In its fourth-quarter hedge-fund outlook, UBS explains that ample bank and dealer balance sheets have kept spreads from widening. Movement in rates alone does not create the dislocations relative-value specialists need.
The allocator warns that some managers may compensate with more directional exposure. It prefers quant equity and merger arbitrage on a liquidity-adjusted basis, while recognizing crowding and factor-volatility risks.
The distinction is useful: a market can become more volatile without improving the trade a strategy is built to capture. These are UBS’s allocation judgments, rather than a universal ranking of strategies.