HFS Bulletin

US Equity Hedged strategies generally produced positive returns in October. The month was marked by significant dispersion in performance, primarily due to idiosyncratic stock selection. During the month, macro variables took center stage, such as improved growth and an associated rise in bond yields. This ultimately pushed equity indices into negative territory as some Magnificent 7 companies’ earnings/guidance reports were poorly received by the market, primarily based on concerns regarding AI spending. On a capital-weighted basis, TMT managers exhibited the best performance followed by generalists, while healthcare managers produced mostly negative performance. Momentum was the leading factor due in part to shifting dynamics as persistence remained in areas such as data center power plays and themes that were perceived to perform well with a Trump win. Alpha was generally positive and driven by the long side of portfolios, marking a continuation of the September trend and a reversal of H1 when the short side was the primary alpha driver. Most sectors posted declines during the month. Defensive sectors, such as healthcare and consumer staples, led the decline as better growth prospects and the potential Trump victory resulted in some rotation from defensives to cyclicals. Conversely, financials were the top performing sector, associated with a stronger outlook for NIMs, bank mergers and less regulation.

European Equity Hedged strategies generated mixed returns in October. Alpha generation was also uneven during the period but generally muted in a month when European markets sold off and underperformed their US counterparts. Industrials and momentum generated mostly positive alpha, while utilities underperformed. On the platform, funds with an energy or utilities tilt generated less alpha, while generalist funds tended to outperform the index. The most net bought sector for the second month in a row was financials, while healthcare and energy were net bought as well. The most net sold sector was industrials, largely driven by long selling. Factor wise, momentum, dividend yield, and value names contributed to performance, while realized volatility and quality detracted for the month. Prime brokers reported net selling of European equities in October, largely driven by net selling of macro products by hedge funds for the first time in four months. They saw an even split of long and short selling during the month. The most net bought regions were France, UK and Greece, while Germany, Ireland and the Netherlands were net sold.

Asian Equity Hedged strategies generally produced positive returns in October. Despite being a weak beta environment, it was a positive alpha month for most funds in the region as many directional China funds were able to protect profit by stock picking and trading around the market. Low net China funds benefited from the selloff, and the short portfolios contributed to performance. The Japanese market remained volatile and heavily influenced by the US as the corporates were more conservative in moving their guidance due to the macro uncertainty which could provide more stock picking opportunities in the next few quarters.

HFRI Equity Hedge Total Index

Fixed income relative value strategies generally produced positive returns in October. Swap spread short exposure in Europe was the largest contributor to performance, along with similar positioning in the US. US cash / futures basis exposure was also a notable positive driver for most managers. Other sub-strategies generally delivered small gains, while European cash / futures basis themes remained fairly quiet.

Capital structure / volatility arbitrage strategies generally produced positive returns in October. Convertible arbitrage returns were driven by multiple sources of positive performance. China ADRs continued to outperform, while volatility trading, bond floors, and low delta event-oriented positions were also additive. The overall improvement in valuations was supportive of returns. Interest rate hedges also performed well. For capital structure managers, long credit / short equity trades generally produced gains, while the reverse set-ups again underperformed. CDS basis trades were also accretive. Global convertible bond issuance was uncharacteristically high, defying typical October seasonal weakness and the US election risks. USD 11.1 billion came to the market, anchored by Boeing’s USD 5 billion mandatory preferred deal. The company offered the new mandatories, together with stock, to protect its balance sheet amid its recent struggles. Global new issues at the end of October totaled over USD 94 billion year-to-date, driven by the US’s more than USD 62 billion and Asia’s nearly USD 21 billion issuance, pacing to reach our year-end global target of UDS 100 billion to 110 billion. Lastly, non-investment grade convertible bond spreads tightened by -51bps in October to 386bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index decreased to +115bps from +152bps.

Merger arbitrage and event-driven strategies generated mixed returns in October. During the period, the market cap weighted arbitrage spread moved 1.1% wider, almost entirely due to the Capri/Tapestry trial loss (-50%) but were unchanged otherwise. The US arbitrage spread pool finished October +20% compared to the prior month. However, excluding Capri, aggregate spreads increased 12%. While M&A volumes were down in October, it was one of the more active months for potential M&A reporting. Twelve situations were added to the list of potential deals. Seven transactions larger than USD 1 billion in size were announced in October, representing approximately USD 28 billion in aggregate transaction value. For equity capital markets managers, October was a more active month in North American deals than initially anticipated as several multi-billion-dollar deals came to market. Activity and performance were generated across the board, from blocks, follow-ons, and IPOs. Market volatility provided opportunities to generate returns on both long and short positions.

Agency MBS strategies generally produced positive returns in October. Managers generally benefited from exposure to mortgage derivatives, which generated gains due to both positive carry and in some cases, tighter spreads. However, duration and basis positioning drove dispersion in returns. In particular, managers who were positioned with long biases to the mortgage basis and/or duration incurred losses because of the rate move.

