May 11, 2025 – Formative months in the market have a way of searing themselves into the minds of investors.
October 1987. October 2008. March 2020. And now, April 2025.
The Liberation Day tariffs (alternatively known as “obliteration day” or the “rose garden massacre” for those who prefer more embellished phrasing), announced April 2nd, presented a depression-level event that threatened to implode the global economy with the highest tariff rates in more than one hundred years.
The market’s reaction was swift, with the VIX Index surging above 50 (indicating “panic” levels) and the S&P 500 falling more than -10% over the subsequent three trading sessions, marking one of the worst stock market crashes since World War II. At its low point, the S&P 500 had fallen more than -20% from peak to trough, confirming a bear market. However, almost as quickly as the Liberation Day tariffs were implemented, the administration was put on its back foot and forced to unwind much of the import duties. As some trade war damage was reversed and attempted to be patched up, the stock market recovered most of its early April losses, with the S&P 500 rising nine days in a row into early May (its longest streak of positive daily performance since 2004).
Nevertheless, while the initial while the initial Liberation Day tariffs were rolled back into a universal 10% tariff, the import duty of Chinese goods was ramped up to 145%, creating an effective trade embargo with the world’s second largest economy. Despite this trade war “relief”, current average import duties in the United States remain at nearly 25%, marking their highest level in more than 100 years.
Certainly, the current tariffs are extremely economically damaging and thoroughly unsustainable. The longer they remain in place, the more damage they do to the economy. While the jobs numbers in April were surprisingly strong, as the U.S. added 177,000 jobs (beating expectations of 138,000) and the unemployment rate remained low at 4.2%, it is only a matter of time before the unavoidable economic wrecking ball created by the trade war wreaks havoc on the U.S. economy.
While it is a consensus-held belief that the America-led trade war was bad for the U.S., surprisingly, the trade war is forecast to be worse for the United States economically than any other major country.
It turns out that having the global reserve currency and importing cheap foreign-made goods for a consumer-centric economy is indisputably good, and implementing tariffs is only harmful to the economy and the country’s populace by causing an unnecessary self-inflicted recession.
While specific lagging indicators such as the unemployment rate have yet to incorporate the economic dread, some coincident economic indicators have begun to point toward a slowdown.
Consumers, who drive 70% of the U.S. economy, are worried about losing their jobs amidst the economic uncertainty. Expectations of more unemployment over the next twelve months have spiked to levels not seen since the 2008 financial crisis.
Currently, there is a reasonable probability that America is on track for a self-inflicted recession. Real GDP contracted by an annualized -0.3% in the first quarter – granted, the decline was primarily caused by importers rushing to bring in goods to get ahead of the tariffs. Moreover, given spending cuts driven by the Department of Government Efficiency, federal government spending is also under contracting, further pressuring economic growth.
While the Atlanta Fed’s GDPNow model, which represents a running estimate of real GDP growth, predicts positive U.S. economic growth of 2.3% in the second quarter, conditions can change quickly. The blue chip consensus forecast remains starkly lower, below 1% growth, dangerously close to dipping below zero. A negative GDP print in the second quarter would officially mark a U.S. recession – classically defined as two consecutive quarters of negative real GDP growth.
A self-inflicted recession would not necessarily be the first for the United States economy. Deliberate public health measures and government-mandated lockdowns effectively shuttered economic activity in 2020, causing a doozy of a recession. In the early 1980s, Federal Reserve Chair Paul Volcker hiked interest rates to extreme levels to break the back of relentless double-digit inflation, which caused the economy to contract.
The difference between the previous two policy-led recessions and present day economic warfare is the cause. Historically, policy-driven recessions were driven by an emergency – pernicious inflation in the early 1980’s and a global pandemic in 2020. Underlying the current trade-war driven economic uncertainty, there really is no valid crisis (except for the one it has wrought). Before the harsh tariff measures were implemented, the United States was the envy of the world. It had near record-low unemployment, above-trend economic growth, and the top performing stock market. Its economy was outperforming nearly everyone else’s. Even if electronics and textiles manufacturing from Asia was reshored to the U.S., it is doubtful Americans would want to work those sweatshop jobs.
The Commerce Secretary’s claim that “the army of millions and millions of human beings screwing in little screws to make iPhones — that kind of thing is going to come to America” seems unlikely. Legendary comedian Dave Chappelle was prescient with his comments regarding reshoring Chinese jobs making iPhones to America on his Netflix special in 2018 when he said, “Leave that job in China where it belongs – none of us want to work that hard!”
If you are scratching you head as to the “why” behind this trade war, you are not alone.
Whether or not the trade war represents a temporary supply shock, or something more malicious, depends on the will of the President. The near-daily tweets (or “truths”) regarding potential great trade deals are increasingly met with more trepidation from investors.
