June 15, 2025 – Volatility can be a gift and a curse for investors.
When investors discuss volatility, they typically refer to downward volatility – no one gets upset when they are rapidly making money. From an allocator’s perspective, volatility is viewed as a negative characteristic, as it serves as a rough proxy for risk. Generally, the more volatile an asset, the greater its perceived risk. And all things equal, for a given return stream, a lower level of volatility is preferred.
The negative case for high volatility is straightforward – high volatility makes investors uncomfortable, and no one likes to lose money (even temporarily). There is a reason why the most common gauge for stock-based volatility, the VIX Index, is colloquially referred to as the “fear index”. High measures of stock market volatility are associated with high stress, and high stress causes the urge for loss aversion, which can lead to short-term mistakes (such as panic selling at the lows).
The human brain is not hardwired correctly to rationally deal with market volatility. Our brains have an ingrained fight-or-flight instinct, a primal survival mechanism that served us well when we survived on the plains of the Sahara tens of thousands of years ago. That said, in modern times, this fight-or-flight instinct gets triggered during stock market declines because the human brain interprets financial loss as a threat similar to physical danger.
Sudden mark-to-market portfolio losses may trigger the amygdala, the brain’s fear center. The amygdala does not distinguish between a bear chasing you or a bear market thrashing your portfolio – both feel like a threat. Moreover, during stock market volatility, the body may release adrenaline, which creates anxiety, a racing heartbeat, and hyper-alertness. This dynamic primes the body to “fight” (double down or call your broker) or “flee” (panic sell). The prefrontal cortex, responsible for logic and long-term planning, gets overridden. That is why even experienced investors can make impulsive decisions under stress.
However, experienced allocators are trained to resist the urge to panic-sell and satisfy the brain’s preference for loss aversion. The upside of shaky markets is capitalizing on the volatility. Typically, higher returns are generated by serving as a liquidity provider during periods of market stress, by buying assets at a discount and waiting for a rebound in prices as volatility subsides. Buying falling assets amidst scary headlines and panicked markets is not easy, otherwise everyone would do it and markets would never crash. In addition, asset prices can and do rerate at significantly lower prices, and whether those discounted prices turn out to be great bargains is in no way guaranteed. Enterprising investing involves balancing the risks.
Nevertheless, stock market volatility tends to be mean-reverting. Periods of high or low volatility tend to be followed by a return to average levels. After a market panic, emotions settle, and investors return to focusing on fundamentals. After a period of extreme calm, complacency tends to lead to increased risk-raking, ultimately sowing the seeds of a correction.
It is often said that markets take the escalator up and the elevator down, meaning asset prices tend to rise slowly and crash quickly. However, that is not always the case.
The “Liberation Day” tariffs announced on April 2nd presented a shock to the global economy, which translated into significant market stress. The higher than expected level of tariffs communicated on Liberation Day would have likely caused a global economic depression if implemented for a material amount of time, on par with the Great Depression of the 1930’s (which was caused by the Smoot-Hawley Tariff Act of 1930). As such, asset prices rapidly incorporated this harmful economic scenario, rapidly plunging the S&P 500 into a bear market with a quick -20% peak-to-trough decline.
Post Liberation Day, markets crashed, and volatility spiked. Since then, throughout much consternation, the extreme tariff policy and economic uncertainty have been rolled back significantly, causing markets to rebound quickly and volatility to rapidly decline.
Since peaking in April, the VIX declined by more than 60% from a level of nearly 60 in early April to below 20 by the end of May. While volatility often spikes, the rapid decline in market stress since April’s rout demonstrates a rare event: the volatility crash. The decline in volatility over the past 9 weeks represented the largest volatility crash on record.
Source: The Market Ear
The last time volatility crashed, and asset prices recovered this quickly, was during the post-COVID market recovery in spring 2020.
It is always worthwhile to study market history and note lessons learned. While markets are inherently unpredictable and uncertain, and each period of stress is often unprecedented and new (such as a global pandemic, a banking crisis, etc.), these periods of extreme stress generally exhibit similar characteristics. The most common trait is a spike in volatility, accompanied by a plunge in asset prices. What is less common is the subsequent volatility crash, along with a quick market recovery, that we just experienced.
However, we are not yet out of the woods (are we ever?). Tariff policy remains uncertain, and geopolitical strife is escalating. Reviewing the past two months of volatile volatility is constructive, as it retaught the same lessons: have a long-term plan, stay diversified, do not take more risk than you can tolerate, and do not make emotional decisions that could disrupt your long-term asset allocation due to short-term events. Managing emotions during periods of extreme stress requires a great deal of hard work and focus, and if making money were easy, everyone would be rich. However, having the right tools, such as a diversified portfolio of uncorrelated assets, provides the most stable foundation not only to survive but also to thrive through periods of great uncertainty.
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 1.9% in May, compared to the 0.7% return experienced by the benchmark S&P Merger Arbitrage Total Return Index. ARB has risen 6.3% year-to-date, while the benchmark has increased 3.4%.
Two market dynamics are creating a fertile environment for arbitrage investing.
