Since the start of March, the escalation of the conflict involving Iran has had a meaningful impact on global markets. Oil prices have risen sharply (approx. 40%), while equity markets have sold off (S&P/TSX Composite -4%, S&P 500 -2.5% approximately) and U.S. 10-year treasury yields were up by ~30bps.

The spike in energy prices has driven a rapid reversal in market leadership. Earlier this year we discussed the market broadening out and cyclical sectors beginning to lead, but the surge in oil prices has shifted the narrative toward a more stagflationary backdrop, with higher energy costs acting as a drag on growth.

We have seen significant de-grossing across hedge funds, where managers reduce overall risk by trimming both long and short positions. Historically, these periods of rapid risk reduction can lead to sharp and sometimes indiscriminate market moves.

Our portfolios have been impacted by these broader market dynamics. Geopolitical events such as wars are inherently difficult to anticipate, and the resulting volatility can create short-term pressure across markets.

Historically however, periods of sharp de-risking often create attractive environments for alpha generation once markets begin to stabilize. Not necessarily the end of the war in the current case, but early signs of de-escalation or reduced hostilities. Importantly, our asset flow analysis suggests a significant amount of risk reduction has already occurred.

In response, the team is actively reviewing opportunities across sectors to identify:

1. High-quality companies that have sold off despite strong fundamentals, and

2. Short positions where prices have remained elevated despite deteriorating outlooks.

Over time, these types of market dislocations have often created some of the most attractive opportunities for active long-short strategies.

Markets have been volatile in recent weeks. Canadian 10-year government bond yields fell 30 bps in February, and have now rebounded 35 bps so far in March. At the same time, credit spreads have begun to widen, with High Yield moving from 275 bps to 350 bps and Investment Grade widening from 72 bps to 87 bps.

Against this backdrop, the portfolio has mostly behaved as expected. Long positions have been generally stable, while short positions have started to move lower alongside the broader market. Our option hedges have not yet contributed meaningfully, but remain well positioned to add value should market weakness continue.

Recent trading activity has focused on:

1. Raising dry powder by trimming select long positions,

2. Realizing gains in shorts that have declined by 5-10%+ and establishing new short positions in bonds that have held up well, and

3. Adding to macro hedges, particularly through overlay credit hedging. We currently have a meaningful level of hedging in place against potential weakness in the high yield market.

Year-to-date performance of our credit strategies has been impacted by three idiosyncratic credit positions. Following the recent selloffs, these bonds have begun to stabilize, and we have selectively added to two of the positions where we believe fundamentals remain intact.

With the single-name movers stabilizing and our credit strategies well hedged against further downside, we’re optimistic about the risk-reward in the strategies going forward. The recent widening in spreads is beginning to create opportunities to deploy capital at more attractive all-in yields.

Looking ahead, we remain cautious about the large fiscal deficits globally, and the risk of inflation re-accelerating. We are starting to see signs of stress in parts of the credit market. We believe having additional tools like shorting and option hedging are absolutely critical to navigate environments like this.

Year-to-date, merger spreads have widened modestly by 1-2% on average, driven primarily by the repricing of the software sector. While concerns around AI disruption have weighed on valuations, in our view, they do not pose a meaningful risk to announced M&A transactions, i.e. invoking a material adverse effect (MAE) on this basis would be extremely difficult to defend in a Delaware court. That said, weaker downside prices in the event of deal breaks have caused spreads to widen in some cases.

For very large transactions such as Warner Bros Discovery Inc. and Norfolk Southern Corp., spreads have also widened simply because the deals are so large that there is not always sufficient merger arbitrage capital to keep pricing tightly aligned during risk-off periods. Importantly, our core thesis remains unchanged: the current antitrust regulatory environment continues to be merger-friendly.

Year-to-date, de-SPAC announcements have been infrequent and generally low quality, with muted market reactions, while new SPAC supply has been excessive following strong returns in 2025. Fortunately, we are starting to see supply tapering off, and IPO terms are improving (with shorter durations and/or more warrant coverage). We believe the SPAC arbitrage strategy continues to offer an attractive asymmetric risk-reward profile.

Convertible arbitrage has performed steadily. Market volatility has been supportive, and the strategy benefited from several positions where converts behaved similarly to put-like structures, as equity prices declined. We are also starting to see an increase in new convertible issuance, which could provide additional opportunities.

Overall, we’re selectively looking to add risk, particularly in merger arbitrage, where wider spreads are beginning to create more attractive entry points.

Year-to-date performance has been driven by several component strategies experiencing short-term headwinds at the same time, as discussed in the earlier part of this note.

The Factor-related hedges weighed on returns during periods of heightened factor volatility. While Factor Risk Premia bucket is not a detraction on its own, factor hedges that are used to manage overlapping exposures across strategies detracted during several sharp market moves earlier in the year.

It’s important to note that the strategy is designed to generate absolute returns through a diversified mix of uncorrelated alpha strategies, and short-term periods where multiple strategies detract simultaneously can occur. The current drawdown reflects a temporary convergence of idiosyncratic challenges rather than a structural shift in the strategy.

Through our decades of managing alternative strategies, we have experienced many periods where individual strategies face temporary headwinds. While these environments are never comfortable in real time, history suggests they are often followed by periods of mean reversion, as manager skill and strategy fundamentals tend to reassert themselves over time.

Looking ahead, our fundamental views on the underlying strategies remain unchanged, we believe the Alpha strategy’s return objective remains achievable without the need to take on additional portfolio risk.