Adam Moir
INSIGHT 29/04/2021

Aurum’s quarterly review – Q1 2021

Adam Moir Product Specialist

All of Aurum’s managed funds and bespoke accounts generated positive returns in the first quarter of 2021. Performance for Aurum’s commingled funds of funds $US classes ranged from +0.5% to +3.0% for Q1.

Risk assets advanced over the quarter, supported by the initial roll-out of COVID-19 vaccinations across much of the world and confirmation of the $1.9 trillion stimulus package in the US. Volatility increased during the middle of the quarter as rising bond yields and inflationary concerns weighed on investor sentiment, though this provided a healthy backdrop for a number of Aurum’s underlying hedge fund strategies.

Multi-strategy funds drove performance over much of the quarter, despite the challenging start made by fundamental equity market neutral platforms. The short squeeze in a number of stocks favoured by retail traders during the last week of January impacted a limited number of teams, although the subsequent deleveraging was more widespread. Periods like this typically create significant pricing dislocations and at some point capital steps in to take advantage of extreme relative value and arbitrage opportunities. Those that were hardest hit in January bounced back the strongest in February. Returns were more muted towards the end of the quarter as rising interest rates and sharp factor rotation from growth into value weighed on returns. Elsewhere, merger arbitrage, index rebalancing, commodity trading and credit relative value strategies also contributed to the strategy’s positive results.

The first quarter was mixed for macro strategies. Traditional macro strategies benefited from reflationary themes via yield curve steepening in the US, as investors bet the Fed would be forced to raise interest rates earlier than previously expected. Commodity strategies were generally well-positioned to benefit from the increases in crude oil and copper prices.

Performance from traditional fixed income relative value strategies was muted; the speed and extent of the moves in interest rates created a challenging environment as swap spreads tightened during February, which detracted from returns. Macro relative value and inflation trading were generally more profitable.

Event driven strategies were positive over the quarter with positioning in SPACs additive in January, before a notable sell-off in a number of names during February. It had become an area of increasing focus for “hot” money and the issuance of SPACs has all but dried up since. In general, the opportunity set for merger arbitrage was healthy, with spreads at attractive levels and strong deal flow providing a number of opportunities. Index rebalancing trading was also profitable despite the large factor rotation impacting positioning.

Systematic strategies were mixed. Volatility remained elevated throughout the quarter and continued to provide a fertile trading environment for short-term strategies, particularly equity statistical arbitrage and machine learning, while longer-term strategies were challenged by the factor rotation during February.

Aurum’s underlying equity long/short funds were negative over the quarter. Losses were driven by the continuation of the rotation from growth into value in the US and Europe. Asia-focused managers were more mixed – gains in real estate and pharmaceuticals were largely offset by losses in the consumer discretionary sector.

The performance of the Aurum portfolios was particularly encouraging in Q1, especially when one considers the deleveraging and choppiness in markets during the quarter. Investing with managers with a trading mind-set, allowed the portfolios to start the year strongly and manage risk as inflation concerns gathered pace. Aurum is always looking to increase the number of diversified alpha streams in the portfolios so it was pleasing therefore to add a number of new positions over the quarter, and continue to strengthen them going forward.