Unified Global Alternatives – Hedge Fund Bulletin

Overall market commentary

Risk assets produced broadly positive performance in September. Retail flows continued to drive asset prices higher, despite some pause in momentum mid-month around the expected pace of interest rate cuts from the US Federal Reserve. AI and technology strength also drove performance as growth factors largely outpaced the broader market. The risk-on dynamic was present across most asset markets despite somewhat elevated valuations and already compressed spreads. The Dow Jones Industrials, S&P500 and the NASDAQ posted positive performance in September, with gains of 1.28%, 3.53% and 5.61%, respectively. The European indices generated mostly positive performance with the MSCI Europe and FTSE producing gains of 1.54% and 1.79%, respectively. The DAX generated marginally negative returns of -0.09%. Asian developed markets produced positive results with the Nikkei 225 generating a gain of 5.18%, in line with the broader risk rally, further supported by a weaker Japanese Yen. Emerging market indices produced broadly positive performance in September. Brazilian, Chinese and Indian markets rallied 3.48%, 0.64% and 0.57%, respectively, driven by lower front-end interest rates. US interest rate markets rallied modestly after pricing in multiple rate cuts in the coming quarters. The two-year US Treasury yield fell to 3.61% from 3.62% and the ten-year US Treasury yield decreased to 4.15% from 4.23%. Given the risk-on background, spreads narrowed across credit markets. The Barclays US Corporate Investment Grade Index rallied 1.50%, while the Barclays US Corporate High Yield Index gained 0.82%. Commodity prices were again mixed in September where gold rose 10.2% on the back of USD weakness and lower USD rates, while oil fell 1.7% on concerns of a slowing global economy. In currency markets, the Euro rose 0.37% from 1.1690 to 1.1733, while the US dollar rose 0.59% against the Japanese Yen from 146.83 to 147.69.

Source returns: UBS World Market Report. As of September 30, 2025. Historical performance indications and financial market scenarios are not reliable indicators of future performance.

US Equity Hedged strategies generally produced positive performance in September. Defying seasonal trends for the second consecutive month, September primarily featured a risk-on tone. While most managers were profitable for the month, the greatest level of dispersion was observed among generalists due to positioning. The strongest returns were produced from directional biotechnology managers. Growth stocks were the primary drivers for the month, emanating from a resurgence in the AI theme. Lower quality, often highly shorted, segments of the market also performed positively, driven by increased confidence of a more dovish Fed policy. While there was a balance of outperforming and underperforming sectors, strength in technology and communications drove results, with the most pronounced weakness observed in materials and consumer staples due to a rotation away from defensive stocks. The overall risk-on tone resulted in realized volatility and momentum, tied to lower quality, while quality and value factors underperformed. Industry alpha appeared to be modestly positive, driven by the long portfolio, although with material dispersion in manager performance.

European Equity Hedged strategies generally produced positive performance in September. Despite the gains for the month, it was mostly viewed as a negative month for alpha generation, with the region underperforming its US and APAC peers. Alpha weakness was driven by losses from positions in France, communication services sector, concentrated long positions and size factor, which was partially offset by gains produced from the UK, Germany, industrials sector and momentum factor. Europe-focused fundamental long / short managers’ gross exposure increased by 20.6% to 192%, while net exposure increased by 8.1% to 56.6%.

Asian Equity Hedged strategies generally produced positive performance in September. Themes across Japan, China and the US were accretive. It was generally a positive month, especially for managers with more directional exposures given the strong beta market. Alpha generation was also additive as the large thematic approaches were mostly additive. The majority of managers noted elevated valuations in US AI but remained positive on the AI momentum in the near term with net exposure close to the highest levels observed in the last couple of years. The Japanese market produced gains due to the rate cut in the US and a weaker Yen. During the month, the BoJ announced its plan to sell its ETF holdings over time, which was widely viewed as having minimal impact to the market. Cyclicals / exporters outperformed domestic demand stocks, with Japanese semiconductors being one of the strongest performers. The Chinese market was also mostly positive, driven by continued support for the domestic AI sector, despite relatively weak macro data. There were also strong inflows across various sectors.

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Fixed income relative value strategies generally produced positive performance in September. Performance was generally positive due to gains in cash / futures basis, while macro trades generated more mixed returns. Japan shorts were typically accretive, while European steepeners detracted. US inflation themes mostly produced gains. Swap spread trading and front-end trading were generally flat to modestly negative.

Capital structure / volatility arbitrage strategies generally produced positive performance in September. Convertible arbitrage was again the standout cohort benefitting from a record month of new issues, most of which had strong day 1 performance. Data centers and AI related firms continued to tap the convertible bond markets to raise money for AI infrastructure expansion. Those areas, as well as digital assets-related deals were heavily featured in managers posting outsized performance for the month. Although many of the underlying equities were trading at elevated valuations, they remained discounted from a convertible option implied vs. realized volatility basis and therefore, remained attractive to convertible arbitrageurs. During the month, there were record global new issues of USD 30bn, bringing the full year-to-date total to USD 125bn. This was 50% higher compared with last year’s pace and three times the typical September new issuance volume. Conversely, credit arbitrage strategies were modest detractors due to the short biased credit relative value strategies. Managers involved in the space noted many individual single name mispricing, but also from a top-down basis they noted credit spreads being near all-time tights.

