Unified Global Alternatives – Hedge Funds Bulletin

Market and hedge fund update in a nutshell

Risk assets were broadly positive in January on the back of optimism related to the expected pro-business and America first policies of the new US administration. In Equity Hedged, US Equity Hedged strategies generally produced positive returns. The majority of managers generated gains, with the highest absolute performance and value-add resulting from TMT managers collectively. European focused equity hedged strategies produced positive performance. During the period, beta gains generally offset alpha losses from Size, Momentum, and UK exposure. Asian Equity Hedged strategies generally produced positive returns. The Japanese market exhibited volatility due to concerns about a potential recurrence of the events of August 2024, leading to futures-based selling in anticipation of the Bank of Japan meeting. In Relative Value, Fixed income relative value strategies generally produced positive returns. Overall, gains were broad based across different strategies, including EUR and US swap spreads, albeit with lighter risk and dispersion of positioning. Capital structure / volatility arbitrage strategies generally produced positive performance. Convertible arbitrage benefitted from high levels of realized volatility, active name rotation and premium expansion. Merger arbitrage and event-driven strategies generally produced positive returns. Regarding public deal activity, just USD 40bn was announced in the US, although there was one large private deal announced in the power sector. Agency MBS strategies generally produced positive returns. The overall results showed some dispersion, but the fundamentals of the strategy were stable as prepayments were slow due to elevated mortgage rates. Quantitative equity strategies generally produced positive returns. Overall, higher frequency models were the top contributors as they were best positioned to isolate the macro dynamic around tariff, immigration and economic policy. In Credit / Income, Corporate credit strategies generally produced positive returns. Managers benefited from the favorable macro backdrop. Asset-backed strategies (ABS) generally produced positive returns, mostly, driven by interest income and mark-to-market gains from long investments. Reinsurance / ILS strategies generally produced negative returns. Performance for the catastrophe bond manager stemmed from coupon income which was slightly more than offset by general spread widening, tied primarily to the California wildfires. In Trading, Discretionary trading strategies generally produced positive returns. There were some dispersions and outliers from consensus trades in EUR receivers and EURUSD FX shorts. Gains were broadly generated from short exposure in Japan, UK receivers, and yield curve steepening trades in the UK and US. Systematic trading strategies generated mixed returns. Overall, losses were generally incurred from long positions in USD, which more than offset smaller gains produced from long equity index positions.

Overall market commentary

Risk assets were broadly positive in January on the back of optimism related to the expected pro-business and America first policies of the new US administration. Markets were also supported by a mild inflation print, a strong start to the corporate earnings season and ongoing expectations for easier monetary policy. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced positive performance of 4.70%, 2.70% and 1.64%, respectively. Across Europe, equity market performance was also positive. The MSCI Europe, DAX and FTSE generated positive performance in January of 6.41%, 9.16% and 5.43%, respectively. Asian developed markets produced negative results as the Nikkei 225 generated a loss of -0.81% in part due the stronger Yen. Emerging markets indices were mixed given uncertainties around the possibility for tariffs and trade wars. Brazilian markets rallied 4.86%, while Chinese and Indian markets suffered losses of -3.02% and -0.82%, respectively. US interest rate markets were little changed as investors awaited the outcome of the next US Federal Reserve Bank meeting. The two-year US Treasury yield fell to 4.18% from 4.25%, while the ten-year US Treasury yield increased to 4.58% from 4.57%. The Barclays US Corporate Investment Grade Index gained 0.55%, driven in large part by carry income as interest rates were mostly stable. The Barclays US Corporate High Yield Index rose 1.37%, driven by carry income and spread tightening in line with the broader risk-on climate. Commodity prices were mostly higher in January as gold rose 7.35%, while crude oil rallied 1.13%. In currency markets, the Euro rose 0.19% against the US dollar from 1.0350 to 1.0370, while the US dollar declined -1.49% against the Japanese Yen from 157.17 to 154.82.

