Hedge funds : UBS View Prefer Relative-value and Event-driven Recommendations ¢ We expect hedge funds (HF) to offer positive asymmetric return characteristics due to active risk Strategic (1 to 2 years) management and stop-loss strategies. On the active risk side of the equation, we have seen lower gross e Recommendation: Active risk exposure and net-market exposure within the overall hedge funds group, with traders being cautiously management is instrumental for capital positioned. With systemic risk at bay, we favor relative-value (RV ) and event-driven (ED) strategies. preservation during adverse market ¢ The inherent hedging in relative value is appealing. Credit relative-value managers should perform well conditions. At the moment, we therefore Pe eg ea SOULS pa XScale SUily and increasing pricing anomalies created by central favor relafive-value and sevenidriven I Vv I Im ITI r . . ¢ While ED managers share some oan performance drivers, idiosyncratic bets reduce the correlation to strategies, since they are less correlated to markets. The real reason to own this strategy, however, is the potential for outsized returns in distressed, equity markets and other risky assets than high-yield, and other credit investments as the Eurozone crisis plays out. trading. e Value proposition: Hedge funds should 4 Positive scenario Prefer Equity long-short achieve robust performance over an e Reduced uncertainty (e.g. resolution in Europe) lowers equities’ correlation and volatility. This helps extended horizon, while displaying bottom-up fundamental analysis and equity long/short managers the most. Also, CEOs will likely make limited volatility vis-a-vis equities and more corporate transactions that can be monetized by event-driven managers, and a clearer other risky assets. Hedge funds try to macroeconomic environment with more persistent trends would support CTA managers. minimize downside losses in adverse ‘Negative scenario Prefer Trading (Global Macro + CTA) market c