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Market and hedge fund update in a nutshell

Risk assets generally performed positively in May due to a pause in tariff implementation that went into effect for most countries. Corpo-rate earnings season was also supportive along with generally favorable economic data. While some believed an economic slowdown was still the base case, the probability of recession was somewhat diminished. Overall, this sustained forecasts for interest rate cuts from the US Federal Reserve later this year. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced positive performance in May. In Equity / Hedged, US Equity Hedged strategies generally produced positive returns, led by technology and cyclical sectors, while the healthcare sector lagged. European Equity Hedged strategies benefited by a broad market rally, with European-focused managers out-performing their regional counterparts. Asian Equity Hedged saw gains driven by long positions in China on the back of improvements in US/China tariff negotiations, and a strong performance of the Japanese markets. In Relative Value / Fixed income gains were driven by US basis and bond relative value due to elevated volatility in the bond market. Capital structure and volatility arbitrage strategies saw mixed outcomes. Merger arbitrage and event-driven strategies were generally positive, with tighter ongoing merger spreads. Agency MBS strat-egies were flat, while Quantitative equity strategies had a positive performance. In Credit / Income, corporate credit strategies had a mixed performance, with corporate long/short strategies incurring losses attributable to alpha shorts and hedges, while corporate long-biased strategies generated gains from a combination of positive carry and spread tightening, particularly in high yield bonds and leveraged loans. Asset-backed strategies (ABS) as well as Reinsurance/ILS strategies were mostly positive. In Trading, Discretionary trading strategies were mostly positive, with gains driven by long volatility exposure, swap spread trading, inflation themes, tactical / semi-systematic trading, as well as Japan payers. Systematic trading strategies had mixed returns, with trend-following strategies extending their losses in May, as choppy conditions persisted across the major liquid asset classes. Systematic managers with more diversified alpha models bounced back, due to equity statistical arbitrage allocations.

Overall market commentary

Risk assets generally performed positively in May due to a pause in tariff implementation that went into effect for most countries. Corpo-rate earnings season was also supportive along with generally favorable economic data. While some believed an economic slowdown was still the base case, the probability of recession was somewhat diminished. Overall, this sustained forecasts for interest rate cuts from the US Federal Reserve later this year. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced positive performance in May. The Dow Jones Industrials, S&P500 and the NASDAQ posted positive performance of 3.94%, 6.15% and 9.56%, respectively. The MSCI Europe, DAX and FTSE indices generated positive performance in May of 3.92%, 6.67% and 3.60%, respectively. Asian developed mar-kets produced positive results with the Nikkei 225 generating a gain of 5.33%, in line with the strong risk on climate. Emerging market indices also produced broadly positive performance in May. Chinese, Indian and Brazilian markets rallied 2.09%, 1.51% and 1.45%%, respectively, in line with the easing of trade tensions. US interest rate markets weakened in May as investors digested stubborn budget deficits and weak long term bond auctions. The two-year US Treasury yield rose to 3.90% from 3.60%, while the ten-year US Treasury yield increased to 4.40% from 4.16%. The Barclays US Corporate Investment Grade Index was little changed at -0.01%, while the Bar-clays US Corporate High Yield Index gained 1.68%. Commodity prices were mixed with modest losses from precious metals given the re-cent price gains, while energy prices recovered somewhat following OPEC production increase announcements. During May, gold fell -1.0%, while crude oil rallied 5.5%. In currency markets, the Euro inched up 0.18% from 1.1327 to 1.1347, while the US dollar rose 1.16% against the Japanese Yen from 142.63 to 144.28.

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

US Equity Hedged strategies generally produced positive returns in May. Most managers posted positive performance with the nega-tive outliers primarily consisting of a few sector specialists with negative idiosyncratic exposures. The moderation in tariff rhetoric, continued strength in consumer and employment data, and gener-ally upbeat earnings reports contributed to positive investor senti-ment. All sectors except healthcare produced positive performance, with technology and cyclical sectors, such as industrials and con-sumer discretionary, registering the positive performance. The healthcare sector continued to be challenged by ongoing concerns in the biotechnology space emanating from personnel changes at the FDA. Realized volatility, growth, and momentum were the key factor drivers in the risk-on tape, with quality and especially value factors lagging. While beta exposure was a positive return driver, it was also a modestly positive alpha month, with most of the contri-bution stemming from the long side (technology and consumer). The short portfolio was generally additive as well during the month.

