UBP’s Alternative Investment Solutions team has reported strong performances for Q3 2025 and here share their strategic insights for Q4 and beyond.
Hedge funds delivered robust returns across strategies in Q3, while experiencing some rotation in performance compared with the first half of the year due to risk-on equity and credit market dynamics.
Hedge funds Q3 performances
Hedge funds delivered strong performances in Q3 2025, with gains across all four major hedge funds strategies. Equity long/short (L/S) managers, represented by the HFRI Equity Hedge Index, gained +7.2%, benefiting from the market rally and strong beta contributions. However, challenges included reduced stock dispersion and narrow market leadership.
Discretionary macro strategies posted a +5.4% gain, driven by expectations of Federal Reserve rate cuts and a weaker US dollar; Japanese equities and gold also contributed to performance. Systematic strategies rebounded, with the HFRI Macro Systematic Diversified Index returning +5.0%, led by directional strategies and trends in commodities such as precious metals.
Event-driven strategies, represented by the HFRI Event-Driven Index, returned +4.3%, supported by a moderate pick-up in M&A, including the USD 55 billion privatisation of Electronic Arts. However, geopolitical concerns and elevated interest rates continued to weigh on corporate confidence and deal flow.
Relative value strategies, represented by the HFRI RV Total Index, gained +2.6%, with convertible arbitrage and EM debt strategies leading the way. High issuance levels in convertible bonds and asset-backed securities (ABS) created attractive opportunities for specialist managers.
Hedge funds outlook: optimistic for the most part in Q4 2025 and beyond
Equity L/S strategies are expected to benefit from a recovery in stock-level dispersion, favouring fundamental research-based approaches. However, risks, such as narrow market leadership and high leverage among retail investors, could lead to performance reversals.
Macro strategies are likely to face challenges from market positioning and potential crowding, but top-tier managers with tactical approaches and sophisticated execution are expected to outperform. Systematic strategies, particularly trend-following and multi-strategy quant managers, are well-positioned to capitalise on macro uncertainty and structural market shifts, with returns expected to be solid over the next 18 months.
Event-driven strategies face a mixed outlook due to geopolitical concerns, elevated interest rates, and slow private equity exit activity. However, multi-strategy event-driven funds and special situation strategies may find opportunities in idiosyncratic events and dispersion.
Relative value strategies are expected to deliver good returns for the remainder of 2025, with convertible arbitrage and asset-backed securities offering particularly attractive opportunities. Rates-focused fixed income arbitrage managers may benefit from global central bank policy divergence, though caution is advised due to potential crowding in this space.
In uncertain markets, focus on low-beta strategies
In summary, while Q3 2025 was a strong quarter for risk assets and hedge funds, the markets’ current pricing for perfection, combined with high leverage among retail investors and tight credit spreads, suggests the potential for increased volatility in Q4. While remaining vigilant about potential risks in the market, we believe that strategies with limited market beta, such as relative value and low-net-exposure equity strategies, are likely to deliver better performances.
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.
