Strategy Outlook

Since the end of 2025, we have been concerned about rising risk of a correction in equity markets mainly due to falling real wage growth, overreliance on the AI Capex cycle, elevated positioning and valuations, and global political turmoil. Nevertheless, fiscal policy remains broadly accommodative and interest rates can fall further, if needed, as inflation remains under control. AI adoption is expected to boost global productivity, ideally translating into rising corporate profits, but possibly at the expense of labor. In the US, higher expected tax rebates in Q1 could further support consumption, while the US administration is now putting affordability at top of the fiscal and regulatory agenda. As such, we believe we remain in a “risk on” regime, albeit one with rising tail risk.

More importantly, market leadership is broadening out and diversification is being rewarded. Equity performance is increasingly driven by a wider set of regions, sectors, styles and market capitalizations, rather a small group of US mega-cap stocks. This is consistent with a world that is moving from US-led, rules-based unipolar system toward a multipolar and fragmented order, characterized by strategic competition, regional blocks, and greater financial sovereignty. Investors’ capital is adapting accordingly, creating healthy levels of macro volatility spanning from rates and cross-currency trading to broad equity themes and strategic commodity plays (e.g. rare earth metals). This is creating a fertile environment for our hedge funds, especially those able to apply macro lenses to their investment process.

We believe our marginal reduction in beta profiles, undertaken across most portfolios in Q4, should be sufficient to balance short-term risks of rising volatility versus medium-term policy support under risk assets. We believe our degree of strategy diversification remains adequate to capture emerging opportunities, especially in areas like discretionary macro and commodities where we maintain strong conviction. We are working on increasing regional diversification, especially outside US and Europe, with focus on alpha and downside mitigation.

In Trading, we maintain high conviction in discretionary macro and commodities. In the short-term, we expect diminishing focus on rates trading in the US and Europe as opportunities broaden into FX, thematic equities and commodities. While we believe our managers can – and should – move where opportunities lie, we are closely monitoring rising cross-strategy correlations as well as managers’ exposures by asset class on a look-through basis. As regional trading / cooperation blocks are re-designed or consolidated, we believe some emerging market countries could be direct beneficiaries. Given this backdrop, we plan to selectively increase EM macro exposure.

Central Bank gold reserves as % of total reserves

Source: World Gold Council, UBS; Daily data; Jan 31, 1970-Oct 31, 2025. Indices are for illustrative purposes only. Please see end notes for index descriptions. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

We maintain high conviction in the alpha generation potential of Equity Hedged. 2025 was nearly a record year for long / short spread and we see scope to continue. As mentioned above, broadening market leadership bodes well for price dispersion. As such, we continue to diversify geographically as we seek to improve portfolios’ alpha mix and overall Sharpe ratios. We are selectively adding back to Equity Hedged in APAC, mindful of maintaining a low net approach and balance across style factors. From a sector perspective, we are marginally increasing exposure to biotech and therapeutics specialists. After 3 years of a bear market, biotech stocks staged a strong recovery in the second half of 2025. We believe this could be the beginning of a more sustained recovery due to the more favourable FDA regime, rising M&A, US drug pricing policy resolution, and AI adoption in drugs research and diagnostics.

Biotech M&A Deal value (USD 500mn-USD 20bn deals)

Source: UBS Research. Data is from Jan 1, 2024-Dec 31, 2025. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

In Credit / Income strategies, we see fewer opportunities as spreads have contracted and all-in yields trend lower. After Q4, we reduced our Credit / Income exposure by over one-third since a recent peak in Q1 2025, mainly across asset-backed and reinsurance. We expect dispersion to benefit corporate long / short as well, and maintain an optimistic outlook for managers focused on liquid trading strategies.

US High yield YTW (yield to worst)

Source: Bank of America Merrill Lynch, Bloomberg; Daily data; Dec 31, 2020–Dec 31, 2025. The YTW (yield to worst) is derived from BofA Merrill Lynch US High Yield Master II (H0A0) index. The shown yield to worst does not take into account costs, changes in the portfolio, market fluctuations and potential defaults. The yield to worst is an indication only and is subject to change. Please see end notes for index descriptions. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

As we reduce less liquid and lower yielding Credit / Income strategies, may be partially replaced by more liquid RV opportunities, namely merger arbitrage. M&A volumes are rising, cost of capital is relatively low, and US antitrust enforcement appears more lenient under the current administration. However, spreads remain tight; as such, we plan to be mindful about execution. We are marginally reducing agency MBS as well. Policy risk has likely not yet peaked, and prepayment fundamentals are looking more like headwinds due to pent-up demand from potential first-time and relocating home buyers.

US vs. EU rates volatility

Source: Bloomberg; Daily data; Jan 20, 2025-Jan 16, 2026. Indices are for illustrative purposes only. Please see end notes for index descriptions. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

The views expressed are as of February 2026 and are a general guide to the views of UBS Asset Management, acting through Unified Global Alternatives - Hedge Funds (“UGA - Hedge Funds” or “UGA - HF”). This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level. This publication encompasses UGA - HF's views based on our internal manager universe and are subject to change. The universe includes managers that are either invested in or followed by UGA - HF and does not represent all hedge fund managers and strategies available in the industry. These views are subject to change. This does not constitute a guarantee by UBS Asset Management.

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. 

Endnotes

Index descriptions

The use of indices is for illustrative purposes only.