Alternative Market Briefing

Corona Fighters - Report 3: Asset managers who delivered during the meltdown

Wednesday, April 08, 2020

B. G., Opalesque Geneva:

In the midst of the current market turmoil, this is the third of our regular reports on hedge fund managers who have bucked the trend.

The global spread of the COVID-19 virus has led to the fastest-ever -30% decline from a peak in major global equity markets. March 2020 was the worst month and quarter for equity markets since October 2008 and fourth quarter 2008, respectively.

Report 1 can be found here.

Report 2 can be found here.

Focus on maintaining positive skew

New York-based Quest Partners saw positive returns in all its funds in March. AlphaQuest Original was up almost +9% and +17.5% YTD. Comparatively, the Short S&P 500 Total Return Index was up +6%, +15.6%, and the SG CTA Index was up +0.17%, down -0.5% YTD.

The program rapidly positioned itself in the direction of volatility, says Quest's monthly commentary seen by Opalesque. "The focus on capturing sharp volatility expansions-or convexity-has been a mainstay of the AQO program since inception nearly twenty-one years ago." The program "entered the month with meaningful risk-off positions, having been short equities, long fixed income, short the energy complex, and long the Japanese yen versus both the U.S. dollar and the euro."

"While the market finally found footing on March 23rd when the U.S. Federal Reserve announced they would do whatever it takes to 'support households, businesses, and the U.S. economy overall,' the AQO program was able to exit core positions prior to the market's reversal. AQO's short-term nature allows it to dynamically source 'risk-off' exposure and to then pivot to the next opportunity set."

AlphaQuest Short Bias was up 19% and 37% YTD. Quest Dynamic Hedging was up 0.15% and 12% YTD. And the Quest Tracker Index was up almost 8% and 10% YTD.

Rather than adapt to low volatility that is no longer there, says Quest, "our research remained fixed on new approaches of capturing positive skewness such as our 'trend crowding' family of systems, which seeks to identify markets that are crowded by concentrated positioning of CTAs. We have also become even shorter-term with the introduction of a suite of intraday strategies."

This focus on maintaining positive skew has been Quest's main differentiation. "Going forward," the commentary continues, "we believe that investors should continue to benefit from paying close attention to the skew profile of their investments, especially for diversifying strategies and CTA exposures."

Founder and CIO Nigol Koulajian was interviewed on Opalesque TV here (article "Quest Partners focuses on skew to avoid the CTA drawdown" here).

Divergent strategies are their backbone

At Rye Brook, NY-based Ridgedale Advisors, the Multi-Strategy Program had a strong month in March as their Divergent portfolio provided the majority of the positive performance, a phenomenon the firm has witnessed in almost every crisis since 1983. "The performance of divergent strategies in crisis periods is the backbone of why we construct our portfolios to have a significant allocation to purely divergent strategies (~20% cash / ~50% risk allocation in MSP)," says a commentary seen by Opalesque.

Ridgedale Global Alpha Fund (7% Volatility Series) was up almost 4% net and 4.3% YTD, Global Alpha Fund (14% Volatility Series) was up almost 8% net and 8.8% YTD, and Global Alpha Fund (Partner Series) was up 17.5% and 20% YTD.

Within the Divergent portfolio, the long/medium-term trend program was able to capture profits with long and short exposure during March's selloff. Short positions in international equity indices including the CAC 40 and SPI 200 were profitable, along with short exposure to the Canadian Dollar as it weakened against the USD during the period. Domestically the program benefited from diversified exposures across asset classes, including short exposure to the Nasdaq 100 and long exposure to Frozen Orange Juice & the US Gov't yield curve. Underperformance for the period was driven by long exposure to gold, silver, and certain European fixed income markets.

On the convergent side of the portfolio, the fixed income portfolio was about flat for the month. "What was really interesting is that we took short positions in Europe and Japan, making back some early losses that the portfolio sustained in Japan."

As we move into Q2 of 2020, Ridgedale has, on the convergent side of the portfolio, increased long exposure to the grains sector, begun looking for markets to take a long exposure in the energy and metals sectors, and maintained a small exposure to global equities. On the divergent side of the portfolio, the managers have reduced exposure to certain currency, meat and agriculture markets.

Ridgedale will be a presenter in the upcoming webinar: The Corona Fighters, on April 20th, 2020.