Source returns: UBS World Market Report

US Equity Hedged strategies generally produced positive returns in January. The majority of managers generated gains, with the highest absolute performance and value-add resulting from TMT managers collectively. In contrast, the energy sector exhibited the weakest performance, with slightly negative absolute returns and value-add. Although the technology sector experienced a slight overall decline, it showed significant variation across subsectors. All other sectors delivered positive performance for the month, with healthcare and financials emerging as the top performers. Alpha tended to be reasonably strong and driven more by the long side and driven in part by contribution from the momentum factor. Market sentiment was broadly driven by optimism around the new US administration’s agenda for the economy and corporate America. The final week of January experienced increased volatility due to the DeepSeek announcement, which raised questions about future capital expenditure needs for AI. Additional elements influencing performance seem to be connected to stock-by-stock dispersion, which was particularly pronounced during the last week of the month.

European focused equity hedged strategies produced mostly positive performance in January. During the period, beta gains generally offset alpha losses from Size, Momentum, and UK exposure. Generalists ended to add positive alpha whereas energy focused funds generated negative alpha, mostly due to exposure to Utilities and momentum. Europe-focused fundamental L/S managers significantly reduced their gross exposure in January. The bulk of the reduction was seen within Healthcare, Pharma, Information Tech as well as via macro products. On the other hand, Financials experienced net buying and pushed its relative weight to record highs, while Industrials was the second most net bought sector, with largest net buying in six months. European fundamental managers reduced their gross exposure through the month though net exposures increased marginally +0.4% to 59.5%.

Asian Equity Hedged strategies generally produced positive returns in January. The Japanese market exhibited volatility due to concerns about a potential recurrence of the events of August 2024, leading to futures-based selling in anticipation of the Bank of Japan meeting. Following the rate hike, the market experienced the effects of the DeepSeek shock and the announcement of global tariffs. Nevertheless, strong third-quarter earnings offered support to the market. In China, the market experienced a V-shaped month. Initially, there was a sell-off when Tencent and CATL were added to the DoD list, causing investor concern about the potential addition of more blue-chip companies. Nevertheless, the markets in China experienced a boost towards the end of the month due to better-than-expected initial tariffs. The technology sector in China experienced an uplift following the news from DeepSeek just before the Lunar New Year closure. For some funds, performance was driven by their long exposure to the technology sector during the month.

HFRI Equity Hedge Total Index

Fixed income relative value strategies generally produced positive returns in January. Overall, gains were broad based across different strategies, including EUR and US swap spreads, albeit with lighter risk and dispersion of positioning. Some managers were challenged from short US asset swaps, while US cash / futures basis, bond RV and other micro RV strategies were generally additive. Several funds experienced gains through Short-Term Interest Rate (STIR) trading and macro directional strategies. Additionally, basis swap trading via wideners contributed positively to the overall strategy results.

Capital structure / volatility arbitrage strategies generally produced positive performance in January. Convertible arbitrage benefitted from high levels of realized volatility, active name rotation and premium expansion. Conversely, deeply distressed situations were challenged. New issuance and exchange activity was quiet in part due to earnings blackout. Short leaning capital arbitrage trades were negatively impacted given the tightening in credit, while long-biased capital arbitrage strategies generally benefitted from the overall risk-on climate. In January, global convertible bond issuance was slightly short of USD 3.2bn, led by the US (USD 1.9bn), and followed by Asia (USD 1.3bn). Europe and Japan didn’t offer any new convertible paper. Lastly, non-investment grade convertible bond spreads decreased -12bps to 340bps in January, while the spread between non-investment grade converts and the Bloomberg HY ‘B’ Index increased to +90bps from +1bps last month.

Merger arbitrage and event-driven strategies generally produced positive returns in January. Regarding public deal activity, just USD 40bn was announced in the US, although there was one large private deal announced in the power sector. Constellation announced they were acquiring Calpine for slightly under USD 30bn. Event-driven multi-strategy platforms’ performance was generally soft for the month with the exception of those who were long-biased, especially in financials, consumer discretionary and industrials sectors.

