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Executive summary

Market and hedge fund update in a nutshell

Risk assets were generally mixed in December, with some markets taking a pause from the year-end rally that followed the US Presidential election. There was also some dampening of market sentiment related to the pace for interest rate cuts from the US Federal Reserve Bank that factored into overall market performance. In Equity Hedged, US Equity Hedged strategies generated mixed returns in December. Amid the beta headwinds during the month, manager performance was split between contributors / detractors on an absolute basis but with a positive skew towards positions with larger allocations. Alpha was primarily generated from the short side, reflecting a shift from recent months and aligning with patterns observed in the first half of 2024. Asian Equity Hedged strategies generally produced positive returns in December. The Japanese market was supported by a number of news flows and expectations including the speculation that the GPIF (Government Pension Investment Fund) could potentially increase its weight for Japanese equities and a more dovish BoJ. In China, markets ended positive despite all the headline news and volatility. In Relative Value, Fixed income relative value strategies generally produced positive returns. US cash/futures basis and bond RV primarily drove performance. Capital structure / volatility arbitrage strategies generated mixed returns. The performance of convertibles in December was adversely affected by a significant presence of issuers related to digital assets and an investment universe that leaned towards domestic, smaller-cap companies. Merger arbitrage and event-driven strategies generally produced positive returns. Average market capital weighted spreads were predominantly tighter for the majority of the top deals. Agency MBS strategies generally produced positive returns. Gains were driven by a combination of positive carry and mark-to-market (MTM) gains. Quantitative equity strategies generally produced positive returns. Gains during the period were somewhat concentrated within fundamental equity long/short and macro. In Credit/Income, Corporate credit strategies generally produced generated mixed returns. Corporate long-biased managers observed that investments in high yield were negatively impacted by spread widening in certain segments of the market. In some cases, the positive carry offset mark-to-market losses. Asset-backed strategies (ABS) generally produced positive returns. Profits were primarily attributable to carry from long investments. Reinsurance / ILS strategies generally produced positive returns. Coupon income and spread tightening drove returns for the catastrophe bond manager, while premium accrual carry drove returns for the collateralized reinsurance manager. In Trading, Discretionary trading strategies generally produced positive returns. Across developed market (DM) macro managers, gains were generally positive, albeit with some dispersion. Japan short positions had a minor negative impact on performance. Conversely, managers with a more hawkish bias outperformed. Systematic trading strategies generally generated mixed returns. Traditional trend-following strategies showed positive performance, with significant gains in foreign exchange markets. Fixed income themes were mixed, while most other asset classes detracted. Commodities had the largest negative impact, followed by credit allocations.

Index

Index

Dec-24

Dec-24

Nov-24

Nov-24

Oct-24

Oct-24

QTD

QTD

YTD

YTD

1Y Annualized Return

1Y Annualized Return

3Y Annualized Return

3Y Annualized Return

5Y Annualized Return

5Y Annualized Return

10Y Annualized Return

10Y Annualized Return

Volatility (10Y)

Volatility (10Y)

Index

MSCI World Total Return - Net USD

Dec-24

-2.61

Nov-24

4.59

Oct-24

-1.98

QTD

-0.16

YTD

18.67

1Y Annualized Return

18.67

3Y Annualized Return

6.34

5Y Annualized Return

11.17

10Y Annualized Return

9.95

Volatility (10Y)

15.06

Index

FTSE US Broad Investment-Grade Bond Index

Dec-24

-1.64

Nov-24

1.02

Oct-24

-2.46

QTD

-3.08

YTD

1.27

1Y Annualized Return

1.27

3Y Annualized Return

-2.48

5Y Annualized Return

-0.33

10Y Annualized Return

1.36

Volatility (10Y)

5.06

Index

Barclays Global High Yield Index

Dec-24

-0.55

Nov-24

0.82

Oct-24

-0.63

QTD

-0.37

YTD

9.19

1Y Annualized Return

9.19

3Y Annualized Return

2.82

5Y Annualized Return

3.27

10Y Annualized Return

4.53

Volatility (10Y)

8.56

Index

Bloomberg Commodity Index Total Return

Dec-24

1.02

Nov-24

0.41

Oct-24

-1.85

QTD

-0.45

YTD

5.38

1Y Annualized Return

5.38

3Y Annualized Return

4.05

5Y Annualized Return

6.77

10Y Annualized Return

1.28

Volatility (10Y)