Precaution and flexibility in Spain

Cygnus Asset Management, located in Madrid, Spain, reported positive performance thanks to its preparedness. For some time, says a communication to investors seen by Opalesque, the managers had been concerned about the levels achieved by markets in an ever riskier environment. Then in January, as the world became more aware of the evolution of the epidemic, the managers prepared their portfolios, expecting "not only health problems but also an impact on a fully valued and fragile market." This precaution has allowed both absolute return strategies to post positive returns in March and YTD.

Cygnus' Utilities, Infrastructure & Renewables UCITS (euro) was up 2.7% in March and 0.9% YTD. The ICAV (USD) version of the fund was up almost 5% and 1.4% YTD. And the Europa Event Driven ICAV (USD) was up 16% and 18% YTD.

As it is anybody's guess as to when the markets will recover, or if there will be some other major correction, the managers are currently holding small portfolios that give them great flexibility to manage risk and that allows them to vary the directionality according to market conditions. "Flexibility is essential in these types of markets," they say.

The ability to navigate changing seas

Typhon Capital Management, a registered CTA located in Florida and founded in March 2008, runs 15 programs, 10 of which recorded positive returns YTD (est.) The best performing one is Leonidas Macro Fund, which is up 32% YTD.

"Typhon was ahead of the curve in identifying both the vulnerability of U.S. markets after 10 years of near-zero interest rates and massive Fed-fuelled liquidity and the large human and economic impact that the Coronavirus would likely wreak upon the world," says a commentary to investors seen by Opalesque.

"This is a time of rapid reversals and the ability to navigate changing seas quickly is paramount. We do not believe this is the time to buy the dip, but rather surf the waves. The news flow will be up and down so a buy-and-hold approach will not survive the associated drawdowns. As the distressed debt market becomes more attractive than equities in sectors such as energy, travel, retail, lodging/gaming, and leisure, equity trading will take back seats and strategies focused on equity long/short will be marginalized."

The firm will be launching two multi-manager products- a '40 Act friendly swap on a major investment bank's platform that is overweighed to its commodities managers and both U.S. and Cayman private funds with an algorithmic allocation between all of our managers.

And others…

All of CTA STRATS' programs were positive in March and YTD. The best returns were delivered by the CTA Trend II (Diversified) strategy, launched in 2013, a systematic, medium-term trading view that seeks alpha returns across multiple asset classes. It returned 16% in March and 30% YTD. There is also the FX Multi-Strategy Program (SELECT), launched in 2015, is a portfolio of emerging currency managers that aim to create alpha through their individual skills-based idea generation process. It returned almost 4% in March, 9% YTD.

Singapore-based Ariana Investment Management, which was set up in 2013, reported that its Global Arbitrage Fund had gained an estimated 1.1% in March and 2.4% YTD. Launched in June 2014, it is a low volatility fund that employs an arbitrage strategy with an absolute return target and minimal directional exposure to underlying asset classes or assets. It has annualised 7% since inception, with a volatility of 2%.

Kelonia Capital Management, with offices in Luxembourg and Geneva, Switzerland, reported that its Multi-Strategy Program had returned 5.8% in March and 11% YTD. Launched in August 2017, it has annualised 8.8% and it employs a systematic investment process across a broad range of futures markets including global equities, fixed income, currencies, and commodities. Trades are generated based on a combination of pattern-based momentum, failed-momentum, and contrarian signals. What distinguishes Kelonia's approach is the use of a sophisticated noise classification and noise measurement framework.

Zurich, Switzerland-based Icon Asset Management reported that its ICON MoSAIQ Carmika Market Neutral Strategy had returned 9.5% in March, 22.5% YTD. The all-weather strategy achieves its returns through MoSAIQ automated systematic non-discretionary trading of highly liquid stocks and futures and Carmika discretionary index options hedge position building. The strategy has averaged 28% per year in the last five years.

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Disclaimer: This is not investment advice. Opalesque has not verified this information and gives no warranty of accuracy or completeness. Past performance is not indicative of future results. See our Terms & Conditions for more information.

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WEBINARS:

- The Corona Fighters: Meet the asset managers that actually delivered during the melt down

Episode 1: Monday, April 20th, 10 am EST

Opalesque will present several investment managers who will give a succinct presentation on how and why their strategies delivered positive returns and/or protected during the Corona led market meltdown, with Q&A session.

For investors only - register now as seats are limited: www.opalesque.com/webinar/corona/

- COVID-19 Survival Training for Family Businesses
April 15th, 10 am EST
Register: www.opalesque.com/webinar/covid_survival/

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