Agency MBS strategies generally produced positive returns in January. The overall results showed some dispersion, but the fundamentals of the strategy were stable as prepayments were slow due to elevated mortgage rates. Gains were attributable to a combination of positive carry from mortgage derivatives and tactical trading in pools / TBA. Conversely, there was some modest spread widening in select lower coupon derivatives, which occurred following a significant amount of spread tightening in December.

Quantitative equity strategies generally produced positive returns in January. Overall, higher frequency models were the top contributors as they were best positioned to isolate the macro dynamic around tariff, immigration and economic policy. By factor, crowdedness and momentum provided a supportive backdrop with short interest also contributing. Momentum and reversal showed significant results in January following a period of weakness in December. Sell-side analyst recommendations were additive in January, with sentiment factors producing positive returns, which supported sell-side alpha capture performance. Quality and low beta factor-oriented models detracted as they ended the month in negative territory.

HFRI Relative Value Total Index

Corporate credit strategies generally produced positive returns in January. Managers benefited from the favorable macro backdrop. Profits were mainly driven by interest income, although some funds also generated mark-to-market gains from investments in corporate bonds and loans. Corporate long-biased managers also produced a positive return as managers benefited from the positive credit backdrop given the positive total returns for corporate credit.

Asset-backed strategies (ABS) generally produced positive returns in January. All funds in the space generated gains during the month, driven by interest income and mark-to-market gains from long investments. At the asset class level, profits were relatively diversified with strong contribution from CLOs and Agency CRT (credit risk transfer) transactions.

Reinsurance / ILS strategies generally produced negative returns in January. Performance for the catastrophe bond manager stemmed from coupon income which was slightly more than offset by general spread widening, tied primarily to the California wildfires. The collateralized reinsurance manager's performance was significantly impacted by California wildfire losses, specifically due to a full write-off of a contract with the California Fair Plan. Additional losses from nationwide multi-peril contracts also detracted from performance. Losses were slightly offset by monthly premium accrual, which is not elevated in January due to typically low seasonal risk during the winter months.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generally produced positive returns in January. There were some dispersions and outliers from consensus trades in EUR receivers and EURUSD FX shorts. Gains were broadly generated from short exposure in Japan, UK receivers, and yield curve steepening trades in the UK and US. US directional trading produced more mixed results, although some managers produced gains. There were also managers who generated gains from tactically trading EUR rates pricing. In FX, USD long exposure gave back the previous month’s gains. Equity strategies were largely positive from thematic exposures across the US and Europe, while index trading was more challenged. Commodities allocations were generally positive via long positions in gold and copper, but gains were partially offset by short positions in oil. Macro RV managers benefited from core macro themes and generated gains in US and EUR bond RV, as well as cross-market rates RV.

Emerging market managers also produced positive performance. Gains were mostly driven by positions in Nigeria, Türkiye, Argentina, Egypt and Zambia. Some managers also generated gains from EM rates receivers as well as DM macro rates trades, although some of the DM hedges in equities and credit offset some of the gains. Commodities managers typically produced positive results from long exposure in EU gas and spread trades / tactical trading in US natural gas. In general, US power trading also produced positive returns, while EUR power RV detracted from performance. Most managers also generated gains from oil, products trading and long positions in precious metals. In green elements, gains were produced from magnets, solar and fiber optics themes.

Systematic trading strategies generated mixed returns in January. Overall, losses were generally incurred from long positions in USD, which more than offset smaller gains produced from long equity index positions. Commodity exposures were mostly challenged within metals and energy, while some managers generated gains from gold. Fixed income positions also detracted from overall results. Alternative market managers produced mixed performance. Commodities positions outperformed, while FX and fixed income themes generally detracted for most managers. Equities strategies were broadly positive via an overall long expression. Systematic managers with more diversified alpha models generated gains from fixed income, energy and metals, while losses were generally incurred from agriculture, equities and FX.

The following document has been 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