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Market and hedge fund update in a nutshell

Risk assets were broadly weaker in March on the back of concerns around the US administration’s tariff initiatives and the prospect of a widening trade conflict. The lack of policy clarity weighed on consumer confidence and corporate capital expenditure plans, while the prospect of large-scale tariffs raised concerns about stagflation, and its influence US Federal Reserve monetary policy. In Equity Hedged, US Equity Hedged strategies had negative returns, with the largest declines coming from managers with directional exposure to tech and biotech. It was a challenging environment for alpha due to long side headwinds and momentum factors. European Equity Hedged strategies produced flat returns, with modest alpha generation, driven by gains in industrial sector allocations and size factors, though partially offset by concentrated longs. Asian Equity Hedged strategies had mostly negative returns. Funds with more overall exposures in US tended to lag, and suffered in the early part of the month. In Relative Value, Fixed income relative value strategies produced positive performance, with gains fairly evenly split across strategies. Capital structure/volatility arbitrage strategies generally produced positive performance, with strength in volatility trades offsetting meaningful losses in stressed and distressed converts, especially those of longer duration. Merger arbitrage and event-driven strategies produced positive returns, with spreads largely unchanged. Agency MBS strategies had positive returns, with carry being a key contributor. Mortgage derivative spreads widened slightly with notable dispersion. Quantitative equity strategies had positive returns, driven by positive alpha. Daily sector dispersion increased, highlighting the growing importance of micro drivers and a better environment for stock pickers. In Credit/Income, Corporate credit strategies generally had positive returns, driven by short positions that capitalized on the spread widening. Investments in high yield bonds and leveraged loans produced negative returns. Asset-backed strategies (ABS) had mostly negative returns, primarily due to the high degree of dispersion and carry. Reinsurance/ILS strategies generated positive returns, as a function of carry income in the form of accrued coupon income and premium accrual. In Trading, Discretionary trading strategies had mixed returns, with gains from risk off trades, receivers and steepeners, and index shorts in equities, but negative results in FX, longs in inflation, and thematic equity. Systematic trading strategies had negative returns, with losses in energy themes, partially offset by gains in equities. Alternative market managers also generated losses due to the underperformance of equities and FX, while energy detracted slightly. Losses were offset by allocations to metals as well as agriculture. Systematic managers with more diversified alpha models were flat for the month. In commodities, energy, metals and agriculture delivered positive returns.

Overall market commentary

Risk assets were broadly weaker in March on the back of concerns around the US administration’s tariff initiatives and the prospect of a widening trade conflict. The lack of clarity around policy weighed on consumer confidence as well as capital expenditure plans at the corporate level. The prospect of large-scale tariffs also prompted concerns about stagflation, and its influence on monetary policy from the US Federal Reserve. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced negative performance of -4.20%, -5.75% and -8.21%, respectively. Across Europe, equity markets were also weaker in line with the wider risk-off climate. The MSCI Europe, DAX and FTSE generated negative performance in March of -4.36%, -1.72% and -2.75%, respectively. Asian developed markets produced negative results with the Nikkei 225 posting a loss of -4.14%, primarily due to expected challenges from tariff policies. Emerging market indices were an outlier despite the elevated level of market uncertainty. Brazilian, Indian and Chinese markets rallied 6.08%, 5.76% and 0.45% respectively. US interest rate markets rallied modestly in March as investors sought safe havens amid the overall market volatility. The two-year US Treasury yield fell to 3.89% from 3.99%, while the ten-year US Treasury yield was essentially unchanged at 4.21%. The Barclays US Corporate Investment Grade Index declined -0.29%, driven by modest spread widening. The Barclays US Corporate High Yield Index fell -1.02%, as recessionary fears drove risk reduction down the credit stack. Commodity prices were mixed but showed strength across precious metals and energy as gold rose +9.5% and crude oil rallied 3.1%. In currency markets, the Euro rallied 4.25% from 1.0378 to 1.0819, while the US dollar declined -0.77% against the Japanese Yen from 150.867 to 149.51.