13.82

Index

ICE BofA Merrill Lynch 3-month T-Bill Total Return

Dec-24

0.40

Nov-24

0.38

Oct-24

0.38

QTD

1.17

YTD

5.25

1Y Annualized Return

5.25

3Y Annualized Return

3.89

5Y Annualized Return

2.46

10Y Annualized Return

1.77

Volatility (10Y)

0.55

Index

HFRI Fund of Funds Composite Index

Dec-24

-0.02

Nov-24

1.93

Oct-24

0.49

QTD

2.41

YTD

9.40

1Y Annualized Return

9.40

3Y Annualized Return

3.19

5Y Annualized Return

5.28

10Y Annualized Return

3.81

Volatility (10Y)

4.99

Index

HFRI Equity Hedge (Total) Index

Dec-24

-1.03

Nov-24

3.11

Oct-24

-0.60

QTD

1.44

YTD

11.97

1Y Annualized Return

11.97

3Y Annualized Return

3.87

5Y Annualized Return

8.09

10Y Annualized Return

6.31

Volatility (10Y)

8.75

Index

HFRI Event-Driven (Total) Index

Dec-24

-0.78

Nov-24

2.72

Oct-24

-0.32

QTD

1.59

YTD

9.27

1Y Annualized Return

9.27

3Y Annualized Return

4.72

5Y Annualized Return

7.13

10Y Annualized Return

5.47

Volatility (10Y)

7.16

Index

HFRI ED: Credit Arbitrage Index

Dec-24

0.74

Nov-24

0.84

Oct-24

1.33

QTD

2.94

YTD

10.33

1Y Annualized Return

10.33

3Y Annualized Return

6.19

5Y Annualized Return

5.79

10Y Annualized Return

5.52

Volatility (10Y)

6.86

Index

HFRI Macro (Total) Index

Dec-24

0.82

Nov-24

1.87

Oct-24

-1.84

QTD

0.82

YTD

5.65

1Y Annualized Return

5.65

3Y Annualized Return

4.69

5Y Annualized Return

5.43

10Y Annualized Return

3.10

Volatility (10Y)

4.82

Index

HFRI Macro (Total) Systematic Diversified Index

Dec-24

0.88

Nov-24

2.13

Oct-24

-2.87

QTD

0.08

YTD

4.09

1Y Annualized Return

4.09

3Y Annualized Return

3.95

5Y Annualized Return

4.17

10Y Annualized Return

1.89

Volatility (10Y)

7.74

Index

HFRI Relative Value (Total) Index

Dec-24

0.30

Nov-24

1.02

Oct-24

0.62

QTD

1.94

YTD

8.72

1Y Annualized Return

8.72

3Y Annualized Return

4.92

5Y Annualized Return

5.13

10Y Annualized Return

4.48

Volatility (10Y)

4.39

Source returns: UBS Hedge Fund Solutions

Strategy performance

Month-to-date

Bar chart with 2 data series.
Source: UBS Hedge Fund Solutions, Bloomberg, Barclays (Lehman) Live, HFR. For illustrative purpose only
The chart has 1 X axis displaying December 2024.
The chart has 1 Y axis displaying values. Range: -3 to 1.25.
End of interactive chart.

Year-to-date

Bar chart with 12 bars.
Source: UBS Hedge Fund Solutions, Bloomberg, Barclays (Lehman) Live, HFR. For illustrative purpose only
The chart has 1 X axis displaying December 2024.
The chart has 1 Y axis displaying values. Range: 0 to 20.
End of interactive chart.

Monthly hedge fund review

Overall market commentary

Risk assets were generally mixed in December, with some markets taking a pause from the year-end rally that followed the US Presidential election. There was also some dampening of market sentiment related to the pace for interest rate cuts from the US Federal Reserve Bank that factored into overall market performance. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced mixed performance with the Dow Jones Industrial Average and the S&P500 posting losses of -5.27% and -2.50%, respectively. Conversely, the NASDAQ produced a gain of 0.48%. Across Europe, equity market performance was also mixed. The MSCI Europe and FTSE generated negative performance in December of -0.53% and -1.26%, respectively, while the DAX rallied 1.44%. Asian developed markets produced positive results as the Nikkei 225 generated a gain of 4.41% in line with a weaker Yen. Emerging markets indices also generated uneven performance, in line with the broader market at year-end. Brazilian and Indian markets fell -4.28% and -2.08% respectively, while the Chinese market rallied 0.76%. US interest rate markets were broadly weaker amid concerns that the recent easing of US monetary policy might pause. The two-year US Treasury yield rose to 4.25% from 4.13% and the ten-year US Treasury yield increased to 4.58% from 4.18%. The Barclays US Corporate Investment Grade Index lost -1.94%, driven in large part by the back up in Treasury yields. The Barclays US Corporate High Yield Index fell -0.43%, where carry income partially offset the move in bond prices. Commodity prices were somewhat mixed in December as gold fell -1.49%, while crude oil rose 5.47%. In currency markets, the Euro fell -2.15% against the US dollar from 1.0577 to 1.0350, while the US dollar rallied 4.65% against the Japanese Yen from 150.18 to 157.17.

