April 12, 2021 – One year ago, the onset of COVID-19 pandemic tipped markets into a tailspin, leading to the fastest bear market in history and the highest volatility on record.
Last month was characterized by the continued recovery and normalization of markets. The volatility index finished the month sub-twenty, a level indicative of a normally functioning equity market and the first time to fall below twenty on a sustained basis since February of 2020.
Long-term bonds remain under pressure as the U.S. Treasury 10-year yield continues its march upward. Despite yields topping 1.7%, up from their low of 0.5% last summer, continued economic momentum will likely see long-term interest rates rise much further. Reading the tea leaves, the outlook for fixed income remains dire, forcing investors to seek alternative yield generators.
“Story stocks”, or those futuristic stocks with poor current fundamentals but lofty projections primarily propelled by hype, continue to underperform. This underperformance is driven largely by a reversion to the mean, given story stocks’ stunning outperformance in 2020. Rising yields will further pressure growth equities, given the vast majority of their value is discounted from far in the future. Look for the outperformance of fundamental factors such as value and quality to continue in the near to medium term.
SPACs represent another asset class recently led by hype to record levels. March brought a bear market to the asset class, bringing valuations back to reasonable levels and setting up investors who are correctly positioned for strong returns on a go-forward basis. A decline in blank check issuance is to be expected. However, the asset class remains in its first inning of growth and will continue to mature over the next decade, bringing it in line with comparable asset classes such as venture capital and private equity. Market observers need to be cognizant that, although SPACs have seen a 10x year-over-year growth rate, their aggregate $200 billion market capitalization pales in comparison to the $3 trillion global private equity industry.
For the remainder of 2021 and beyond, inflation remains a key wild card at the top of investors’ mind. Bitcoin remains investors’ best tool in forecasting the negative effects of unprecedented fiscal and monetary stimulus. As bitcoin rises past $60,000 and beyond, it remains a prominent warning sign to investors that a nasty bought of inflation is a scenario that should be considered with a somewhat reasonable probability.
With so many outstanding uncertainties, combined with seemingly elevated levels of complacence across traditional asset classes, diversification remains as essential as ever.
Accelerate manages four 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
ARB made its debut into a fruitful market environment on April 7, 2020. The Fund finished its first year as an ETF up nearly 40% with a Sharpe ratio, a measure of return compared to risk, of approximately 4. ARB outperformed its benchmark, the S&P Merger Arbitrage Index Total Return, by more than 2,800 basis points net of fees.A measure of the true value of an alternative strategy is its correlation (or lack thereof) to traditional asset classes. The lower the correlation, the better. Over the past 12 months, ARB had a correlation of just 0.32 to stocks and 0.08 to bonds.
The average hedge fund has a Sharpe ratio of approximately 0.5. ARB’s Sharpe ratio of 4, nearly 10x the historical industry average, would rank it amongst the top performing hedge funds in the world. The fact that its fee is up to 80% lower than its peers, combined with its track record of outperformance, makes its value proposition clear. However, we do not forecast the past twelve month’s truly exceptional performance to continue, although we do expect to continue to outperform in a low-risk manner, along with a low correlation to stocks and bonds.
The conservative positioning of ARB heading into March’s SPAC bear market allowed the Fund to capitalize on what we view as the best arbitrage opportunity set observed since April 2020, when markets were in turmoil from a raging pandemic.
Arbitrage spreads remain extremely attractive, especially given the low risk levels presented by the current market environment.
After struggling through 2020, alternative risk premia such as value, quality and momentum, are finally once again “working” in 2021. The market has transitioned from caring about “stories” to now caring about fundamentals.
Now that stocks are once again being driven by fundamental factors, we could be in the early innings of a golden age for multi-factor long-short investing, last seen during the period of 2000 to 2007.
HDGE’s 4.7% gain in March was driven by the +9.9% gain in the value factor, in which undervalued stocks rallied +9.5% while overvalued equities fell -0.4%. The quality factor also contributed to returns, as high-quality stocks gained 6.3% and low-quality equities rose just 1.0%. The momentum and trend factors were negative on the month, as seen in the latest AlphaRank Factor Performance.
ONEC’s 4.5% gain in March was driven by another monthly surge in bitcoin’s price, which rallied about 25%. In addition, infrastructure’s 6.8% return, along with long-short equity’s 4.7% gain, and alternative equity’s 4.4% return contributed to the positive month.
Detractors included a -4.8% fall in arbitrage, a -3.0% decline for gold and a -1.1% drop in risk parity.
The diversity within ONEC, including six alternative asset classes and ten alternative strategies, makes it well set-up to deal with a myriad of economic environments.
The ATSX multi-factor long-short overlay, meant to mitigate downside risk in market drawdowns, added 30 basis points of outperformance in a strong market during the month.
ATSX gained 4.4% last month, and its overlay added alpha as high quality stocks at attractive valuations outperformed overvalued, low quality equities.
Historically, multi-factor investing has worked better in Canada compared to the U.S., given its a strategy that is not nearly as popular in the Canadian market. In March, Accelerate’s Canadian long-short multi-factor model portfolio gained 7.7% while the U.S long-short multi-factor rallied 6.1%, as seen in the latest AlphaRank Factor Performance.
Have questions about Accelerate’s investment strategies? 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.