European Equity Hedged strategies generally produced positive performance in May. Performance was primarily driven by a broad market rally. Alpha was overall positive, with gains derived from industrials, size, and momentum, offsetting weakness from short-term signals and idiosyncratic returns. European-focused managers once again outperformed their regional counterparts, such as the US and Asia. Across the industry, European fundamental managers reduced their gross exposure through the month by -7.4% to 173.6%, its 12th percentile on a three-year basis. Net exposures increased by +0.5% to 57.2%. The long-short ratio increased by +3.7% to 1.986, its 47th percentile on a three-year basis.

Asian Equity Hedged strategies generally produced positive returns in May. Performance was largely driven by long positions in China, US and Japan. The Japanese market had a strong month, with gains initially driven by a weaker Yen, a more dovish BoJ, and im-provements in US/China tariff negotiations. Although there were concerns regarding the rise in long-term interest rates, the market rallied again toward the end of the month along with the US mar-ket. In China, the market started the month positive on the back of US / China trade negotiations but faced some volatility toward the end of the month as headline risk re-emerged. Earnings from large technology companies also showed intensifying domestic competi-tion and softness in domestic demand, which weighed on senti-ment

HFRI Equity Hedge Total Index

Fixed income relative value strategies generally produced positive returns in May. Gains were primarily driven by US basis and bond relative value due to elevated volatility in the bond market over the last few weeks. Macro directional performance was mixed, with gains from short exposure to Japanese interest rates for some managers. The popular HKD short/carry trade also added to per-formance. Swap spreads attribution was quieter but generally positive. Portfolio hedges were the only slight detractor in the strategy during May.

Capital structure / volatility arbitrage strategies generated mixed returns in May. Convertible arbitrage exposure benefitted from tightening credit spreads and the rally in risk assets. However, these gains were modestly offset by declines in equity volatility, which remained lower than realized levels but still high compared to historical standards. Distressed and stressed convertible perfor-mance generally depended on individual situations and the relevant hedge ratios. New issue exposure was a positive feature, with new convertible issues totaling USD 19bn, the largest amount since May 2021. This was led by the US at USD 13.5bn, Asia at USD 3.2bn, and Europe at USD 1.9bn. The spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index increased to +46 basis points from +27 basis points last month. Credit arbitrage relative value strategies were mixed last month. The cash CDS basis performed well due to reduced volatility and one-off single name idiosyncratic and curve moves. However, short-biased credit expo-sure versus low delta equity hedges generated losses due to the rally in credit. May performance for equity capital market (ECM) managers was modestly positive overall, driven by CRWV, a few medium-sized IPOs that performed relatively well, and some large blocks. Asian ECM activity continued its strong run. The dominant theme in the first quarter re-emerged, with ‘jumbo deals’ once again took the lead across global transactions. US capital markets leadership returned in May, generating 42% of volume, including IPOs, but more notably in follow-on offerings and 45% of global volumes. Asia, with 28% of activity, had another strong ECM month (CATL raising USD 5.2bn and Hengrui raising USD 1.3bn) and remained an area of focus given the revival.

Merger arbitrage and event-driven strategies generally produced positive returns in May. The average ongoing merger arbitrage spread tightened by 40bps on a median basis and over 2% on a market capital weighted basis. The most notable tighter spread situation was US Steel with shares rallying +23% following what was called a strategic investment by Nippon Steel. After a slow April, M&A activity in May nearly returned to normalized levels with a balanced mix of private equity and strategic dealmaking. On the public side, there were 9 deals greater than USD 1bn, accounting for USD 40 bn in aggregate value. The private M&A market re-mained robust, including the USD 35bn Cox/Charter merger. Only 1 of this year’s 5 largest M&A situations in the US included a publicly traded target. The backlog of paused deals was expected to start materializing later this year as the trade landscape improved.

Agency MBS strategies generated essentially flat performance in May. Manager dispersion was modestly elevated, although returns were fairly muted during the month. Managers benefited from positive carry on the underlying portfolios. However, some manag-ers were negatively impacted by the performance of their hedges.