Merger arbitrage and event-driven strategies generated mixed performance in September. Average annualized spreads for 0-30% deals ended at 4.1% from 5.6% the previous month, while median spreads ended the month at 3.3% from 4.1%. The total US spread opportunity finished the month near USD 12.5bn, which was about the same compared to the prior month-end. The average non-annualized spread to the deal price was 3.5%, while median deal spreads were at 0.6%. Market capitalized weighted average deal spreads ended at 4.7%. The deal environment, both from a regulatory and market perspective, continued to be highly conducive to additional deals being announced.

Agency MBS strategies generated mixed performance in September. During the month, there was a lot of dispersion in manager performance. At the portfolio level, most funds benefited from positive carry. Managers with net short basis exposure generated negative results, while managers with flat to net long basis exposure and a larger allocation to inverse IOs generated positive returns. Overall, the mortgage derivative investments were profitable, while the dispersion in performance was largely driven by hedging and duration positioning.

Quantitative equity strategies generally produced positive performance in September. Overall, there was a wide dispersion in manager performance across strategies, with gains driven by positive alpha and partially offset by beta losses. Low-frequency approaches outperformed, while statistical arbitrage technical models tended to underperform. With momentum positioning decreased and with the lower correlation between momentum and quality, the market observed a decoupling of industry outcomes. The within-sector vs. between-sector dispersion ratio decreased in September, suggesting a more macro-driven environment. From a factor perspective, medium-term momentum, sector tilts toward consumer staples and materials, liquidity, and short concentration were among the largest alpha contributors to returns in September. This was partially offset by losses from size, domestic China exposure, and short-term momentum factors. Regionally, losses were concentrated in the US. Geographical diversification provided some cushion, as quant performance in Europe outperformed the US.

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Corporate credit strategies generally produced positive performance in September. The corporate long / short sub-strategy generated a positive return with most funds generating gains. Several managers with multiple portfolios benefited from increased event activity and dispersion in credit markets, even while spreads continued to move in a tight band during the month. Generally, US allocations outperformed other regional allocations driven by both long and short exposures, while the European segment of the portfolio produced gains from the long portfolio but losses from short biased themes. The corporate long biased sub-strategy generated a positive performance during the month, although there were large dispersions. While carry was additive, the amount of capital appreciation from long investments varied significantly.

Asset backed strategies (ABS) generally produced positive performance in September. Long investments were the key driver of performance as interest income was the primary contributor to returns, although certain strategies benefited from elevated prepayment income / penalties during the month. Investments in Other Income, SRTs, RMBS and CMBS contributed positively to performance, while CLO equity experienced negative mark-to-market impacts.

Reinsurance / ILS strategies generally produced positive performance in September. Performance was mainly a function of seasonally elevated premium accrual for the collateralized reinsurance manager and typical seasonal price appreciation via spread tightening for the cat bond manager, although coupon income was a material contributor here as well. There were no loss producing events during the month as all tropical systems of potential consequence remained well east of the US mainland.

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Discretionary trading strategies generally produced positive performance in September. Performance was largely driven by equities and commodity positions, with mixed contributions from rates. In equities, gains were generated from exposure to AI and technology, EU defense, and other thematic allocations. Commodities were also additive, mostly due to the continued gold rally. In rates, steepeners in the US and EU were challenged, with additional losses from front-end receivers in the EU and UK, while JGB flatteners and payers provided some offsetting gains. Contributions from FX were more muted, with gains from long EURUSD partially offset by short USDJPY positions. Additionally, long positions in EM carry, mostly in Latam, were additive for some managers. Across the EM landscape, managers were also mostly positive in September. The idiosyncratic carry trades in EGP, NGN, TRY and Zambia drove gains, with additional profits across FX themes through short USD vs. EM currencies. Interest rates exposure was more muted, with gains in receivers in Romania and Mexico, while CZK was more mixed depending on positioning. DM contributions were mixed, while some managers incurred losses from hedges in equities, as well as credit and DM rates trading, although there were gains from long positions in equities for some managers, mostly in the mining space.

Systematic trading strategies generally produced positive performance in September. Traditional trend following CTAs performed well mostly due to long exposures in equities, precious metals and short USD. Programs with more diversified exposures also produced gains with similar contributors. Alternative trend followers generated positive results as they were able to capture downtrends in natural gas, grains, and electricity, while profiting from long exposures to emerging market FX and high yield credit.

Source: UGA - Hedge Funds, HFR. For illustrative purpose only. As of September 30, 2025. Historical performance indications and financial market scenarios are not reliable indicators of future performance.

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