Supporting the stock market rebound was a seemingly relentless “bro bid” – retail speculators who went heavy into leveraged equity funds at a record pace last month.
In contrast to the equity market, the private credit market was hit hard by the economic uncertainty last month and has not seen a comparable price recovery.
Historically, liquid private credit funds (publicly-traded BDCs) have traded in line with their net asset values (NAV), or the value of their underlying loan portfolios, on average. There are periods in which liquid private credit funds trade at premiums to their NAVs, for example, in some drama-free market environments, while there are periods in which private credit funds trade down to NAV discounts – typically in recessionary bear markets.
Last month, the median NAV discount in the liquid private credit market hit -20%, which was only materially exceeded during the 2008 financial crisis and the 2020 COVID market panic.
This level of median NAV discount has only happened four other times over the past twenty years: October 2008, August 2011, January 2016, and March 2020. Historically, after reaching a -20% median NAV discount, private credit has produced a 1-year return of 40.0%, along with 3 and 5-year returns of 16.8% and 14.7% annualized, on average:
If the current market dynamic settles in as a run-of-the-mill bear market and relatively shallow recession, then we have likely seen the bottom in private credit NAV discounts, and a recovery may be underway. Private credit funds have historically traded back to NAV on average, as the market settles and fear dissipates. Regarding historical loss metrics, private credit has experienced a 1.1% default rate and a 73.8% recovery rate (according to S&P).
One of the attractive features regarding private credit funds structures as BDCs is that they are public filers, and disclose their quarterly results, along with their entire loan portfolios, in form 10-Q and 10-K on EDGAR. We are approximately two-thirds through the Q1 reporting season in the private credit space. Thus far, credit fundamentals remain relatively solid (although not perfect) amidst the uncertain economic environment, seemingly contradicting the bearish market sentiment as manifested through broad NAV discounts offered on private credit funds.
Nonetheless, while the economic environment remains highly uncertain, it appears the worst is behind us. Not to mention, the self-inflicted recession can be halted at any moment with just one tweet – the sooner the better. Until then, opportunities have arisen amidst the volatility for enterprising investors to capitalize on.
While economic uncertainty and (downward) market volatility are never fun to experience, they can be viewed as the price of admission for attractive long-term investment returns. However, it is through effective diversification, via uncorrelated investments, that can help mitigate the volatility without sacrificing returns.
For investors dealing with an uncomfortable amount of volatility during this uncertain economic environment, unexpectedly, one of President Trump’s mantra’s from his book The Art of the Deal is helpful:
“Protect the downside and the upside will take care of itself”.
Accelerate manages five alternative investment solutions, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): Merger Arbitrage
- Accelerate Absolute Return Fund (TSX: HDGE): Absolute Return
- Accelerate OneChoice Alternative Multi-Asset Fund (TSX: ONEC): Multi-Asset
- Accelerate Canadian Long Short Equity Fund (TSX: ATSX): Long Short Equity
- Accelerate Diversified Credit Income Fund (TSX: INCM): Private Credit
ARB gained +3.2% in April compared to the benchmark S&P Merger Arbitrage Index’s +0.2% return. Year-to-date, ARB is up +4.3%, while the benchmark has gained +2.7%.
In last month’s merger memo, Return of the SPAC, we discussed how SPAC arbitrage is making a comeback, exemplified by significant returns from certain blank check companies. The Fund held positions in all the top performing SPACs in April, including:
- Cantor Equity Partners (CEP), which announced a merger with Twenty One Capital, gaining 292.3%
- Colombier Acquisition II (CLBR), which previously announced a merger with GrabAGun, gaining 15.4%
- dMY Squared Technology Group (DMYY), which previously announced an LOI for a merger with Horizon Quantum, gaining 15.0%
- Cohen Circle Acquisition I (CCIR), which previously announced a merger with Kyivstar, gaining 7.1%
The Fund was pre-positioned for these events, buying at the IPOs of these SPACs, allowing the Fund to have full principal protection combined with explosive upside optionality, which has been paying off in the current market environment. If one can have the downside risk of U.S. Treasury bills, along with upside potential of 292% (as was the case with CEP), then that is a bet that should be made. The Fund remains positioned to capitalize on a potential repeat of 2020’s “SPAC mania”, while maintaining full downside protection by buying SPACs at or below their NAVs (the value of the Treasury bills they hold).
During the month, ARB participated in 8 new SPAC IPOs (of 12 new issues that came to market), allocating more than 10% of the Fund to new issues offered throughout the month.
