UBP’s Alternative Investment Solutions group is forecasting a favourable environment for alpha generation across hedge fund strategies for the rest of 2025, but warns that persistent macroeconomic volatility and policy uncertainty will require robust risk management and selectivity.
UBP sees a favourable backdrop for equity long-short strategies, particularly those using fundamental, stock-picking approaches. The bank notes that equity dispersion will continue to move towards pre-zero interest rate policy levels, with single-stock correlations remaining low – conditions that are conducive to alpha generation.
However, UBP maintains a “high conviction” stance only on market-neutral and low-net exposure strategies, having downgraded long-biased equity funds to “neutral” late last year due to valuation concerns and macro-driven volatility. The firm says fundamentals must regain influence over macro narratives before conviction can rise further.
Macro hedge funds are expected to benefit from continued policy divergence, geopolitical tensions, and rising economic uncertainty, with UBS projecting top-tier discretionary macro managers to deliver 10–12% net annualised returns over the next 18 months – well above the five-year average. Key return drivers include fiscal and inflation risks in the US, yield curve trades, and divergent central bank policies. UBS highlights the ability of elite managers to tactically rotate portfolios and execute swiftly, giving them a competitive edge.
Systematic strategies had a mixed start to 2025, with longer-term trend followers suffering from rapid price reversals tied to the fading “US exceptionalism” trade. However, short-term trading strategies and statistical arbitrage strategies have thrived amid heightened volatility and stock dispersion. UBP expects 9–11% net returns for systematic strategies over the next 18 months, supported by risk-free yield accrual and an expanding opportunity set. Multi-strategy quant managers and equity market-neutral funds using advanced techniques like machine learning are seen as particularly well-positioned.
While the potential for a resurgence in deal activity remains, UBP sees the current macro and political climate – especially in the US – as a drag on executive confidence and M&A volumes. Elevated private equity valuations are also slowing transactions. The firm sees better near-term potential in smaller US deals and more attractively valued European and UK markets. UBS prefers multi-strategy event-driven managers that can flexibly allocate capital across sub-strategies, rather than pure-play merger arbitrage funds.
UBP expects relative value strategies to generate 7–9% net returns in 2025, largely in line with long-term averages. Standout opportunities include convertible arbitrage, bolstered by strong issuance and equity volatility, and asset-backed securities (ABS), where spreads remain wide and consumer credit stress is rising. UBS also highlights the appeal of insurance-linked securities (ILS) for diversification and the return of attractive bond basis trades in fixed income arbitrage. While dispersion supports credit long/short strategies, the firm cautions that potential crowding among multi-strategy funds could limit upside in some RV trades.
UBP maintains a constructive view across hedge fund strategies for 2025, driven by improved dispersion, greater macro volatility, and opportunities created by shifting policy regimes. But the firm stresses that strong returns will be reserved for managers with rigorous risk frameworks, agile execution, and deep expertise across asset classes.
