March 8, 2022 – In the mid-aughts, an investment concept that quickly gained in popularity with allocators was the “BRICs” – a catchy acronym for the fast-growth (at the time) markets of Brazil, Russia, India and China.

Underwriting the BRICs thesis was the higher-than-average economic growth of those regions. What was left out of this growth proposition was the accompanying risk that investing in the regions entailed.

The BRICs trend came and went, encapsulating the attention of investors for a brief moment in time and to the detriment of their portfolios.

If the two severe bear markets since the advent of the BRICs, namely the global financial crisis and the Covid-pandemic, then Russia’s invasion of Ukraine serves as another reminder that BRICs investing is dead. Emerging markets such as Russia have shown that a fatal and complete wipeout of the stock market can occur seemingly overnight.

Investors experienced this lethal blow as Russian equity ETF values were essentially wiped out.

The long-term determinant of the attractiveness of a stock is the future cash flows of the company that investors have a claim to. While Russian equities have long appeared cheap on a price-to-earnings basis, the flaw in the valuation metric is whether western investors have any claims on these corporate earnings.

Putin’s invasion of Ukraine solved this investment conundrum by proving, if any still exist, that Russian corporate earnings will not see the light of day for western investors.

While a recovery in Russian equities may be a possibility, it is most probable that the Russian equity market has been decimated.

However, this is not the first time Russian stocks have gone to zero.

In 1911, it was estimated that Russia was the fifth-largest capital market globally, encompassing 5% of the global market for stocks and bonds at the time.

Hundreds of Russian companies were listed on the St. Petersburg Stock Exchange. Then, amid the chaos of World War I, the Russian market closed in 1914. In 1917, it reopened briefly, shuttering again after the Bolsheviks overthrew the Czar.

The last time the Russian stock exchange was closed for this long (over one week and counting), in 1917, it remained closed for 75 years. Investors had lost everything.

History doesn’t repeat, but it rhymes. Regrettably, it appears the same scenario from 1917 is playing out currently.

Unfortunately, for those invested in Russia, the total loss of the domestic stock market serves as a painful reminder of the importance of diversification.

Russian investors had nearly 100% of their equity investments allocated to their domestic stock market, which is now worthless.

Not only have their equity portfolios gone to zero, but the local currency has suffered devastating losses as well, losing the majority of its purchasing power this year.

A key lesson learned? A modification of the fictional Gordon Gekko’s impassioned speech may be appropriate:

The point is, ladies and gentleman, that diversification — for lack of a better word — is good. Diversification is right. Diversification works. Diversification clarifies, cuts through, and captures the essence of the evolutionary spirit.

Historically, when investors thought of diversification, they imagined buying international equities. Or, unfortunately, they thought of buying more stocks in their local market.

Recent stock market volatility has proven that both methods don’t sufficiently diversify investor portfolios. February’s events show that both strategies are wrought with risks, whether investing in one’s domestic stock market or diversifying into international stock markets.

To diversify one’s portfolio, it is not sufficient to buy more local stocks or stocks in international markets. In addition, including bonds within a portfolio does not provide much diversification benefit either, given that both stocks and bonds declined last month. Moreover, stocks and bonds have been positively correlated for months now, eliminating any perceived diversification benefits.

Asset performance in February once again proved the diversification benefit of including alternative investments in one’s investment portfolio.

As both stocks and bonds declined last month, all five of Accelerate’s alternative ETFs generated positive returns.

While alternative investments are no panacea, and cannot ensure positive returns when markets decline, they serve to further diversify investment portfolios to improve risk-adjusted returns.

With horrific and heartbreaking geopolitical events that we previously thought unimaginable now occurring, diversification is needed now more than ever to protect investor portfolios. Thankfully, investors now have access to more alternative asset classes to attain this much-needed diversification.

The crisis in Ukraine also proved the importance of cryptocurrencies, specifically bitcoin and ether, for a well-functioning global society. Cryptocurrencies have been central to the humanitarian effort in Ukraine, with the country collecting approximately $40 million in aid via their new cryptocurrency wallets. No other store of value could have been mobilized with such speed and transferred to people in need that quickly. Bitcoin is proving to be a truly life-saving technology, which is wonderful to see.

