INSIGHT 27/07/2020

Aurum’s quarterly review – Q2 2020


Aurum’s discretionary portfolios enjoyed one of their strongest quarters to date, comfortably covering losses experienced in March. Performance ranged from between +4.6% and +7.9%, to bring year to date returns +2.0% to +6.0%.

The risk-on trend since mid-March continued until mid-June, fuelled by the unprecedented fiscal and monetary stimulus measures taken by governments and central banks across the world. The gradual easing of lockdown restrictions in many countries and stronger-than-expected US payroll data further supported risk assets early in June, before renewed Covid-19 concerns saw sentiment shift. Markets quickly fell back, while volatility ticked up sharply. One wonders how much this is a sign of things to come, with markets reacting sharply to disappointing news flow.

All underlying hedge fund strategies were positive for the quarter, with Aurum’s multi-strategy funds leading the way. Those that were the most negatively affected in March were the best performers over Q2 as spreads in fixed income, merger arbitrage and volatility normalised significantly over the quarter. Fundamental equity market neutral platforms performed well as a record amount of corporate refinancings and the repricing of company fundamentals has increased the opportunity set for the strategy.

Having been significantly impacted by the aggressive deleveraging seen in Q1, statistical arbitrage strategies enjoyed a particularly noteworthy quarter. These strategies are typically dependent on elevated levels of volatility and volume to be successful, and Q2 proved to be an exceptionally good environment for these strategies. June was a particularly strong month for reversion strategies that capitalised on the uptick in volatility in the middle of the month. Short-term futures strategies also benefited from higher realised volatility.

Macro funds’ performance was largely positive. Directional macro strategies were the standout performers as depressed asset prices from the start of the quarter and the elevated level of volatility provided a number of mispricings and opportunities. Those with an emerging market bias benefitted from the rebound in emerging market assets, with government bonds in countries such as Brazil, Mexico and South Africa all recovering over the quarter. Developed market strategies benefitted from curve steepening in the US and the UK in May, as well as long equity index positions. Commodities trades were also profitable, as risk on sentiment and expectations of further supply cuts saw oil prices rebounding strongly, almost doubling in value over the quarter. Long silver positions also added to gains, catching up with gold, which had experienced notable demand following the aggressive easing measures by central banks.

Fixed income relative value strategies also had a very strong quarter, with outsized returns in April, capitalising on a range of mispricings from March. Gains were reported across a broad range of strategies, including cash/futures basis, yield curve steepeners, and rates volatility RV.

Event driven strategies benefitted from a normalisation in markets. It was a fruitful quarter for merger arbitrage as several high profile deals completed and deal spreads tightened more generally. There was, however, an increase in deal-breaks, the most noteworthy was a deal in the technology sector that detracted from performance in May. It was a very strong quarter for index rebalancing strategies; the MSCI completed its semi-annual rebalance in May, which was the largest on record due to the recent turnover and market activity, and the S&P completed its delayed quarterly rebalance in June.

Equity long/short funds enjoyed a strong quarter as global equities recovered and managers felt more comfortable increasing both net and gross exposures. A key theme was the “new normal” of remote working, as valuations of IT services, electronic payments, and software security companies rerated dramatically over the quarter.

Aurum’s portfolio construction helped its funds absorb the extreme market events during March and provided a solid platform to be able to capitalise on a number of opportunities during Q2. Aurum’s approach of trying to generate return streams that are not beta-driven, while focusing on minimising drawdowns, has enabled its portfolios to navigate through the first half of 2020. While the uncertainty that surrounds the spread of Covid-19 continues, Aurum remains optimistic that its discretionary portfolios will continue to successfully navigate the second half of this year and beyond.