Strategy Outlook

We intend to add opportunistically as we find Commodity and Discretionary Trading managers with the right approaches.
During an inflationary environment, we believe Commodities offer alpha opportunities and correlation benefits for portfolios. Our emphasis is on managers who can trade both directionally and relative value, seeking alpha and tactical beta, within a disciplined risk framework. After a decade of nothing to do, many commodity funds went out of business, leaving this market with fewer skilled portfolio managers to capture extraordinary opportunities. We also plan to slightly increase Discretionary Trading exposure, focusing on managers who are smaller, can be nimble and opportunistic across a wide range of markets and asset classes, construct convex portfolios and provide tail protection.

We have now scaled back most sub-strategies within Relative Value, except for FIRV (Fixed Income Relative Value), where we plan to increase allocations.
As we shift from a world of QE to QT, uncertainty around inflation and the policy rate response will drive volatility across yield curves, and the range of movement for asset prices should allow for larger dislocations. Managers may also benefit from breadth of sub-strategies in play including agency mortgages, inflation relative value, front-end STIR trading, bond relative value, yield curve and swap spread trading. Furthermore, cash / futures basis opportunities, particularly in the US and Europe, have returned to the core FIRV playbook.

HFS continues to embrace a cautious approach to our manager selection with a keen focus on identifying managers who can generate gains on the short side of portfolios.

We have built core positions in multi-PM funds and seek to complement this with generalists who are conscious of style skews, manage a balanced portfolio and can adapt to market conditions. Given the secular energy transition dynamics combined with energy security needs, we believe alpha opportunities should be exceptional; we endeavor to allocate to managers that invest across the entire spectrum of energy markets while keeping a low net exposure. In Asia, we have a more cautious outlook and are currently downgrading our outlook on China-focused long / short due to the challenges of Common Prosperity and the zero covid policy, and now heightened geopolitical tensions associated with a transitioning world order.

We maintain allocations to the ABS, Agency MBS and Corporate Long / Short sub-strategies.

HFS remains focused on trading-oriented Corporate Long / Short strategies that we believe are positioned to benefit from volatility across both long and short themes. We believe this enables us to benefit from widening spreads while we wait for default activity to take hold in 2023-2024. The opportunity set has improved with greater potential dispersion as companies experience varied outcomes from rising rates, the impacts of inflation on business models and macroeconomic challenges. In the meantime, we have targeted exposure in less correlated, short duration ABS and Agency MBS derivatives allocations, combined with longer-biased exposure to China property credits.

The use of indices is for illustrative purposes only.

The strategies described herein are speculative and entail substantial risks which may place your capital at risk. An investment in these strategies includes the risks inherent in an investment in securities, as well as specific risks associated with limited liquidity, the use of leverage, short sales, options, futures, derivative instruments, investments in non-US securities and illiquid investments. The Fund invests largely in other unregulated hedge funds. Such a portfolio of hedge funds may increase an investor’s volatility for potential losses or gains.

A particular manager of any strategy, from time to time, may invest a substantial portion of the assets managed in an industry sector. As a result, the manager’s investment portfolio may be subject to greater risk and volatility than if investments had been made in the securities of a broader range of issues. There can be no assurances that any particular strategy (hedging or otherwise) will be successful or that it will employ such strategies with respect to all or any portion of its portfolio. These strategies can be highly illiquid, are not required to provide periodic pricing or valuation to investors, and may involve complex tax strategies.

The strategies may be highly leveraged and the volatility of the price of its interests may be great. The fees and expenses charged by any individual manager of a strategy may substantially offset any trading profit.

This is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of 1m2y, 1m5y, 1m10y and 1m30y Treasury implied vols with weights 0.2/0.2/0.4/0.2, with volatilities on the CT2, CT5, CT10, and CT30.

The views expressed are as of February 2022 and are a general guide to the views of UBS Hedge Fund Solutions, a distinct business unit of UBS Asset Management (Americas) LLC (“UBS Hedge Fund Solutions”). This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level.

Please note that past performance is not a guide to the future. Potential for profit is accompanied by the possibility of loss. The value of investments and the income from them may go down as well as up and investors may not get back the original amount invested. This document is a marketing communication. Any market or investment views expressed are not intended to be investment research. The document has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. All such information and opinions are subject to change without notice.

A number of the comments in this document are based on current expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Hedge Fund Solutions best judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class, and the markets generally, nor are they intended to predict the future performance of any UBS Hedge Fund Solutions portfolio or fund.

Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing or changes occurring after the date hereof. Certain information contained in this presentation constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof of other variations thereon or comparable terminology. Due to various risks and uncertainty, actual events or results or the actual performance of a Fund may differ materially from those reflected or contemplated in such forward-looking statements.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.