Equity Hedged

US Equity Hedged strategies generated mixed returns in December. Amid the beta headwinds during the month, manager performance was split between contributors / detractors on an absolute basis but with a positive skew towards positions with larger allocations. Alpha was primarily generated from the short side, reflecting a shift from recent months and aligning with patterns observed in the first half of 2024. From a factor standpoint, size and quality were notable outperformers, while momentum lagged given some of the reversals from the movements tied to the Trump election narratives. All market sectors, except consumer discretionary, ended the month negatively. Cyclical sectors, such as energy and materials, posted double-digit declines as higher long-term rates amid a ‘hawkish cut’ from the Fed pressured these areas. Small capitalization stocks also notably underperformed, likely at least in part to the less constructive outlook for interest rates. Large-cap growth stocks outperformed as investors stayed bullish on AI.

Asian Equity Hedged strategies generally produced positive returns in December. The Japanese market was supported by a number of news flows and expectations including the speculation that the GPIF (Government Pension Investment Fund) could potentially increase its weight for Japanese equities and a more dovish BoJ. In China, markets ended positive despite all the headline news and volatility. The Chinese government provided somewhat of a policy floor, however, as of the end of December, uncertainties and challenges related to potential tariffs and how China will respond via fiscal support to increase consumptions, remained.

HFRI Equity Hedge Total Index

MTD -1.03% 

QTD -1.44%

YTD 11.97%

Relative Value

Fixed income relative value strategies generally produced positive returns in December. US cash/futures basis and bond RV primarily drove performance, while other micro-RV (GBP/EU/JP) had a more muted impact. Swap spread trading was slightly positive, although risk in the space decreased from prior months. Some funds produced additional gains in STIR (short term interest rate) trading and / or macro directional strategies, specifically in Japan short exposure. Basis swap trading (wideners) generally detracted in December.

Capital structure / volatility arbitrage strategies generated mixed returns in December. The performance of convertibles in December was adversely affected by a significant presence of issuers related to digital assets and an investment universe that leaned towards domestic, smaller-cap companies. In December, global convertible bond issuance almost reached USD 12.0bn, extending the strong activity levels seen throughout 2024 to finish the year on a positive note. Total global supply was more than double the historical average for December at USD 5.6bn. Regionally, volumes were concentrated in the US with USD 11.7bn, followed by Europe, Japan, and Asia. As of year-end, convertible bond issuance totaled just below USD 119bn globally, led by the US. Digital assets related convertible bond issuers priced USD 14.3bn of new converts in 2024. At the end of December 2024, they comprised 5% of the global convertible bond market and 7% of the US convertible bond market. Lastly, non-investment grade convertible bond spreads decreased -26bps to 352bps in December, and the spread between non-investment grade converts and the Bloomberg HY ‘B’ Index also decreased to +75bps from +124bps.

Merger arbitrage and event-driven strategies generally produced positive returns in December. Average market capital weighted spreads were predominantly tighter for the majority of the top deals, except for US Steel / Nippon Steel. Trump appointed Gail Slater, an aide to JD Vance, to lead the antitrust division in the Department of Justice. Her appointment indicated a continuation of strong antitrust enforcement, which aligned with Vance's position on the matter. Andrew Ferguson was named to head the FTC. As an existing commissioner, his appointment did not require congressional approval to lead the division. For the year overall, global M&A activity was steady with a slight year-over-year increase. North America drove a record share of global activity. Technology, industrials, as well as media and telecommunication sectors drove the rise of USD 1bn+ deal activity, with technology, energy and financial institutions making up over half of UDS 10bn+ deals. Strategic M&A was especially topical in 2024 as firms looked to acquire capabilities and boost profitability through scale and synergies. Financial sponsors remained highly active in the public markets as USD 1bn+ take-private activity remained at a 17-year high in North America. In ECM, global activity totaled USD 42bn in December. Performance was quite meager for global ECM strategies, except for managers who had the access and capacity to fund attractive PIPE deals.

