Diversify with alternatives

18 September 2026, 12:07 UTC Chief Investment Office GWM Investment Research

Strategic: Diversify with alternatives Diversify with alternatives Author: Sagar Khandelwal, Strategist, UBS Switzerland AG

• Why? 1) Demand for hedge funds is robust, with industry assets reaching a record USD 5.6 tr (HFR estimates) at the end of the second quarter after the largest quarterly increase on record; 2) Private infrastructure can diversify long-term income sources, with inflation-linked cash flows potentially appealing if oil supply disruptions persist. 3) Private equity offers the potential to capture long-term growth and direct exposure to key themes such as tech, health care, or energy. Investors must be prepared to tolerate unique A diversified allocation to alternatives can broaden risks when investing in alternatives such as illiquidity, return drivers and strengthen resilience when traditional equity and bond diversification is less effective. Source: high fees, and limited transparency. Sinitta Leunen_Unsplash

Hedge funds In merger arbitrage, second-quarter performance benefited The current environment of resilient AI investment, from deal completions, regulatory progress, and spread broadening earnings growth, and gradually moderating compression. inflation should support growth and risk assets, while Global M&A activity reached USD 3.1 trillion in the first half policy uncertainty, geopolitics and elevated long—term of the year, up 48 % year over year (Dealogic), supported by yields leave room for volatility. For hedge funds, this strategic acquisitions, AI—driven business transformation, backdrop creates a favorable mix of return generation and ongoing industry consolidation. Health care remains and diversification opportunities. Elevated dispersion and particularly active as companies seek to replenish product rapid market rotations support active alpha generation, pipelines, while energy and power infrastructure are while less reliable traditional diversification (given higher benefiting from rising electricity demand and AI - related government bond yields) and a broader set of structural capacity expansion. Financing markets remain open, and the themes strengthen the portfolio case for hedge funds. US regulatory environment has become more pragmatic. We favor seasoned managers with the expertise to navigate We like low net and market neutral equity hedge managers, hostile and unsolicited bids and regulatory complexity. supported by high dispersion and low correlations. Equity market neutral strategies have returned 5.0% this year In fixed income relative value, heavy sovereign issuance, through August, a relatively steady performance profile shifting investor demand, and periodic derisking should despite sharp shifts in equity market leadership. The continue to generate opportunities across curves, asset backdrop for alpha generation remains favorable. Elevated swaps, and sovereign markets. We favor diversified equity dispersion and unusually low correlations continue managers able to rotate across regions, maturities, and to support stock selection, while broadening market instruments. The strategy can also complement traditional participation beyond the largest AI beneficiaries is increasing long-dated debt positions. differentiation across companies, sectors, and regions. Discretionary macro managers remain up 8.8% year to We also rate merger arbitrage, fixed income relative value, date, with August marking a strong rebound. Performance and discretionary macro strategies as Attractive. has been supported by equity and AI-related themes, carry strategies, and selective rates positions. More recently, returns have been mixed as developed market rates repriced

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

and concentrated equity exposures came under pressure, although EM carry and select commodity trades provided Private equity valuable offsets. However, sticky inflation, fiscal expansion, Global private equity experienced a temporary setback in the evolving central bank reaction functions, continued AI- first half, but the broader recovery…