December 14, 2020 – November was a month for the ages, in which broad-based equity indices had one of their best monthly performances on record.
Equity investors cheered Pfizer’s positive vaccine news on November 9th. Undoubtedly, the announcement was exceptionally positive for the world in its battle against Covid. It represented the first step in a path to economic recovery and the normalization of life for all of us.
While November 9th proved to be a tremendous day for humanity and holders of risk assets, it will be remembered as “black Monday” for short sellers and hedgers. Those with material short positions suffered through the worst short squeeze I have ever witnessed, with many low-quality “junk” stocks rallying 40% or more that day.
November represented a tale of two exposures. The riskiest of assets had tremendous rallies, while relatively safe and hedged exposures declined.
Accelerate manages five alternative ETFs and model portfolios, 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
- Accelerate OneChoice Alternative Portfolio: Diversified alternative portfolio solution
We are proud of our long-term track record in the arbitrage strategy. November’s performance was the best in the strategy’s 7-year track record, leading a record-setting year for performance in 2020. SPAC arbitrage is “working” tremendously well this year, leading to low-risk double-digit returns. In fact, SPAC arbitrage has been so effective that November’s return exceeded the strategy’s annual target in one month.
While we view 2020 as an anomaly for the fruitfulness of SPAC arbitrage with 20%+ returns, we believe the strategy will continue to generate attractive risk-adjusted returns on a go-forward basis. The 250+ SPACs outstanding has created an exceptional opportunity set to harvest low risk returns over the next couple of years.
November was a month of feast or famine. Investors long of risk assets were able to feast. It was a famine for those with material short positions.
HDGE aims to harvest alternative risk premia, or factors that have historically outperformed, both long and short. Essentially, HDGE aims to systematize what a human portfolio manager would do. The Fund goes long high quality stocks with attractive valuations, strong price momentum, positive operating momentum and an upward share price trend while shorting low quality stocks with unattractive valuations, poor share price momentum, negative operating momentum and a downward share price trend.
The face-ripping rally of low-quality “junk” stocks, those shorted by HDGE, led to negative performance for the month. While alternative risk premia have demonstrated a long-term track record of outperformance, the AlphaRank Monthly Factor Performance displayed the bloodbath that evidence-based long-short investors faced in November. It may have been the worst monthly performance that quantitative market neutral investors have ever witnessed.
The long-short “buffer” of ATSX is designed to cushion the downside while allowing for upside participation. In one of the most volatile years on record, ATSX has allowed investors to maintain benchmark exposure while reducing volatility. In blistering rallies such as November’s, ATSX should be expected to trail the benchmark given its short positions within the buffer. Nonetheless, we believe the approach has merit given its downside-limiting and volatility suppressing capabilities, combined with positive upside participation that has given investors a smoother ride.
Perhaps the long-awaited return of the “private equity factor”, leveraged small cap value, has finally arrived. The private equity factor was hit hard during the pandemic, as small caps and value stocks were punished. With the emergence of a vaccine, the private equity factor was placed firmly in the recovery camp, reversing some of its past underperformance. Will small cap value return to its outperforming ways?
OneChoice’s diversified alternative allocation helps augment traditional portfolios with additional diversification from alternative asset classes with low correlation. This diversified approach helps lead to a smoother and more consistent portfolio performance.
OneChoice’s positive performance in November was led by Bitcoin’s 39.9% rally, in addition to a 10% return from infrastructure, 7.4% from real estate and 6.4% from arbitrage. Gold and absolute return contributed negatively to the OneChoice portfolio in November, with declines of -9.7% and -7.9%, respectively. 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.