Agency MBS strategies generally produced positive returns in December. Gains were driven by a combination of positive carry and mark-to-market (MTM) gains. The MTM gains were the result of the tightening in OAS for mortgage derivatives. Mortgage derivatives benefited from positive fundamental developments for the asset class. In particular, the assets benefited from the increase in mortgage rates and the relatively slow prepayment speeds released in the recent reports.

Quantitative equity strategies generally produced positive returns in December. Gains during the period were somewhat concentrated within fundamental equity long/short and macro. In the realm of fundamental equity long/short strategies, we noted positive spreads predominantly driven by short alpha. The majority of managers reported widespread gains across various sectors. Crowding was positive despite the momentum sell off around mid-month. Positive performance was amplified by the lack of year-end degrossing. Some negative alpha was detected following the Federal Reserve's adjustment to a less dovish stance. Quantitative strategies were also positive due to a conducive factor backdrop, a lighter momentum exposure versus recent history and healthy but moderating dispersion. Within macro, there were positive outcomes from macro positioning, while commodity results lagged. Credit exposure produced modest gains during the month.

HFRI Relative Value Total Index

MTD 0.30%

QTD 1.94%

YTD 8.72%

Credit / Income

Corporate credit strategies generated mixed returns in December. Corporate long-biased managers observed that investments in high yield were negatively impacted by spread widening in certain segments of the market. In some cases, the positive carry offset mark-to-market losses. In addition, managers with larger allocations to equities underperformed relative to funds with larger loan allocations. Corporate long / short funds exhibited the highest levels of dispersion in terms of manager performance. In aggregate, the sub-strategy produced relatively flat returns for the month as European managers outperformed relative to the US managers. In addition, the dispersion was generally driven by long investments where managers with positive carry profiles outperformed.

Asset-backed strategies (ABS) generally produced positive returns in December. Profits were primarily attributable to carry from long investments. Although corporate credit spreads widened in December, spreads for most ABS investments were relatively unchanged for the month. From a sector perspective, gains were attributable to investments in CLOs, Agency CRT (credit risk transfer), and SRT (significant risk transfer). The non-Agency RMBS and multifamily CMBS investments produced muted results.

Reinsurance / ILS strategies generally produced positive returns in December. Coupon income and spread tightening drove returns for the catastrophe bond manager, while premium accrual carry drove returns for the collateralized reinsurance manager. Collateralized reinsurance pricing was slightly lower than last year but remained historically attractive. Catastrophe bond pricing also moderated due to material spread compression over the past year, while the risk-free rate also declined 100 basis points over this time frame. Nevertheless, all-in yields were attractive compared to other carry investments.

HFRI ED: Credit Arbitrage Index

MTD 0.74%

MTD 2.94%

YTD 10.33%

Trading

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.

Discretionary trading strategies generally produced positive returns in December. Across developed market (DM) macro managers, gains were generally positive, albeit with some dispersion. Curve steepeners significantly impacted results, whereas those with a receiving bias faced challenges across G3 rates. Japan short positions had a minor negative impact on performance. Conversely, managers with a more hawkish bias outperformed. USD long positions consistently yielded significant gains, particularly against the EUR and CNH. Equities performance exhibited variability, with some gains observed in long positions in Japan, while performance was either negative or flat in other G3 regions. Commodities exposures faced difficulties primarily due to long positions in gold and copper as well as short positions in oil. Macro RV managers gained from curve and RV trades in European rates markets, short positions on swap spreads, and cash/future basis trades / bond RV in the US. Emerging market (EM) managers generally produced positive returns. Long USD positions contributed positively to performance and frontier / idiosyncratic stories, such as Egypt, Türkiye and Nigeria, were also additive. Positions in EM rates negatively impacted performance, whereas specific long positions in EM credit yielded positive results. Within commodity funds, most energy managers achieved positive performance from long positions in EU gas and spread trades as well as tactical trading in US natural gas. European and Nordic power RV traders also produced gains. Some managers incurred losses from long positions in electricity, coal and refined products as well as precious metals. In green elements, losses were typically incurred from positions in magnets, hydrogen and nuclear themes.

Systematic trading strategies generated mixed returns in December. Traditional trend-following strategies showed positive performance, with significant gains in foreign exchange markets, particularly in long USD positions versus JPY and KRW. Fixed income themes were mixed, while most other asset classes detracted. Alternative market managers were more challenged with gains produced in currencies, while equities and interest rates results were mixed. Commodities had the largest negative impact, followed by credit allocations. Managers with a broader range of alpha models achieved gains in currency and equity index sectors, while experiencing losses in the energy, metals, and interest rate sectors

HFRI Macro Total Index

MTD 0.82%

QTD 0.82%

YTD 5.65%

Endnotes

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