Quantitative equity strategies generally produced positive returns in May. We observed positive performance across the QE market neutral cohort, with our UCITS proxy and systematic long / short managers producing positive alpha, while the long / short spread was essentially flat within the cohort. From a factor perspective, crowdedness, medium-term momentum, industrials, short concen-tration, and profitability were among the largest alpha contributors to systematic long / short returns in May. This was partially offset by losses from asset selection, size, healthcare and volatility. Within vs. between sectors daily dispersion suggested increased importance of micro drivers and an improved environment for stock pickers.

HFRI Relative Value Total Index

Corporate credit strategies generated mixed returns in May. Across traditional corporate long / short strategies, there was a high de-gree of dispersion, although the majority of managers generated gains. The skew of the strategy was negative as the losses were outsized relative to the gains and were largely were attributable to alpha shorts and hedges. In addition, managers with a short expo-sure bias underperformed compared to their net long-biased peers. Corporate long-biased funds generally performed well in May. All funds were positive during the month and benefited from the rally in risk assets. Profits were attributable to a combination of positive carry and mark-to-market gains from spread tightening particularly in HY bonds and leveraged loans.

Asset backed strategies (ABS) generally produced positive returns in May. Carry was the lead contributor as most funds also generated mark-to-market gains. From a sector perspective, CLOs were a distinct outperformer and funds with higher exposure to the sector outperformed. In addition, investments in Agency CRT, Non-Agency RMBS, and CMBS also performed well.

Reinsurance / ILS strategies generally produced positive returns in May. Performance for both managers were mainly a function of carry (accrued coupon income for the catastrophe bond manager and premium accrual for the collateralized reinsurance manager). However, there was a slight negative offset from spread widening for the catastrophe bond manager and a modest offset for the collateralized reinsurance manager as the result of a negative adjustment to some aggregate contracts that were exposed to severe convective storm (SCS) activity. The spread widening wit-nessed for the catastrophe bond manager was due to typical sea-sonality heading towards the hurricane season as well as the im-pact from a material increase in supply during the month.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generally produced positive returns in May. Interest rate themes were mostly weaker given the broadly dovish and curve steepener bias. Conversely, some managers gen-erated gains via long volatility exposure, swap spread trading and inflation themes. Gains were also produced from tactical / semi-systematic trading, as well as Japan payers. FX were more chal-lenged due to short USD bias vs. EUR, CNH, JPY and in some cases other Asia currencies. In contrast, the HKD carry trade was addi-tive. Equities were mostly positive from thematic plays in defense, US technology, with some give back from index hedges. Equally, smaller credit hedges generally detracted from performance. Commodities risk was generally light, but gains were produced from copper, emissions and uranium positions, which was offset from shorts in oil and more tactical trading in gold. Among emerg-ing markets managers, frontier market trades continued to deliver positive returns. Broader EM receivers were more mixed, with gains in ZAR, TRY and MXN but this was partially offset by losses in BRL, CE3/Romania and Asia. Across FX themes, results were varied with shorts in TRY being challenged from the negative carry. Conversely, HKD shorts reversed some of the losses in April. In credit, hedges were a detractor, as was also the case with broader DM hedges for some of the managers in places like US equities. Commodity trading was overall negative as gains from natural gas trading were more than offset by losses from power trading.

Systematic trading strategies generated mixed returns in May. Traditional trend following strategies extended their losses in May, as choppy conditions persisted across the major liquid asset classes. The outperformance of slower trend-following strategies in May was driven by fixed income and equity indices, where positioning was slower to react or had not yet switched directions. Faster strategies were challenged in these sectors due to being whip-sawed by the continued recovery in equities and a selloff in short-term interest rate futures and short-dated US Treasuries. Long exposure to the German DAX and short exposure to long-dated US Treasuries were, however, a source of gains for trend followers. Alternative trend followers were challenged again in May, as prof-its from long credit positions and short exposure to Chinese indus-trial commodities were offset by a recovery in power and gas markets, as well as reversals in EM FX and interest rates. Systemat-ic managers with more diversified alpha models bounced back in May, due to equity statistical arbitrage allocations.

The following document has been prepared by �۶���Ƶ Asset Management (Americas) LLC (“UGA Hedge Funds” or “UGA HF”), acting through Unified Global Alternatives Hedge Funds., a provider of hedge fund strategies. It contains UGA Hedge Funds' 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 UGA Hedge Funds. 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 UGA Hedge Funds’ 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 Hedge Funds 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 UGA Hedge Funds universe performance.

HFRI Macro Total Index