Adam Moir
INSIGHT 01/05/2020

Aurum’s Quarterly Review – Q1 2020

Adam Moir Product Specialist

The first quarter of 2020 will be remembered for years to come; not least because of the tragic human cost associated with COVID-19 and the market impact caused by the global shutdown. The result of which is one of the most challenging market environments since 2008; and arguably, since the Great Depression. While the very freedoms that we all take for granted have been (temporarily) suspended, all of us acknowledge and commend those on the frontline for putting their lives on the line to protect ours.

Aurum’s discretionary portfolios generally started the year positively, most producing solid returns during the first two months of the year. February was particularly encouraging, as the spread of COVID-19 seemed to be finally acknowledged by markets. The portfolios showed exceptional risk management after the S&P 500 had hit all-time highs on 19th February to then finish the month down 8.4%. Quarterly performance was, however, largely driven by the events in March, which was the most turbulent month for financial markets since 2008.

Arguably, the oil price war between Russia and Saudi Arabia that started on 8th March compounded the pre-existing negative investor sentiment, and sent markets into a tailspin. Industry participants proceeded to aggressively de-lever into very poor liquidity, causing pain for many quant equity and statistical arbitrage strategies, as well as fundamental equity market neutral platforms. The velocity of the moves that occurred over that period, is what seems to have surprised managers the most; at its peak on 16th March, the VIX volatility index closed at 83, having been at a more normalised 15 only a month earlier. The latter part of March saw some stability return to markets due to an unprecedented monetary and fiscal response from central banks and governments across the world.

Against this backdrop, data from Aurum’s Hedge Fund Data Engine1 suggest that within the hedge fund industry as a whole, dispersion between the best and worst performers (measured by the difference between the 5th and 95th percentiles) surpassed levels Hedge Fund Data Engine observed in October 2008. The performance of multi-strategy funds was no exception to this trend; many finished the month flat and are on average up YTD, though there are some outliers that experienced double-digit losses.

Within quant equity market neutral and statistical arbitrage strategies, PMs that volatility-adjusted their position sizing earlier in the month, fared better than those that aggressively cut risk mid-month, and therefore did not participate in the modest recovery towards the end of the month. Short-term futures strategies benefited from higher realised volatility over the course of the month and were generally able to generate positive performance.

Dividend arbitrage strategies suffered as governments, predominantly in Europe, put pressure on firms to cancel dividends. Companies that chose to declare dividends were threatened with action that would prevent these firms from being able to access government assistance.

March was also a challenging environment for event driven strategies. The uncertainty that plagued equity markets in March caused merger spreads to widen significantly. Deal spreads remained wide through to the end of the month due to uncertainty about how corporate activity would be affected by the unprecedented drop off in consumer spending. Merger arbitrage managers have reduced risk and have rotated capital into shorter-dated deals with fewer barriers to deals closing on time.

Index rebalancing arbitrage strategies also contributed to losses during the month. Following the decision by S&P Dow Jones to postpone its quarterly rebalancing, managers had to close out positions and realise losses. This was the first time S&P Dow Jones elected to take this action, which took many index arbitrage managers by surprise.

Equity long/short funds finished the month down mid-digits on average, broadly in line with expectations given global equities measured by the MSCI World Index (USD) finished the month down over 13%. Net exposure for funds was obviously a key determinant of performance, though factor exposure also played a part. Growth and momentum continued to outperform value, while large caps outperformed small caps. In term of sectors, technology, healthcare, and consumer staples outperformed, while financials and energy understandably lagged.

Macro funds’ performance was largely positive and insulated losses elsewhere in the Aurum portfolios. The more directional and ‘bearish’ managers have performed best, with gains from long fixed income in the US, UK, Canada, Japan, NZ and China. Others traded equities tactically throughout the month, generating returns on the short side at the beginning of the month, before covering to realise gains, then going long in the final week of the month as pension funds rebalanced in to quarter-end and central bank stimulus helped support asset prices. Fixed income relative value strategies also benefitted from central bank intervention and generally recovered the majority of intra-month losses.

Aurum’s role is to deliver a return stream that is not market-dependent or beta-driven and diversification will always mean that we have both winners and losers in our portfolios. During March, Aurum’s portfolio construction enabled funds to absorb the extreme market events and, at the time of writing, all Aurum funds are indicating positive performance in April thus far.

Aurum remains attentive to the uncertainty that surrounds the spread of COVID-19 and is optimistic that its discretionary portfolios will continue to navigate the remainder of this year and beyond.


  1. Aurum’s proprietary Hedge Fund Data Engine database containing data on over 4,000 hedge funds representing in excess of $2.9 trillion of assets as at December 2019. Information in the database is derived from multiple sources including Aurum’s own research, regulatory filings, public registers and other database providers.