Income, Corporate credit strategies generally had positive returns in February, driven by long investments and tactical positions in convertible bonds and emerging markets. Asset-backed strategies (ABS) also had positive returns, primarily from interest income, with non-Agency RMBS, SRT, and multi-family CMBS outperforming. Reinsurance / ILS strategies generated positive returns, with collateralized reinsurance benefiting from accrued premiums and catastrophe bonds contributing positively despite modest spread widening. In Trading, Discretionary trading strategies had positive returns in February, with gains from G3 receivers, curve steepeners, and long copper and gold, but mixed results in FX and equities. Systematic trading strategies had negative returns, with losses in commodities due to energy exposure, partially offset by gains in equities.

Overall market commentary

Risk assets were mixed in February on the back of a less certain geopolitical landscape, prospects for a trade war as well as forecasts for slowing economic growth. Furthermore, the US Federal Reserve signaled that monetary policy was likely to be on hold over the medium term. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced negative performance of -1.58%, -1.42% and -3.97%, respectively. Across Europe, equity markets were supported by uncertainty related to the war in Ukraine as alliance strains prompted expectations for increased domestic spending in Europe. The MSCI Europe, DAX and FTSE generated positive performance in February of 3.61%, 3.77% and 0.93%, respectively. Asian developed markets produced negative results with the Nikkei 225 posting a loss of -6.11%, due to the stronger Yen and uneven risk climate. Emerging market indices were mixed given uncertainties around the possibility for tariffs and trade wars. Chinese markets rallied 2.16%, while Indian and Brazilian markets suffered losses of -5.55% and -2.64%, respectively. US interest rate markets rallied during February despite the pause in interest rate cuts, as expectations for slower growth and profit taking in equities sent yields lower. The two-year US Treasury yield fell to 3.99% from 4.18%, while the ten-year US Treasury yield decreased to 4.21% from 4.58%. The Barclays US Corporate Investment Grade Index gained 2.04%, driven by lower Treasury yields and carry income. The Barclays US Corporate High Yield Index rose 0.67%, as carry income generally offset any spread widening during the period. Commodity prices were mixed in February as gold rose +0.5%, while crude oil fell -3.1%. In currency markets, the Euro was essentially flat against the US dollar, edging higher from 1.0370 to 1.0378, while the US dollar declined -2.68% against the Japanese Yen from 154.82 to 150.67.

Source returns: UBS World Market Report

US Equity Hedged strategies generated mixed returns in February. During the month, crowded long positions generally outperformed crowded short positions by most measures, although it was a challenging month for alpha generation as the headwinds in the momentum factor dominated markets. Subpar readings from various metrics, such as retail sales, home sales, and consumer confidence, along with increased tariff concerns sparked worries about slowing economic growth in the US. Underlying sector results reflected significant dispersion as this backdrop pressured consumer discretionary stocks. This weakness spilled over into the momentum factor more broadly, resulting in declines across much of the semiconductor and AI-related cohorts. Conversely, defensive areas of the market, such as consumer staples, utilities, and healthcare, registered gains. Financials also traded well, in part due to the lack of tariff exposure. The typical risk-off playbook manifested itself across factors in the US with strength in quality and size factors, while momentum and especially realized volatility were notable detractors. The expectation of an on-hold Federal Reserve (at least over the immediate future) led to a preference for value stocks at the ex-pense of growth stocks, despite the move lower in 10-year rates.

European Equity Hedged strategies generally produced positive returns in February. Fundamental long / short managers underperformed the market significantly, driven by the negative alpha from UK exposure, volatility, size, and asset selection. On balance, beta gains were generally offset by alpha weakness. Overall, Europeanfocused managers tended to outperform US-focused managers. European equities were the most net bought regional equities in February, although the net buying amount was relatively small. Across the industry, European fundamental managers increased their gross exposure throughout the month by +24% to 191.7%, its 95th percentile on a three-year basis. Overall, the net exposures increased by +2.7% to 62.2%.

Asian Equity Hedged strategies generated mixed returns in February. Funds with more directional long technology exposure in China fared better, while funds with more US exposure were challenged by the risk-off dynamic in the US. The Japanese market remained volatile and was weighed down by US tariff concerns, a stronger yen and the volatility in the technology sector. In China, the markets were positive and continued to ride on the momentum from the DeepSeek release, which boosted the technology sector. However, an additional tariff announced at the end of the month resulted in a market pullback. Despite this, markets ended the month in positive territory.

HFRI Equity Hedge Total Index

Fixed income relative value strategies generated mixed returns in February. Overall, results were fairly muted during the month. Gains were broad based across different strategies, including G3 directional rates, European government bond spreads trading, cross currency basis trading, as well as basis and bond RV in JPY and EUR. Losses were mostly incurred from asset swaps across different regions, as well as US basis and bond RV strategies with some small widening of the US treasury basis into the calendar roll period.

Capital structure / volatility arbitrage strategies generally produced positive performance in February. Convertible arbitrage benefited from a combination of factors including high realized equity volatility, high trading volumes, solid new issue and corporate action activities. Although some losses occurred in rho (interest rate) hedges, these were offset by resiliency in bond values and richening valuations. Deeply distressed situations underperformed. In contrast, long-leaning credit RV produced relatively flat returns. Capital arbitrage RV trades faced challenges due to the rally in credit. However, long-biased capital arbitrage strategies benefited. Global ECM activity was relatively quiet in February compared to other market activities. The performance for ECM managers was similar to January, ranging from flat to modestly positive.

