Research

Aurum's Quarterly Review - Q1 2019

All of the Aurum portfolios made a positive start to the year. With the exception of a fund that launched in February 2019, all returned between +2.0% and +3.7% for the quarter, while the HFRX Global Hedge Fund Index returned +2.6%.

Multi-strategy funds rebounded strongly during the first three months of the year. Performance was buoyed by fundamental equity market neutral teams capitalising on improving investor sentiment as market participants re-levered portfolios following the sharp deleveraging seen towards the end of 2018.

Much of this renewed optimism has been based on market expectations that the Fed will not raise interest rates again as previously anticipated, indeed, the market is actually now pricing a rate cut. It was only as recently as October 2018 that Fed Chairman Jerome Powell commented that US rates were a “long way from neutral” and the market was pricing in two rate rises in 2019. What a difference a few months makes!

Commodity strategies also performed strongly as the sharp rebound in oil prices and moves in natural gas created a number of opportunities. Merger arbitrage and fixed income relative value strategies were also positive.

The return of risk-on investor sentiment was, as expected, a strong tailwind for equity strategies. While the earnings outlook had fallen somewhat during Q4 2018, improving trade talk rhetoric between the US and China supported a more constructive outlook on global growth. Together with more accommodative central banks, the impact of a global slowdown on company fundamentals appears to be discounted now more than markets had priced in towards the end of 2018. Notable gains were made by certain high- quality defensive names that were indiscriminately sold-off during the Q4 2018 rotation.

After a strong 2018, merger arbitrage strategies continued to provide non-correlated returns to markets and the Aurum portfolios. Deal flow remains particularly healthy with $1.0tn of deals announced in Q1 according to Dealogic, with only the first quarter of 2018 having a stronger start to the year since 2007. A large transaction in the media sector was a notable contributor to returns, closing in March having received final regulatory approval in February. Gains were also made from tactically trading the spread in a mega deal in the pharmaceutical industry that was announced in January.

Macro performance was mixed. Fixed income relative value strategies performed strongly following the change in tone from the Fed and ECB, which saw government yields tumble; US Government 10y yields ended the quarter at 2.41%, from 2.68% at the beginning of the year. As assets flooded into fixed income markets, liquidity improved and the balance sheet stress that was seen towards the end of last year began to normalise, creating a very fertile trading environment in US and European bond RV and basis trading. Conversely, the improvement in investor sentiment was a headwind for strategies with a more cautious outlook, however, those strategies were accretive in Q4 2018. Funds with an emerging market bias capitalized on constructive positions in Argentina, Brazil, Turkey and South Africa coming into the beginning of the year.        

Having performed below expectations in 2018, the systematic strategies in the Aurum portfolios performed strongly during Q1. Machine learning models in US equities had a stellar February, while short term futures strategies in fixed income were additive in March, capitalising on the collapse in government bond yields. Statistical arbitrage also made money as cross-sectional volatility abated over the quarter.

The performance of the Aurum portfolios was particularly encouraging in Q1, especially when one considers the environment was a polar opposite to December where risk assets had one of their worst months since 2008. The last six months is a stark reminder at how quickly investor sentiment can change from both a risk-off and risk-on perspective. Aurum’s role is to identify hedge funds that protect capital and deliver returns that are not market-dependent or beta-driven.