First, merger and acquisition activity has increased markedly since the pause in April. Last month, twenty-four public M&A deals were announced in North America, and ARB participated in five new merger investments. An increased opportunity set generally leads to increased returns, as arbitrageurs have more places to allocate capital. In addition, mergers are completing as expected in the current environment, reducing potential losses for arbitrageurs. Last month, thirteen public M&A transactions were consummated, crystalizing P&L and allowing for the redeployment of capital. Deals that closed held by ARB include Veren’s $8.4 billion merger with Whitecap Resources, 2seventy bio’s $100 million acquisition by Bristol Myers Squibb, Despegar’s $1.7 billion buyout from Prosus, Discover Financial’s $35.3 billion merger with Capital One Financial, Nordstrom’s $6.3 billion go-private, Checkpoint Therapeutics’ $355 million merger with Sun Pharmaceutical Industries, and K-Bro Linen’s subscription receipt arbitrage.
Second, the SPAC market is generating attractive positive upside optionality in the current market environment. Not only does this dynamic increase returns for the SPAC shares held by the Fund, but it also allows ARB to exit SPAC warrants and rights, that were acquired for free by participating in SPAC initial public offerings, at attractive valuations . The SPAC IPO market remains very active, with 22 new issues coming to market last month. ARB participated in 13 of these IPOs, deploying 13.4% of the Fund’s NAV. Every single new issues trades above its $10.00 offering price.
Currently, the Fund is 127.4% long and -8.7% short (136.1% gross), with 59% allocated to SPAC arbitrage and 41% to merger arbitrage.
We are pleased to announce that ARB has been awarded a #1 global performance ranking in its category in the latest BarclayHedge global hedge fund rankings.
HDGE increased 3.2% in a mixed month for long-short multi-factor models.
In the U.S. portfolio, the Fund experienced positive performance from long-short operating momentum and trend portfolios, with negative performance from market-neutral value, quality and price momentum portfolios. In the Canadian portfolio, long-short value, quality and operating momentum factors generated alpha, while price momentum and trend factors contributed negative performance.
Top three Fund contributors for the month include long positions in NRG Energy and Celestica, along with a short position in Jeld-Wen. Top three Fund detractors include short positions in Foot Locker and Delek US, along with a long position in Lantheus.
ONEC returned 1.8%, in a month that exhibited broad-based gains across a diversified spectrum of asset classes.
The Fund’s returns were bolstered by long short equity, private credit, and absolute return strategies, which gained 5.5%, 4.0%, and 3.2%, respectively.
Real estate, infrastructure, broadly syndicated loans, and merger arbitrage all produced returns between 1.0% and 2.0%, while risk parity and managed futures gained less than 1.0%.
The only allocations on the negative side of the ledger last month fell into the inflation protection bucket – specifically, gold and commodities – which were both down less than -1.0%.
ATSX gained 5.5%, compared to the benchmark S&P/TSX 60’s 5.3% return in May. Year-to-date, ATSX has returned 7.5%, compared to 7.1% for the benchmark.
In Canadian long-short factor portfolio performance, value led the pack with a 7.2% gain, followed by quality with a 2.6% increase and operating momentum, which gained 1.4%. Conversely, the long-short price momentum and trend portfolios detracted from Fund performance, as those factors lost -7.6% and -2.5%, respectively.
Top three Fund contributors for the month include long positions in Aritzia, Celestica, and Finning. Top three Fund detractors include short positions in Cameco, Aya Gold & Silver, and NexGen Energy.
INCM returned 4.0% in May, as NAV discounts partially recovered after a significant widening the month prior (due to tariff-related volatility).
We launched the Accelerate Diversified Credit Income Fund (TSX:INCM) one year ago with the objective of creating a widely-diversified, high-quality private credit loan portfolio by buying private credit funds (listed BDCs) in the secondary market (ideally at a discount to their net asset value – below the value of their loans) with a focus on senior secured, floating rate direct loans to sponsor-backed private companies.
Since then, there have been positives and negatives. On a positive note, base rates remain high, and spreads remain relatively attractive, resulting in private credit yields exceeding 10%. It remains the highest-yielding major asset class available. In addition, credit performance remains decent, leading to a high-single digit total return for the underlying loan portfolios.
Conversely, the performance of INCM since its launch has been unsatisfactory. The Fund’s lackluster performance can be attributed to two main factors. First, the negative performance of INCM has been primarily caused by the widening of NAV discounts. The prices of listed private credit funds can diverge from the underlying loan portfolio values. This discounted NAV dynamic spiked in April and has only partially recovered. Widespread NAV discounts remain persistent in the current market environment, which was not the case one year ago when INCM launched. Second, and to a lesser extent, the U.S. dollar has depreciated, hurting the value of U.S.-denominated assets (private credit) when marked in Canadian dollars (as INCM is CAD-denominated). To address this risk and provide investors with more choice, we launched a CAD-hedged series last month, which trades under the symbol INCM.B.
Throughout May, all publicly traded private credit funds disclosed their first quarter results, disclosing their underlying loan portfolios and detailing loan performance. We provided a detailed review in our latest quarterly private credit memo titled, Accelerate Liquid Private Credit Monitor – Resilient, But Risks Persist.
Currently, INCM is allocated to 20 private credit funds, which hold 4,153 loans and investments, of which 84.8% are senior secured and 91.6% floating rate. The Fund currently trades at a -6.7% discount to the value of its underlying loans.
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-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.
