Q3 2025 Performance review
Q3 2025 Performance review
UGA - HF鈥檚 Broad Based Diversified and Broad Based Neutral strategies both generally underperformed hedge fund benchmarks in Q3. Performance was largely dictated by a portfolio鈥檚 degree of exposure to certain Trading and Credit / Income sub-strategies.
- Within Credit / Income, we had positive contribution from sub-strategies including corporate long / short, reinsurance / ILS, and CLO / corporate lending. Results in other income strategies were underwhelming, overall, as a co-investment detracted within some portfolios.
- Trading detracted in Q3 due to negative performance from gas and power trading. That said, metals was a bright spot as China鈥檚 announcement of plans to expand their scope of export controls on various green transition materials led to scarcity pricing in some of the rare earth metals.
- Positive returns for the quarter were primarily derived from Equity Hedged strategies. While the strategy broadly benefited from continued enthusiasm over AI, stock picking from our technology and biotechnology specialists also contributed positively to returns.
- Relative Value strategies generally contributed smaller gains. Convert arbitrage managers benefitted from healthy levels of volatility, a near historic quarter of new issue activity, and increased investor interest.
Q4 2025 Outlook
Q4 2025 Outlook
Despite recent data on stagnating US labor demand and political impasses about elevated fiscal spending on both sides of the Atlantic, equity markets continue to march higher while credit spreads remain firmly at historical lows. With most central banks seemingly more dovish and with fiscal support well into 2026, recession odds appear muted. We believe that the tariff鈥檚 impact on imported goods has yet to peak; however, we observe offsetting price trends in housing and crude oil. Declining nominal wage growth may also act as a headwind for inflation; as inflation remains under control (~3%), pro-growth policies, especially in the US, should continue to support both the global economy and risk assets into next year.
Yet, there are few reasons for concern as we move into 2026:
- Real wage growth in the US is slowing while the job market is in perfect equilibrium (for now). With 50% of consumption driven by the top 10% of the income distribution, consumption and GDP are increasingly dependent on the wealth effect generated by rising asset prices.
- AI capex is the other major contributor to US growth. However, much of the spending so far is justified by expected returns that haven鈥檛 materialized. We have yet to see meaningful enterprise adoption leading to measurable productivity gains.
- Initial warning signs are appearing in US HY Credit markets after 3 years of elevated interest rates and more recent impact of tariffs.聽
- Valuations for risk assets and positioning, while not extreme, are certainly elevated, predominantly in the US.
As such, we are marginally shifting towards a more conservative positioning within our portfolios, reducing beta by exchanging some of our more directional Equity Hedged strategies and Credit in favor of Relative Value strategies.
CIO model portfolio and sub-strategy outlook
Equity Hedged
Sub-strategy | Q4 2025 |
|---|---|
Fundamental | -17 |
Opportunistic Trading | +13 |
Equity Event | 3 |
Equity Hedged Total | 33 |
Relative Value
Sub-strategy | Q4 2025 |
|---|---|
Quantitative Equity | +7 |
Merger Arbitrage | 1 |
Cap Structure/Vol Arb | 3 |
Fixed Income Relative Value | 8 |
Agency MBS | 4 |
Relative Value Total | 23 |
Credit/Income
Sub-strategy | Q4 2025 |
|---|---|
Distressed | 1 |
Corporate Long/Short | 8 |
Reinsurance/ILS | 3 |
Asset-Backed | -3 |
Other Income | -2 |
Credit/Income Total | 17 |
Trading
Sub-strategy | Q4 2025 |
|---|---|
Systematic | +2 |
Discretionary | 16 |
Commodities | 8 |
Trading Total | 26 |
Niche & Other
Sub-strategy | Q4 2025 |
|---|---|
Niche & Other Total | 1 |
Strategies
Trading
Trading
Trading strategies continue to represent a relatively large allocation within our portfolios, particularly discretionary macro. Despite some short-term consolidation in some popular themes (short USD, long steepeners, long gold), discretionary macro managers are well positioned to provide convexity in most market scenarios. We are monitoring carefully rising long equity exposures to make sure our overall beta profile remains in check. We are marginally increasing exposure to systematic macro with higher allocations to alternative markets. These allocations may provide a diversifying source of alpha as well as a possible source of positive contribution in a risk-off scenario. We maintain high conviction in commodities trading, both from a cyclical and structural point of view. While our focus has been mainly energy, we believe climate change and geopolitics could present good opportunities in agriculturals and metals going forward.
Policy rate changes 2025 YTD with forecasts through Q2 2026
Equity Hedged
Equity Hedged
In Equity Hedged, we are taking some profits in more fundamental strategies, especially in technology, following two years of very strong performance. We remain bullish on long-term AI adoption but are wary of potential short-term recalibration of capacity expansion targets and equity valuations. We continue to diversify across regions and plan to increase allocations to Pan Asia Equity Hedged strategies. Japan and South Korea markets are benefitting from shareholder-friendly corporate reforms and renewed interest from foreign investors. In China equity markets, stock pickers鈥 focus remains more skewed towards AI / technology; nevertheless, rising retail participation should support gradual expansion of alpha opportunities. We believe financials, biotechnology and, to a lesser extent, technology will continue to represent the majority of sector specialists鈥 alpha.
P / E Ratios of AI Power and AI TMT vs. S&P
Relative Value
Relative Value
In Relative Value, we continue to hold our exposure in fixed income relative value as we expect opportunities to broaden outside traditional cash / futures basis trading, especially in Europe. We are reallocating some of the proceeds from Credit / Income into quantitative equity sub-strategies. The focus remains on short- to medium-term frequency statistical arbitrage with global breadth. We are turning more constructive on merger arbitrage as global M&A volumes pick up (although from a low level). Nevertheless, we remain cognizant of relatively tight spreads and potential crowding from any inflows from multi-strategy funds. Further increase in merger volumes and one or two merger break-ups could potentially create tactical entry points.
Move vs. VIX
Credit / Income
Credit / Income
We are further reducing Credit / Income allocations, acknowledging extremely narrow credit spreads and liquidity risk premia. Recent corporate credit events in the US appear to be isolated cases of balance sheet mismanagement rather than the beginning of a major distressed cycle. However, fatigued lower income consumers, elevated interest expenses (especially for loans), and tariffs could potentially cause further corporate mishaps and overall credit spread volatility. As such, we remain constructive on credit long / short, as opportunities could emerge on both sides of the portfolio. We are carefully reassessing risk-reward for our reinsurance exposure as we approach contract renewals for next season. Despite wildfires impacts early in the year, pricing appears to have peaked in many segments and is expected to soften in 2026.
Current Spread vs. Minimum & Maximum (past 5 years)
Endnotes
Index descriptions
The use of indices is for illustrative purposes only.
