Arbitrage deep dive – 2021

Arbitrage is the most diverse strategy group monitored, with incredibly large dispersion between the best and worst performing sub-strategies.

Asset growth

Arbitrage is the smallest strategy group that Aurum covers, accounting for just $65bn in AUM across 107 funds. However, these figures do not tell the whole story as arbitrage strategies tend to be a material component in many multi-strategy funds. Consequently, the true amount of hedge fund AUM in arbitrage strategies is significantly higher.

Arbitrage funds have seen some very notable positive inflows over the period: nearly $13bn of new capital (net) was allocated to the strategy. Combined with positive net P&L generated of nearly $4bn, the AUM of funds in the arbitrage strategy grouping has grown by a quarter from last year. Strategy assets grew rapidly from March 2020, both through performance and flows. All four sub-strategies attracted net inflows in the past 12 months.

Returns by sub-strategy

Arbitrage is the most diverse strategy group monitored, with incredibly large dispersion between the best and worst performing sub-strategies. Arb opportunistic strategies were able to take advantage of the elevated market volatility at the beginning of the period and subsequent opportunity set it presented to post a great year, returning on average and net of fees nearly 20%. As discussed below, most of this gain was concentrated in the end of 2020 and first two months of 2021.

Arb opportunistic strategies were able to take advantage of the market volatility, and subsequent opportunity set it presented, to post a great year, returning on average and net of fees nearly 20%.

On the other hand, tail protection strategies, in-line with their ‘downside protection’ mandate, understandably struggled in the subsequent strong market rally, returning on average just worse than -10%. Thus, a greater than 30% spread at just the inter sub-strategy headline level.

Convertible arbitrage (convert arb) strategies were also able to take advantage of the same opportunity set, returning 13.2%. Volatility arbitrage (vol arb) returns were muted at a headline level at just shy of 2% for the 12-month period. The sub-strategy monetised only some of the dislocations from the elevated market volatility at the beginning of the period, but then notably struggled as markets rallied and volatility normalised.

NET RETURN OF MASTER AND SUB-STRATEGIES (1 YR)

*HF Composite = Aurum Hedge Fund Data Engine Asset Weighted Composite Index. Bonds = S&P Global Developed Aggregate Ex Collateralized Bond (USD). Equities = S&P Global BMI. RFR = Rolling 3 Month USD LIBOR