Source returns: �۶���Ƶ World Market Report

US focused equity hedged strategies generated negative performance in March. Increased concerns about the escalating trade war and anticipated stagflation weighed on investor sentiment. Most managers posted negative performance for the month with the largest declines tending to come from managers with material directional exposure to tech and biotech. Additionally, it was a challenging environment for alpha, given long side headwinds as well as momentum factors. Realized volatility, growth, and momentum were the biggest headwinds from a factor standpoint, in line with a typical risk-off backdrop. Conversely, there were tailwinds from quality and value factors which were less associated with recent position crowding. Daily volatility was exacerbated by unwinds from some multi-PM platforms and more generally across the momentum factor. All sectors registered declines except for energy, where consumer discretionary and technology stocks were the most impacted, given the tariff threat and the adverse impact to consumer confidence. On a relative basis, more defensive sectors such as healthcare and utilities held up reasonably well during the month with more muted declines.

European focused equity strategies generated essentially flat performance in March. On balance, these managers outperformed US-focused managers, though mostly underperformed their Asian focused counterparts. For the period, there was modest alpha generation that was largely driven by gains in Industrial sector allocations exposure to “size” factors, though partially offset by “concentrated” longs. Across the industry, European fundamental managers decreased their gross exposure through the month by -6.2% to 185.5%, its 65th percentile on a three-year basis. Net exposures also decreased by -2.8% to 59.5%.

Asian focused equity hedged strategies produced mostly negative performance in March. Funds with more overall exposures in US tended to lag, especially in the early part of the month. The Japanese market remained volatile amid the global market volatility and suffered from the US tariff on the auto sector. For China, it was also a volatile month where the market continued higher on the back of the tech driven strength in the 1st half of the month, but gave back most of the gains in the final week as investors reduced risk ahead of the announcements on reciprocal tariffs.

HFRI Equity Hedge Total Index

Fixed income relative value strategies produced positive performance in March. Gains were fairly evenly split across strategies, including G3 asset swaps, G3 bond basis and RV, European bond spreads trading, cross currency basis trading and European tenor basis.

Capital structure/volatility arbitrage managers generated positive performance in March. During the month, 12 deals for USD 13bn came to market, with strength in volatility trades offsetting meaningful losses in stressed and distressed converts, especially those of longer duration. Rho hedges generated modest losses during the period. Cash levels generally rose despite the increase in new issues, in part due to exchanges but also due to credit sales. Valuations moved from relatively expensive to modestly cheap. Short leaning non-convert capital structure and senior/sub trades were profitable during March on the back of meaningfully wider credit spreads. Debt vs equity trades were mixed but generally positive. We saw a meaningful reversal in net notional exposure from some of our credit arb RV managers as they lifted overall short leg delta and added to long legs. Equity capital market strategies were mixed last month, with the highly anticipated Coreweave deal pricing significantly below the lower end of the range and trading lower on the first day, while larger size European blocks like Ferarri traded poorly. Some Mid and smaller sized as well as more seasoned deals performed significantly better, notably a successful Swedish healthcare IPO.

Merger arbitrage/event driven strategies generated positive performance in March. Overall spreads were largely unchanged during the period. This may have been due to some spread tightening earlier in the quarter, as well as investors expecting a more attractive opportunity set. Despite a slow start, March was the most active month for US M&A in the past year. Homebuilding & Home Financing was a key M&A theme. For all of Q1, US M&A volumes trailed last year’s pace, despite a slight bump up in March. The decline was most visible in strategic dealmaking (-50% vs. Q1’24), which investors previously thought would benefit from a more permissive regulatory environment.

Agency MBS strategies produced positive performance in March. Every fund generated a profit, Carry was a key contributor to performance during the month as all managers generated positive results in the period. Spreads on mortgage derivatives were marginally wider on the month although there was a reasonable amount of dispersion. In addition, managers benefited from short biases to the mortgage basis.

