HFS Bulletin

US Equity Hedged strategies generally produced positive returns in November. It was a strong month for market beta and overall long / short results. Manager performance was generally positive across the board with only a few downside outliers, mostly within the healthcare and energy subsectors. While alpha was mixed when simply looking at market-neutral spreads from the classic VIP-type indices, there was ample dispersion underneath the surface both among and within sectors. Alpha was driven primarily by the long side, continuing the trend of the past few months. Factor-wise, the risk-on playbook was largely in effect with ‘realized volatility’ the standout factor while ‘quality’ lagged due to a ‘low quality’ rally during the second half of the month. Growth also performed well, led by software and low / no profitability names. All sectors posted positive performance during the month with the most notable strength occurring in consumer discretionary and financials. Healthcare was the laggard though still positive, owing to concerns over what potential new cabinet appointments in the new US administration might mean for the pharmaceutical industry as well as somewhat of a shift away from defensive stocks.

European Equity Hedged strategies generally produced positive returns in November. Alpha was generated across the universe of long / short managers, while overall returns were more muted in line with market indices. Momentum and industrials were once again sources of positive alpha, while geographic exposure to France detracted from performance. Within European funds on the platform, generalist funds produced positive alpha, while funds with higher levels of energy exposure generally produced negative value add. The most net sold sector was industrials for the third month in a row, followed by energy, while materials and financials were the most net bought sectors. In terms of factors, momentum and growth contributed to performance, while value and dividend yield names detracted. Prime brokers reported that Germany, Finland, and the UK were the most net bought markets, while Denmark, Ireland, and Italy were the most net sold.

Asian Equity Hedged strategies generally produced positive returns in November. Performance was primarily driven by exposures in the US and short positions in China. The Japanese market remained volatile, starting the month strong ahead of the US elections based on mostly solid economic data, but the market weakened during the second half of the month due to concerns regarding potential tariffs and a stronger Yen. In China, markets continued to be volatile in November as the market remained disappointed since the policy direction remained focused on de-risking rather than stimulating growth. Additionally, Trump winning the election added headline worries regarding potential tariffs, but domestic investors held stronger expectations for increased stimulus, which allowed onshore A-shares to outperform offshore H-shares and ADRs.

HFRI Equity Hedge Total Index

Fixed income relative value strategies generally produced positive returns in November. Macro directional and short-term interest rate / front-end trading strategies generally drove gains. There was some volatility around German swap spreads and European country spreads, where performance was flat to negative for the month given the stress in France. Core micro-RV and cash / future basis strategies were a bit more muted, although the US cash / futures basis portfolios were still a positive driver for most managers.

Capital structure / volatility arbitrage strategies generally produced positive returns in November. Within the convertible bond space, a heavy representation from the volatile digital assets-related issuers provided tailwinds for the strategy. Volatility valuations appeared to become elevated as arbitrage long market values moved higher as pod shops continued to move capital to this strategy. Long-only convertible strategies generally produced gains as performance was fuelled by strong underlying equities that generally outpaced market indices. Global convertible bond issuance was strong as USD 11.5bn of paper was priced. The US supported November’s supply with USD 9.6bn, over twice the historical average for the month. Europe, Asia, and Japan each issued one deal, totalling USD 211mn, USD 1.6bn, and USD 145mn, respectively. Global new issuance exceeded USD 106bn year-to-date, driven primarily by the US’s almost USD 72bn and Asia’s USD 22.5bn. Non-investment grade convertible bond spreads decreased -8bps to 378bps, while the Bloomberg US HY ‘B’ Index spread decreased -17bps to 254bps. The spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index increased to +124bps from +115bps.

Merger arbitrage and event-driven strategies generated mixed returns in November. Market cap weighted average spreads were approximately 1.4% tighter during the month. November was quiet in IPOs but quite active in convertible new issuance. PIPEs, blocks and follow-on trades were relatively active as well. Coreweave executed a USD 650m private secondary sale at a USD 23bn valuation and filed a prospectus for a listing, expected late Q1 at a USD 35bn valuation. During the month, the outgoing administration remained quite active on the regulatory front, leading to wider spreads on Amedisys / UnitedHealth Group and Juniper Networks / Hewlett. Overall, the composition of the incoming administration, specifically the future heads of the FTC and the DOJ, remained front and center for managers as they tried to assess and navigate the upcoming regulatory environment.