Accelerate manages five alternative ETFs, each with a specific mandate:

  • Accelerate Arbitrage Fund (TSX: ARB): SPAC and merger arbitrage
  • Accelerate Absolute Return Hedge Fund (TSX: HDGE): Long-short equity
  • Accelerate OneChoice Alternative Portfolio ETF (TSX; ONEC): Alternatives portfolio solution
  • Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX): Buffered index
  • Accelerate Carbon-Negative Bitcoin ETF (TSX: ABTC): Eco-friendly bitcoin
Please see below for fund performance and manager commentary.

ARB was very slightly positive for the month of February. While arbitrage spreads have generally widened, deals continue to close as expected.

While the war in Europe has put a chill on certain areas of the capital markets, including IPOs, mergers and acquisitions continue at a brisk pace. In February, 19 public M&A deals were announced in North America, representing over $81 billion of total aggregate value.

The current merger arbitrage opportunity set includes 83 lives deals totalling $447 billion, while the SPAC arbitrage opportunity segment includes 717 blank check companies totalling $202 billion. With $650 billion of total M&A and SPAC opportunities in the market, there’s always something to do in arbitrage.

The current weighted average yield of ARB’s holdings is 5.8% (before leverage). Considering the approximate 1.5x leverage utilized by ARB, we expect the current opportunity set to generate returns in the 7-8% annualized range.

One advantage of generating attractive, fixed-income-like returns through arbitrage is its inherent low duration, which is important in a rising rate environment. The weighted average duration of ARB is just 5.9 months, allowing the portfolio to turnover quickly to adjust to steadily higher interest rates.

HDGE gained 0.8% in February, continuing its streak of positive performance as the S&P 500 declined.Since its inception, HDGE has had a beta of -0.02, meaning on average it has zigged while the equity market zagged.

Typically, when investors think of portfolio hedges, the first thing that comes to mind are put options on the equity index. The problem with put options is that they are expensive – investors pay for this portfolio insurance as put options have a negative expected value.

HDGE has a unique value proposition in that it has exhibited a negative correlation to the equity index while exhibiting positive returns. This can be analogous to insurance that one gets paid to own, given HDGE’s positive expected returns and negative expected correlation.

In February, it was a mixed result for multi-factor long-short investing. Long-short multi-factor generated +1.5% return in the U.S. and a -3.4% drop in Canada, with outperformance generated from price momentum and trend factors and underperformance from the quality factor.

ONEC notched a 0.7% gain in February, with positive performance led by bitcoin and gold, up 9.1% and 6.4%, respectively.

Additional positive attribution came from long-short equity, arbitrage and enhanced equity, with each alternative strategy increasing less than 1.0%.

Infrastructure, risk parity, mortgages and leveraged loans all declined by less than -1%. From the ten alternative strategies held by ONEC, the only significant decliner for the month was real estate with a -3.7% drop.

Last year, as inflation surged after trillions of dollars were printed during the pandemic, we were disappointed regarding gold’s negative performance. We remained confident in the allocation, which is paying off this year as the precious metal has gained north of 10% year-to-date. We continue to believe alternative currencies, including gold and bitcoin, play essential roles within investment portfolios by protecting purchasing power in a highly inflationary environment.

ATSX had positive performance of 0.6% in February, outperforming the benchmark by 0.7%. In contrast to other buffer funds, which utilize put options to mitigate downside, ATSX reduces downside risk with a long-short portfolio overlay, which has generated positive returns since inception.

Since its inception in 2019, ATSX has outperformed the benchmark while exhibiting downside participation of just 89% (meaning it had less than 0.9x of the market downside). Moreover, its current yield of 6.6% is well-supported by its since-inception return of 11.2% per annum.

Have questions about Accelerate’s investment strategies? Book a call with me.


Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this distribution is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate Financial Technologies Inc. (“Accelerate”) as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Past performance is not indicative of future results. Visit for more information.


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