UBP’s Alternative Investment Solutions team reports strong performances and share their strategic insights for Q2 2025, showcasing adaptability in a volatile global market. The quarter was marked by significant geopolitical and economic uncertainties, yet hedge fund strategies delivered solid results, with several standout performers.
Market overview: Resilience amid uncertainty
Q2 2025 was characterised by heightened market volatility, driven by US trade policy uncertainty and the ongoing conflict in the Middle East. Despite these challenges, economic data remained resilient, and risk assets mostly ended the quarter in positive territory. Developed market (DM) and emerging market (EM) equities rallied, with the US S&P 500 gaining +10.9%. Growth stocks (+17.0%) and small caps (+11.8%) led the way, reversing Q1 trends.
Fixed income markets also performed well, with European government bonds (+1.9%) outperforming US Treasuries (+0.8%) and Japanese Government Bonds (-0.2%). Credit markets were robust, with investment grade bonds (+4.4%) and US and European high-yield bonds gaining +3.6% and +2.1%, respectively.
Hedge fund performance: A strong quarter
Hedge funds delivered solid results in Q2 2025, with three out of four strategies posting positive returns. Equity long/short strategies (HFRI Equity Hedge Index) gained +7.6%, driven by both market-neutral and directional approaches. Event-driven strategies also excelled, with the HFRI Event-Driven Index returning +5.0%, marking its strongest performance since Q1 2021. Relative value strategies added +1.6%, supported by robust credit markets and convertible arbitrage opportunities. However, systematic strategies underperformed, with the HFRI Macro Systematic Diversified Index posting a return of -5.0%.
Strong alpha generation amid high dispersion and volatility
Equity long/short managers benefited from high levels of dispersion and volatility, which created a favourable environment for alpha generation. Both market-neutral and directional strategies performed well, with the HFRI Equity Market Neutral Index gaining +3.2% and the HFRI EH Directional Index up +8.0%.
Event-driven strategies: A resilient quarter
Event-driven strategies posted their strongest quarterly performance since Q1 2021, with the HFRI Event-Driven Index returning +5.0%. Special situations and multi-strategy approaches led the way, benefiting from higher volatility and dispersion. Despite a slowdown in US deal activity early in the quarter, momentum picked up in May and June, driving a two-month surge of +6.0%.
Convertible arbitrage: A top performer
Convertible arbitrage emerged as a standout performer in 2025, benefiting from a robust new issuance market and favourable trading conditions. The HFRI RV Convertible Arbitrage Index has returned +4.0% year-to-date, capitalising on opportunities created by a surge in convertible bond issuance in 2020–2021, which set the stage for a ‘mini maturity wall’ in 2025–2026, creating arbitrage opportunities. This strategy demonstrated resilience by taking limited directional market risks while benefiting from market volatility.
Convertible arbitrage managers were able to capitalise on the volatility of underlying equities, locking in profits while maintaining hedged positions; for example, technology sector equities experienced significant price swings, creating opportunities for active trading.
Outlook: Optimising hedge fund portfolios
Looking ahead, UBP’s AIS team emphasises the importance of higher Sharpe ratio strategies for optimal hedge fund portfolios. The focus remains on relative value strategies, low net-exposure equity managers, and specialists in areas like energy and EM macro.
UBP also highlights the potential for discretionary macro strategies to deliver strong returns, driven by pro-growth policies and opportunities in government bond markets and FX. Meanwhile, systematic strategies are expected to benefit from bursts of volatility, particularly in shorter time frames.
The views and opinions expressed by fund managers (internal or external) may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