The merger arbitrage book also contributed positively to ARB’s monthly return, buoyed by a 9.1% increased consideration for Converge Technology Solutions shareholders from its buyout by H.I.G. Capital. In addition to the Converge deal closing, the Fund crystalized gains on a significant number of mergers that were consummated throughout the month, including Intra-Cellular Therapies’ $14.6 billion acquisition by Johnson & Johnson, Nevro’s $220 million merger with Globus Medical, Logility’s $423 million merger with Aptean, Air Transport Services’ $3.1 billion buyout by Stonepeak, Altus Power’s $2.2 billion buyout by TPG, Patterson’s $4.1 billion buyout by Patient Square Capital, Chimerix’s $935 million acquisition by Jazz Pharmaceuticals, Paragon 28’s $1.2 billion merger with Zimmer Biomet, Markforged’s $115 million acquisition by Nano Dimension, and InPlay Oil’s $32.8 million subscription receipt issue.
Currently, the Fund is 116.0% long and -10.3% short (126.3% gross exposure), with 61% allocated to SPAC arbitrage and 39% to merger arbitrage.
We are pleased to announce that ARB has been awarded a #5 global performance ranking in its category in the latest BarclayHedge global hedge fund rankings. In addition, ARB celebrated its 5-year performance milestone, more than doubling the benchmark’s return since its inception.
HDGE declined -0.8% last month as multi-factor portfolios experienced varied performance.
In both American and Canadian markets, both the long-short value and quality portfolios declined, as overvalued stocks outperformed undervalued, and low-quality securities outperformed high-quality. In contrast, the long-short price momentum and trend portfolios generated positive performance. The negative correlation between the price momentum and value factors helped produce a balanced result through the month.
The top contributors to the Fund’s return in April include short positions in Neogen and Nabors Industries, along with a long position in Lundin Gold. Top detractors include a long position in EOG Resources, and short positions in Compass Minerals and Simulations Plus.
ONEC declined -2.2% in a mixed month for various asset classes.
Gold continues to shine for diversified portfolios, rising +6.0% in April, representing the Fund’s top performing allocation. Additional positive contributors to Fund performance include merger arbitrage and Canadian long short equity, which gained +2.3% and +1.8%, respectively.
Several asset classes experienced moderate declines in a volatile month, with risk parity, leveraged loans, absolute return, and managed futures falling less than -1.0%.
The Fund’s real asset allocations came under pressure in April, with infrastructure declining -2.2% and real estate falling -2.1%. Commodities suffered a -3.2% loss, while private credit experienced an extremely challenging month, falling -10.2% as NAV discounts surged amidst fears of a recession.
ATSX gained 1.8% in April, compared to the benchmark S&P/TSX 60’s uptick of 0.1%.
Within Canadian multifactor performance, the long-short trend and price momentum generated positive performance, while the market-neutral value, quality, and operating momentum portfolios were down.
The top contributors to the Fund’s return in April include short positions in Cenovus Energy and Endeavour Silver and a long position in Lundin Gold. The top detractors for the Fund’s monthly return include long positions in Trican Well Service and Suncor Energy, along with a short position in NexGen Energy.
INCM dropped -10.2% in a very difficult month for private credit. Two dynamics that caused this monthly drawdown.
First, private credit NAV discounts blew out on fears of a recession. As recently as March 27th, the average private credit fund was trading in-line with the underlying value of its loan portfolio. Within eight trading sessions across late March and early April, NAV discounts blew out quickly, with the average and median discount bottoming at -16.3% and -19.8%, respectively, on April 8th. Since then, while the equity market has bounced back and recovered most of its losses, the private credit market has not. Currently, the average NAV discount in listed private credit is -8.5%, while the median fund trades -13.5% below the value of its loan portfolio. While private credit is economically sensitive and comes under pressure amidst a recession, with increasing NAV discounts, a focus on senior secured loans (at the top of the capital stack) typically helps to mitigated losses. Currently, we are in the midst of Q1 reporting season and for the most part, underlying credit performance has been not bad, and far better than what the poor market performance implies. We believe that buying private credit funds in the secondary market at significant discounts to NAV provides both a margin of safety and a potential for attractive returns. In addition, with a yield of 11.7%, one gets paid to wait for a recovery.
Second, the U.S. dollar depreciated significantly in April, dropping -3.4% compared to the Canadian dollar, accounting for one-third of INCM’s monthly decline. All of INCM’s underlying loan portfolios are in USD, and therefore the Fund’s performance will suffer when the USD falls. Historically, during challenging market conditions, the USD has rallied, providing a downside cushion to US-denominated portfolios. Unfortunately, the trade-war driven bear market caused the opposite effect, with investors fleeing the dollar. To address this risk, Accelerate recently launched a CAD-hedge series of INCM, which trades on the Toronto Stock Exchange under the symbol INCM.B.
Currently, INCM holds 20 private credit funds, which provide exposure to more than 4,000 loans and investments, of which 87.1% are senior secured and 94.0% are floating rate. The Fund’s private credit holdings are trading at a -10.4% discount to NAV on average.
Have questions about Accelerate’s investment strategies? Click below to book a call with me:
-Julian
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 www.AccelerateShares.com for more information.