Merger arbitrage and event-driven strategies generally produced positive returns in February. The market capital weighted spread for ongoing merger situations was 1.3% tighter during the month. Given the light deal flow, spread tightening, and the smallest available arbitrage pool over the last 12 months, this resulted in a fairly tight arbitrage universe. Through the end of February, public M&A (> USD1bn) was -30% and -65% YoY in terms of deal count and dollar volume, respectively. Arbitrage performance was strong in February as HCP, SUM and MTTR closed, and Paychex’s acquisition of PYCR avoided a prolonged review. In February, notable situations included: Honeywell’s separation of Automation and Aerospace in the second half of 2026; Middleby’s separation of the Food Processing business by early 2026; Solventum’s USD 4bn sale of their purification & filtration business; and Teleflex’s.

Agency MBS strategies generated mixed returns in February. A reasonable amount of manager dispersion was evident as some funds were profitable while others were more challenged during the period. Positive carry was offset by OAS widening on mortgage derivatives. In general, the negative performance of the derivative portfolio was attributable to general market volatility, the decline in interest rates, and faster than expected prepayment speeds on lower coupon collateral.

Quantitative equity strategies generally produced mixed returns in February. The overall landscape changed materially from the prior months, as we witnessed weakness across US fundamental equity long / short strategies. At the factor level, momentum rolled over, resulting in some pockets of extreme de-risking at the broader industry level, particularly across the technology sector. Furthermore, beta losses pressured long alpha, long / short spreads as well as top line performance. In general, diversified quant franchises fared better, but not over monetizing the volatility given the momentum swings and some broader de-risking. Macro approaches also outperformed with some evidence of good two-way trading. US gas moves tended to challenge short exposure for select managers.

HFRI Relative Value Total Index

Corporate credit strategies generally produced positive returns in February. Although credit spreads widened for most segments of the market, credit outperformed relative to most other asset classes as total returns were positive for fixed rate bonds given the rally in rates. In addition to corporate bonds, leveraged loans were slightly positive. In corporate long-biased, gains were generally diversified with minimal outsized contributors, while some positions were adversely impacted by spread widening due to the increase in market volatility. Within corporate long / short, funds were generally positive for both long-biased and low net managers. The European segment of the portfolio outperformed, although the US allocation also generated profits. Gains were generally driven by long investments as managers benefited from increased dispersion. In addition, tactical investments in convertible bonds and emerging markets were also accretive to performance.

Asset-backed strategies (ABS) generally produced positive returns in February. Most managers primarily profited from interest income, while the impact from spread changes varied by sector. Managers with larger investments in non-Agency RMBS, SRT, and multifamily CMBS outperformed. Investments in CLOs produced mixed results, while select corporate credit investments were negative for the month.

Reinsurance / ILS strategies generally produced positive returns in February. Collateralized reinsurance was an additive allocation in February as returns were primarily attributable to the accrued premium. The catastrophe bond allocation was also a positive contributor as positive carry offset the modest amount of spread widening. Spread widening was tied primarily to supply/demand dynamics as new issuance volume exceeded the level of cash made available from maturing bonds during the month.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generally produced positive returns in February. Receivers in G3 and curve steepeners were broadly supportive of results, along with payers and flatteners in Japan. Managers with a more hawkish bias generally experienced some underperformance. Overall, FX exposures were more challenged, with long USD bias underperforming. However, some managers generated gains from long positions in JPY FX. In equities, results were generally mixed with some managers generating gains from EUR defense and banks, while others incurred losses from exposure to technology, especially in the US, and long positions in Japan. Index short exposure provided some positive performance outside of Europe. Overall, long copper and gold, coupled with short crude were additive to overall results. Emerging market managers tended to produce more mixed performance. Gains were mostly driven by idiosyncratic high carry long positions in Nigeria, Türkiye, Argentina, Egypt and Zambia. Some managers also benefited from EM rates receivers as well as tactical trading in US rates. USD long exposure and some of the volatility hedges in equities, as well as short exposure in credit as protection underperformed. Some managers also incurred losses from US technology equities, as well as long exposure in EM credit. In commodities, February was a mixed month for energy managers overall with gains from EUR power RV trading and US power. Conversely, performance in natural gas was more mixed, with some directional losses in European gas and US gas spreads trading. Reversals and volatile price action also led to losses in other energy markets like oil. In metals, green elements produced positive performance, which was driven mostly by the solar and magnets themes.

Systematic trading strategies generally produced negative returns in February. Traditional trend-following strategies generated negative performance overall with losses in commodities as energy exposure weighed on results. Losses were partially offset by gains in equities. Rates and FX produced slightly negative returns. In general, alternative market managers also incurred losses mostly due to the underperformance in commodities where themes around agriculture was particularly challenged. Systematic managers with more diversified alpha models also incurred losses as rates, FX and energy exposures were negative, but equities continued to outperform coupled with metals and agriculture.

Prepared by UBS Hedge Fund Solutions, a distinct business unit of Asset Management (Americas) LLC (“UBS Hedge Fund Solutions” or “HFS”), acting through Unified Global Alternatives Hedge Funds., a provider of hedge fund strategies. It contains UBS Hedge Fund Solutions' view of market events during the specified period and all such information and opinions are subject to change without notice, and does not pertain specifically to products managed or advised by UBS Hedge Fund Solutions. The materials are provided for information purposes only and do not constitute investment advice. The information contained herein is believed to be reliable but its accuracy is not guaranteed. This publication encompasses UBS Hedge Fund Solutions’ views based on our internal manager universe and are subject to change. The universe includes managers that are either invested in or followed by UBS Hedge Fund Solutions and does not represent all hedge fund managers and strategies available in the industry. Any indices shown throughout this report are for illustrative purposes only and not a representation of UBS Hedge Fund Solutions’ universe performance.

HFRI Macro Total Index