UBS reshapes hedge-fund allocations for higher inflation

Edoardo Rulli, Head of Hedge Funds at UBS, said the bank has adjusted its hedge-fund portfolios in recent months, increasing allocations to long/short equity, event-driven and commodity strategies and raising exposure to multi-strategy platforms and direct buy-side alpha capture.

He explained the shift reflects the end of a long period of low inflation and low interest rates and the emergence of a higher baseline inflation regime with greater volatility. That change, he said, has increased the risk premium across bonds and equities and prompted capital flows into strategies that can perform in a more unstable environment.

UBS is operating near the top end of its historical allocation to long/short equity, Rulli added. He described long/short as well suited to a market where high-quality companies with strong balance sheets separate from more leveraged businesses. “It is a market that rewards winners and punishes losers,” he said.

The bank has also increased allocations to event-driven funds to take advantage of a revival in IPO and M&A activity, and to commodity strategies where supply constraints are creating trading opportunities. UBS divides those allocations between specialist single-strategy funds and larger multi-strategy platforms.

Large multi-strategy firms remain a major component of UBS’s allocations despite investor attention on concentration and leverage at some pod-based managers. Rulli noted these platforms continue to attract people and capital as they scale and that many have launched buy-side alpha capture programs to deploy growing pools of capital.

UBS prefers direct access to alpha capture offerings rather than exposure solely through external managers. Rulli said direct programs could allow investors to replicate parts of a multi-strategy portfolio at lower cost and adjust exposures to fit the rest of their holdings. He added that targeted standalone alpha-capture products are becoming more common and of interest to smaller allocators.

Rulli identified specific risks in the current environment. He flagged rising AI capital expenditure, saying spending on AI buildout has climbed faster than visible revenue growth. He also warned about cyber threats, adding: “AI in the wrong hands could cause enormous damage; a major cyberattack involving theft of access to bank accounts or digital financial infrastructure could create a broader crisis of confidence.”

On geopolitics, Rulli said higher defense and supply-chain security investment is generating additional spending that can support GDP growth and that the probability of a major global conflict appears low.

UBS’s repositioning mirrors an industry effort to find strategies that can operate with higher rates, inflation and episodic volatility while keeping costs under control and aligning exposures with investors’ broader portfolios.