Agency MBS strategies generally produced positive returns in November. Performance dispersion across managers was relatively significant during the month. The dispersion was generally driven by variances in mortgage derivative composition and hedging approaches. Managers who were positioned with a long bias to rates and the mortgage basis outperformed during the month. In addition, lower coupon mortgage derivatives outperformed relative to higher coupon mortgage derivatives.

Quantitative equity strategies generally produced positive returns in November. Performance was driven by positive alpha from the systematic long / short cohort as well as gains from long / short spread. Short crowdedness, asset selection, financials, long crowdedness, and medium-term momentum were among the largest alpha contributors in November. Gains were partially offset by losses incurred from short-term momentum factors, dividend yield, and growth. Within versus between sectors daily dispersion suggested reduced importance of micro drivers and a somewhat deteriorating environment for stock pickers.

HFRI Relative Value Total Index

Corporate credit strategies generally produced positive returns in November. The corporate long / short sub-strategy produced profits. Gains were generated from long investments, while short portfolios offset a portion of those gains. Managers benefited from exposure to high yield bonds, investment grade bonds and convertible bonds. The corporate long-biased sub-strategy generally produced gains as all funds were positive during the month. Gains were driven by long investments to high yield bonds and leveraged loans as CCC debt and distressed investments outperformed. At the portfolio level, profits were driven by carry and spread tightening.

Asset-backed strategies (ABS) generally produced positive returns in November. Profits were driven by interest income, although select asset classes also generated positive total returns. The exposure to CLO equity was a key driver of performance. In addition, the allocation benefited from exposure to SRT, Agency CRT and Non-Agency RMBS. The CMBS investments were positive although the results lagged other asset classes.

Reinsurance / ILS strategies generally produced positive returns in November. Coupon income and spread tightening drove returns for our catastrophe bond manager, while premium accrual carry and reversal of some mark-to-market losses tied to Hurricane Milton drove returns for the collateralized reinsurance manager. The adjustment was due to the manager’s expectation of lower overall industry losses from Milton than had previously been assumed (USD 20 to 25bn versus USD 30 to 32bn initial assumption). Premium accrual for the collateralized reinsurance had now diminished substantially as hurricane season is over.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generally produced positive returns in November. In the developed market space, receiver positions in European and UK rates were additive, while short positions in Japan also produced gains. Conversely, US themes were mixed given market reversals. Curve steepening exposures in European rates produced gains, but the gains were partially offset by trades in the US.

In FX, gains were achieved via long USD positions, particularly versus EUR and CNH. Equity exposure was mixed, with sector exposures, particularly in technology, financial and defense companies in the EU, continued to perform well, while index hedges were mostly detrimental. Commodities were generally challenged from long copper and gold positions, while oil short exposure provided modest gains. Macro RV managers generated positive results from macro trades and basis positions but were challenged by swap spreads short exposure in Europe. Allocations to emerging markets were generally positive. Key drivers of performance were rates receivers in Asia, Mexico and Türkiye, which were offset by BRL exposures. Developed market exposure, particularly long USD, and in some cases, receivers in EUR/UK and Japan payers also contributed to performance. Positions in Türkiye was additive, while exposure to Egypt was more challenged within FX. For commodity strategies, small losses generally occurred from green elements, while energy managers produced mixed performance. Managers generated gains from long positions in EU natural gas, while some managers also made money from tactical trading in the US gas. EU power trading typically detracted from performance, while US power generated gains. Lastly, there were some losses from oil and refined products, metals and agricultural themes.

Systematic trading strategies generally produced positive returns in November. In general, performance for trend-following strategies was driven by exposure to currencies, credit and equities with commodities detracting. Overall, industrials, metals and energy incurred losses with agriculture themes providing offsetting gains. Long positions in coffee, Euribor and short positions in CHF and the Korean Won against the US dollar were generally in the top performers, while long positions in US natural gas and precious metals were mostly in the bottom performers. Alternative market managers generated strong performance with gains occurring primarily in agriculture, equities, fixed income, credit/volatility and interest rate swaps. Conversely, energy, metals and yield curve strategies generally detracted from performance. Long positions in coffee, cocoa and US equity factors were among the top performers, while long gold and short natural gas positions were among the bottom performers. Systematic managers with more diversified alpha models generated gains in currencies, agriculture, equity indices and metals, while most losses occurred in energies and rates. In terms of risk, gross exposures were trimmed across interest rates and currencies.

Prepared by UBS Hedge Fund Solutions, a distinct business unit of UBS Asset Management (Americas) LLC (“UBS Hedge Fund Solutions” or “HFS”), 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