Markets started the year with a notable shift in tone as a series of sharp moves across equities, rates, and commodities signaled a return to a more volatile and two-sided trading environment. January and February were defined by equity rotation, with a pronounced repricing in U.S. equities across both single names and factors. Software was a key weak spot during the quarter, as the emergence of agentic AI tools accelerated concerns around structural disruption, driving a broad-based de-rating across software and other AI-sensitive sectors. Broader market repercussions from the software sector’s repricing were felt in credit markets, as non-traded Business Development Companies (BDCs) came under redemption pressure. International equities outperformed on the quarter, with gold and silver reaching all times high before reversing course later in the quarter.

March marked a clear inflection point, with macro and geopolitical developments driving a sharp increase in cross-asset volatility. The escalation of tensions in the Middle East pushed oil prices higher, with Brent crude reaching multi-year highs. Interest rate markets also experienced significant moves during the quarter. In the UK, borrowing costs rose to their highest levels since 2008, reflecting a rapid shift in central bank expectations. Similar moves were observed across other European curves with both front-end cash and futures rates adjusting sharply. With inflation considerations driving price action, stocks and bonds remained highly correlated during the quarter, leaving limited places for long-only investors to hide.

While hedge fund performance was mixed across the industry, our diversified portfolios proved resilient as both balanced and uncorrelated composites finished with positive returns on the quarter. Our overweight to less correlated strategies was impactful as relative value strategies finished as the top contributors across portfolios. Elevated volatility provided a tailwind for most relative value trading strategies, with statistical arbitrage and volatility arbitrage driving the bulk of the gains. In contrast, long/short equity strategies were the largest detractors on the quarter as macro driven markets led to negative alpha for U.S generalists and tech specialists. While discretionary macro returns were challenged late in the quarter, a strong start to the year helped soften the blow.

We made some selective positioning adjustments during the quarter in an effort to capture alpha from the uptick in volatility. Broadly speaking, we remain most constructive on uncorrelated strategies, particularly statistical arbitrage, where sustained dispersion and ongoing market inefficiencies should provide support for alpha generation as markets stabilize. Across portfolios, we continue to prioritize diversification and flexibility as elevated uncertainty persists into the second quarter.