Quantitative equity strategies generated positive performance in March. Positive results were achieved across the market neutral cohort as well as via systematic L/S managers driven mainly by positive alpha. From a factor perspective, Asset Selection, Crowdedness, both Short and Long, Volatility, China, sector tilt (Financials and Consumer Discretionary), Japan, and Earnings Yield were among the largest alpha contributors to Systematic L/S returns in March. Within vs between sectors daily dispersion increased month over month, which suggested increased importance of micro drivers and an improved environment for stock pickers.

HFRI Relative Value Total Index

Corporate Long/Short strategies generated positive performance in March. Managers with low net exposures and/or defensively positioned portfolios outperformed relative to their net long counterparts. Profits were primarily driven by short positions, which capitalized on the spread widening. In addition, several funds also benefited from idiosyncratic gains on the long side. Conversely, corporate long-biased strategies produced a negative return. All investments were down during the month and were negatively impacted by the market weakness. Long portfolios drove losses as the positive carry was offset by spread widening. Losses were attributable to investments in high yield bonds and leveraged loans.

Asset backed strategies produced mostly negative performance in March. Overall results reflected a significant degree of dispersion. Carry income was the key contributor to performance while marks on longs were flat to lower on the month. In terms of positive contributors, investments in short duration residential credit, CLO S1s, and select CMBS investments were profitable. Conversely, allocations to CLO equity, CRT B2s, and consumer ABS were negatively impacted by mark-downs.

Reinsurance strategies produced positive performance in March. Results for both managers was primarily a function of carry income, in the form of accrued coupon income for the cat bond manager and premium accrual for the collateralized reinsurance manager. A very small portion of the collateralized reinsurance manager’s return stemmed from a positive revision to the reserves taken for the California wildfires.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generated mixed performance in March. While some managers were successful with risk off trades, including receivers and steepeners, as well as index shorts in equities, other material parts of the portfolio such as JPY payers, longs in inflation, and thematic equity plays, including long exposure to tech, financials and defense names, suffered. Long themes in gold also underperformed, though generally commodities risk was reduced recently. In FX markets, gains were achieved via

longs in EUR, JPY, and short CNH. Additionally there were losses on carry baskets in Latam, and Asia/Pacific. Long volatility exposures were also accretive for some managers. Macro RV managers suffered from some fixed income relative value themes, including shorts in swap spreads in EUR and cash futures basis. Across emerging manager performance was generally steady to marginally positive, as developed market hedges were positive contributors such as receivers in US rates, shorts in US equities, longs in VIX, and long positions in EUR. Some managers also benefitted from receivers in EM, including longs in BRL. However, there was some idiosyncratic weakness around Egypt and Nigeria due to moves in the local currency. In commodities, managers produced positive results as the energy complex offered an attractive trading environment Calendar spread trading in US gas was profitable in March while base metals strategies also produced gains.

Systematic trading strategies generated negative performance in March. Losses were centered around energy themes. These losses were partially offset by gains in equities while rates and FX exposures were more muted or weaker. Alternative market managers also had a negative month due to underperformance of equities and FX while energy detracted slightly. Losses were offset by allocations to metals as well as agriculture. Systematic managers with more diversified alpha models were flat for the month. Commodity had a strong month as energy, metals and agriculture delivered positive return. Additionally, interest rate trading reversed losses from the previous months. Conversely, FX and equities exposure proved a detractor last month.

Prepared by �۶���Ƶ Hedge Fund Solutions, a distinct business unit of �۶���Ƶ Asset Management (Americas) LLC (“�۶���Ƶ Hedge Fund Solutions” or “HFS”), a provider of hedge fund strategies. It contains �۶���Ƶ 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 �۶���Ƶ 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 �۶���Ƶ 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 �۶���Ƶ 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 �۶���Ƶ Hedge Fund Solutions’ universe performance.

HFRI Macro Total Index