Aurum’s quarterly review – Q3 2022

Multi-strategy

Multi-strategy funds contributed positively to all portfolios for the quarter. After a strong rally in equity and bond markets in July, both sold off sharply in August and September. Fundamental equity market neutral team strategies successfully traded through this period and also generally seemed to navigate the ongoing factor rotations between growth and value. Quant, macro, energy trading and fixed income relative value were generally additive.

Macro

Macro funds continued to drive performance over the quarter, having taken a cautious approach in July as markets started to price in interest rate cuts in 2023. In August, the Fed reiterated that its priority remains to fight against inflation rather than supporting growth, thus supporting a number of macro themes that had been profitable for much of the year. The US dollar’s continuing strength was a noteworthy source of returns as were short rates and curve flattening positioning. Towards the end of the quarter, the new UK government’s unfunded fiscal package caused significant volatility with sterling falling sharply and Gilt yields increasing dramatically. This forced the Bank of England to take the unusual step of intervening to avoid a melt-down in the pensions space. While most managers had limited positioning, some were caught wrong-footed by the move, which detracted from performance. Elsewhere, shorting “big tech” stocks continued to add to returns as well as short Canadian banks.

Systematic

Systematic strategies invested in by Aurum’s funds delivered mixed results over the quarter. Equity market neutral funds benefited from volatility in equity markets, particularly after the 21^st September meeting of the Federal Reserve. Volatility strategies contributed positively to performance. A build up in storage volumes resulted in a huge fall in natural gas prices. When combined with oil prices losing ground as demand dampened, one of the commodity-focused funds Aurum invests in experienced moderate losses.

Event driven

Event driven funds contributed to performance over the quarter. A merger between healthcare companies, widely held in merger arbitrage funds, received regulatory approval – which supported performance. Merger arbitrage spreads widened towards the end of the quarter, but managers have generally de-risked deals which are in advanced stages and have used volatility as an opportunity to add to positions. Elsewhere, index rebalancing was additive.

Equity long/short

Equity long/short funds invested in by Aurum generally detracted marginally from performance in a highly volatile period for global equities. The rally in July was short-lived, Jerome Powell’s hawkish comments at the Jackson Hole Symposium caused most developed equity market indices to sell off significantly towards the end of August and into September. Against this backdrop, performance was encouraging with Japan-focused managers Aurum invests in were marginally positive overall, US/Europe-focused funds finished the quarter flat.

Conclusion

While there are signs of a slowdown of inflation, interest rates continue to rise and there are growing signs of an imminent global recession. This has caused significant headwinds for risk assets as well as fixed income. It is encouraging that the Aurum portfolios have so far not only protected capital, but also seized on the various opportunities presented so far in 2022. Given that uncertainty persists, we continue to believe that Aurum’s bias towards trading-orientated managers should ensure the portfolios will continue to respond in a similar fashion as we approach the end of the year and into 2023.