January 15, 2021 – An interesting month of December capped off a unique year.
In 2020, we went from the fastest bear market in history and the highest VIX level ever recorded in March to new highs for U.S. equities and valuations at record levels by year end. One key lesson that investors learned from the pandemic is that monetary stimulus is a helluva drug.
Did anyone forecast the dramatic market events of 2020? No. Last year proved that the best approach to investing may be to hold a widely diversified investment portfolio, with an allocation that consists of more than just two asset classes (stocks and bonds). Some alternative strategies helped buoy investment portfolios by zigging while the market zagged, cushioning portfolio values with uncorrelated return streams.
There is an oft-cited dogma in finance that says “the only free lunch in investing is diversification“. Accelerate is pleased to bring the first diversified alternative portfolio solution in ETF form to Canada. The Accelerate OneChoice Alternative Portfolio ETF (TSX: ONEC) is set to launch on January 27th.
The goal of investing in OneChoice is to augment traditional portfolios by lowering portfolio risk and improving risk-adjusted returns through increased diversification.
The Accelerate OneChoice Alternative Portfolio ETF provides exposure to the following asset classes and alternative strategies:
- Absolute Return: Arbitrage and Long-Short Equity
- Private Credit: Mortgages and Leveraged Loans
- Real assets: Infrastructure and Real Estate
- Alternative Currencies: Gold and Bitcoin
- Global Macro: Risk Parity
- Alternative Equity: Alpha + Beta
Accelerate manages five alternative ETFs and model portfolios, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): Event-driven
- Accelerate Absolute Return Hedge Fund (TSX: HDGE): Long-short equity
- Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX): Alpha + beta
- Accelerate OneChoice Alternative Portfolio ETF (TSX; ONEC): Diversified alternative portfolio solution (to launch January 27th)
- Accelerate Private Equity Alpha Fund (TSX: ALFA): Private equity replication
Last month, I wrote that the Accelerate Arbitrage Fund’s “November’s performance was the best in the strategy’s 7-year track record”. The good news is December topped last month’s record return with a significantly higher monthly return. December’s 9.2% monthly gain in ARB nearly exceeds the strategy’s previous record yearly performance of 11.4% set in 2012. ARB’s 2020 return of nearly 30% was about 5x higher than our target return for the low-risk strategy and unlikely to be repeated.
Nonetheless, we continue to establish ARB as an industry-leader and look forward to a fruitful opportunity set in the SPAC and M&A space in 2021.
HDGE bounced back from November’s short squeeze to notch a positive performance in December. Last year was a difficult one for hedged strategies such as the Accelerate Absolute Return Hedge Fund, as short portfolios got punished as the market rallied in October and November.
The goal of HDGE is to provide an uncorrelated return stream to investors. In fact, HDGE has been slightly negatively correlated with the broad equity indices. HDGE was one of the few funds that had positive performance in March 2020, a month in which the equity indices plummeted worldwide, helping to cushion investor portfolios when the bottom was falling out.
ATSX finished 2020 with an average return (+5.1%) in a year that was anything but average. When stocks dropped precipitously in the first quarter, ATSX’s long-short equity buffer helped cushion the drawdown and lower volatility. During the bounce back, ATSX investors were able to earn the majority of the upside participation.
While there are several ways in which investors can “buffer” equity index returns, we believe the long-short overlay buffer of ATSX is superior to the put option-based buffers of competing products. Specifically, we expect to generate positive returns from ATSX’s long-short buffer overlay, while options-based buffers tend to cost money and have a negative expected value on average.
ALFA finished a tough year with a strong quarter of positive returns. It feels like the value rotation is beginning to take hold in the market. If so, the private equity factor, defined as leveraged small cap value stocks, could continue its recent streak of outperformance.
Unfortunately, private equity replication did not catch on in the market. The thesis behind ALFA was to offer private equity returns in a liquid ETF with a 0% management fee (performance fee only), an approach that investors did not want and at a fee level that was sacrificial to Accelerate. While we will continue to offer private equity replication via our SMA platform, the ALFA ETF will close on or around March 15, 2021.
Nine out of ten of OneChoice’s alternative strategies had positive performance in December. ONEC was buoyed by Bitcoin’s 49.6% rally, arbitrage’s 9.2% surge and a 3.6% gain in gold. The only detractor for ONEC for the month was real estate, with a -0.5% decline. The remaining six alternative strategies in ONEC returned between 0.2% and 3.5% in December.
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 www.AccelerateShares.com for more information.