Quantitative equity strategies generated mixed returns in October. The market neutral cohort experienced modest gains across UCITS platforms, while weakness was seen among systematic long / short managers in October. Despite some positive long / short spread, alpha contribution was generally negative. Long term momentum, medium-term momentum and reversals contributed positively, while quality was the main laggard as investors shunned better fundamentals for growth. Sell side analysts experienced a successful month as analyst sentiment type factors were positive in October. Asset selection, growth, and volatility were among the largest alpha detractors, partially offset by gains from short crowdedness, country tilts, medium-term momentum, and short-term momentum factors. Within sectors daily dispersion was lower which suggested the substantially reduced importance of micro drivers and a more challenged environment for stock pickers.

HFRI Relative Value Total Index

Corporate credit strategies generally produced positive returns in October. The long / short sub-strategy generally produced positive performance. Overall, funds with long-biased portfolios outperformed relative to their net short counterparts. Long exposure drove performance as managers benefited from the tightening in credit spreads. Conversely, short positions generally detracted from performance. The corporate long-biased sub-strategy also produced positive results. Although total returns for the high yield index were negative, these managers benefited from the move tighter in spreads coupled with the outperformance of CCC debt. Gains were driven by long investments with managers capitalizing on investments in emerging market sovereigns and stressed high yield issuers.

Asset-backed strategies (ABS) generally produced positive returns in October. Long investments drove performance, and carry was the key contributor as managers benefited from floating rate and/or short duration investments, which were insulated from the volatility attributable to the back up in interest rates. At the asset class level, profits were driven by CLOs, SRT, Agency CRT, multifamily CMBS, and short duration private credit. Managers who were positioned with a net long duration bias underperformed during the month.

Reinsurance / ILS strategies generated mixed returns in October. Hurricane Milton was the main driver for the month as it made landfall along the west coast of Florida near Sarasota on October 9th as a Category 3 storm. After some volatility during the month, the catastrophe bond manager finished with positive performance due to the coupon income from the bonds. The month-over-month price changes in the portfolio were negligible as the assumption was that none of the portfolio’s bonds would incur any actual losses. The collateralized reinsurance manager took a markdown of approximately 300 bps from Milton, much of which was offset by the elevated seasonal premium accrual of October. The Milton-related markdown stemmed from write-downs of varying degrees across 70 bonds, each of which had at least some exposure to Florida wind.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generated mixed returns in October. It was a slightly negative month for DM macro overall with some exceptions for those with a hawkish bias in interest rate positioning. Those funds with G3 receivers and steepening yield curve exposures were challenged with limited offsets via short themes in Japan. FX was generally positive due to long USD bias, especially versus CNH and EUR. Equity exposures were mixed, driven by gains on thematic sector plays in technology and autos as well as shorts in US/EU indices, but gains were offset by losses from short exposure in Japan. Commodities generally incurred losses due to long positions in copper, performance in oil was mixed, while long gold positions outperformed. Macro RV managers generated some positive results on micro-RV trades and swap spreads but were challenged on more directional macro trades. Emerging market macro managers also generated mixed performance as EM receivers underperformed, but some managers with long exposure in credit, a paid bias in US rates and long USD exposure outperformed. Japan short positions were also additive in some cases. Idiosyncratic high carry stories, including Türkiye and Egypt continued to generate returns. Within DM, long volatility positions also delivered positive performance.

For commodity managers, October proved to be a quieter month in green materials. In the energy space, managers generally produced gains on US natural gas short exposure, with smaller gains in European natural gas. Oil trading was more mixed, with some losses on long positions. Some energy managers also incurred losses from long positions in base metals and long / short trading in refined products.

Systematic trading strategies generally produced negative returns in October. Trend-following strategies generally incurred losses from bonds, currencies and equities, which were modestly offset by gains in metals and agriculture. Within FX, losses were incurred from short USD positions and long British pound positions, which were modestly offset by short Japanese yen positions. Fixed income losses occurred in long Italian and Euribor futures, while gains were produced from short UK Gilts. Fixed income positions shifted to net short by the end of the month. Losses in equities were broad-based with Japanese equities being the sole contributor to performance. Alternative market managers generally detracted from performance with losses in fixed income, rate swaps, equities, yield curve strategies and energies. These losses were somewhat offset by gains in metals, equity factors and alternative commodities. Long gold and short natural gas were the top performers, while long positions in coffee and emerging market equities underperformed. Overall, currency positions were switched from net long to net short, while long positions in fixed income were trimmed. Systematic managers with more diversified alpha models generated gains in currencies, equity indices, agriculture and rates while incurring losses in energies and metals. Rates and equity positioning were switched to net short by the end of the month as net long exposure in metals was reduced.

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