June 4, 2020 – Markets are firmly in recovery mode, staging a fierce rally off the March 23rd coronavirus panic-driven lows.
Many market participants remain confounded by the strength in risk assets given the perilous state of the economy (record-setting job losses and a steep decline in GDP), however, markets are not the economy. Risk assets are forward-looking, and are pricing in a swift recovery in both growth in commerce and the profitability of businesses. In addition, the more than $10 trillion of fiscal and monetary stimulus provided by the Federal Reserve and U.S. Treasury likely didn’t hurt investor risk appetite either. Even the Canadian central bank joined the stimulus party, implementing a quantitative easing programme for the first time in its history.
In North America, COVID-19 cases peaked in April and have continued their downtrend since. Businesses are reopening and society is easing its way back to normal life, albeit with slight adjustments.
Alas, Accelerate runs systematic investment strategies and does not worry about nor rely on economic forecasts. The goal of Accelerate’s investment strategies is to methodically harvest various factor premia. These factor premia comprise of academically and practically proven risk factors including the merger risk premium, the quality anomaly and the momentum effect. We provide the tools investors need to craft an endowment-style asset allocation framework, and we leave the macroeconomic prognostications to the allocators.
Accelerate manages four alternative ETFs, each with a specific mandate:
- Accelerate Absolute Return Hedge Fund (TSX: HDGE): Long-short equity
- Accelerate Arbitrage Fund (TSX: ARB): Event-driven
- Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX): Alpha + beta
- Accelerate Private Equity Alpha Fund (TSX: ALFA): Private equity replication
With its 110% long exposure and 50% short exposure, HDGE’s portfolio is designed to participate in market upside while cushioning the downside, with the goal of attaining market-like returns with lower volatility. It felt stupid holding onto a short portfolio in 2019, as the rally in low-quality, speculative stocks hurt returns in the fourth quarter. However, the notion of holding a compelling short portfolio was vindicated as HDGE was able to protect capital, reduce downside risk and attain an approximate flat return year-to-date in a highly volatile environment.
The performance of specific alternative risk premia driving HDGE’s long and short portfolios can be found in May’s AlphaRank Factor Performance.
ARB launched at $20.00 per unit on April 7th, 2020, in the midst of the swiftest bear market in history. Given the dramatic market volatility, arbitrage spreads remain ultra-wide, pricing increased downside risk of M&A targets and heightened deal break risk. As I stated in the most recent AlphaRank Merger Monitor, “It remains an opportune time to invest in select merger arbitrage opportunities. Spreads remain exceptionally wide, however, some of that spread is warranted, given the current elevated risk of deal terminations. Careful security selection, sufficient diversification and deliberate caution is called for in an uncertain market environment.”
Thus far, it has been a volatile environment in merger arbitrage, but the extreme wide spreads have more than compensated investors for the risks.
ATSX gained 7.5% in May compared to a 3.1% rise in the TSX 60. Year-to-date, ATSX is up 2.8% while the TSX 60 is down -8.3%, inclusive of dividends.
“When markets suffered a violent drawdown in March, ATSX had a downside capture of just 85.6%,” I wrote in the recent post “Alpha + Beta: One Year In“. The key aspect of ATSX’s outperformance has been its short portfolio, which cushioned the downside volatility and reduced drawdowns in a market experiencing record volatility.
The current market environment has not been kind to private equity, defined as leveraged, small-cap value stocks. Despite both the small cap anomaly and value factor both having a 90-year track record of market outperformance, in the past number of years, small cap value stocks have been clobbered by large cap growth equities. ALFA is a 130/30 fund, and is designed to provide 130% exposure to the “private equity factor” (small cap value stocks), along with a 30% short position in the S&P 500. Thus far, it has performed poorly.
As I discussed in the piece, “Your Private Equity Fund Is Down -37% This Year. Where Do We Go From Here?“, one thing investors should keep in mind is the historical outperformance of private equity coming out of a recession. After the 2001 downturn, private equity had a 1-year return of over 60%. After the 2008-2009 recession, private equity saw a 1-year return of more than 160%.
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.