Aurum’s quarterly review – Q3 2023
Performance for Aurum’s commingled fund of hedge funds $US classes ranged from +1.7% to +2.4% in the third quarter of 2023, against a backdrop of negative performance for risk assets. Multi-strategy and macro strategies drove performance as volatility and dispersion returned to equities, while long dated yields started to rise. Market sentiment was largely swayed on expectations that interest rates may remain elevated for longer. The “dot plot” released post the US Federal Reserve meeting, indicated that 12 FOMC participants anticipate another 25bps interest rate hike in 2023.
The contribution to performance by Aurum’s multi-strategy funds was positive overall. In the early part of the quarter, positive performance was driven by allocations in macro, fixed income, and commodity trading, with quant and equity trading largely detracting. As the quarter progressed, increasing dispersion in equities provided a healthy environment for fundamental equity market neutral strategies, with allocations to macro, event-driven, and fixed income strategies also contributing.
Towards the end of the quarter, quant allocations also began to play a more significant role in driving positive performance, alongside allocations to macro, event-driven, and fixed income.
It was a positive quarter for macro, which contributed to performance overall. At the beginning of the quarter, easing inflationary pressures benefitted US curve steepening positions, which had previously weighed on returns in in past months. Long positioning in precious metals, short positions in the US dollar and Japanese government bonds, contributed to performance. Short US equity positions slightly detracted.
As the quarter progressed, nearly all underlying macro funds continued positively. Primary drivers were hawkish fixed income themes, evident in curve steepening trades and short fixed income positioning. Additionally, the portfolio’s short equity and long energy positions, as well as short positions on Japanese government bonds, contributed positively. On the flip side, long positions in agricultural commodities and precious metals slightly detracted from the overall performance.
By the end of the quarter, the macro funds maintained their positive momentum. Hawkish fixed income themes continued to drive performance. Short positioning in equities and the Japanese yen further added to returns. However, long positions in wheat and precious metals detracted.
Aurum’s systematic strategies had positive overall performance during the third quarter with high dispersion between managers. Equity statistical arbitrage strategy was largely positive, with managers benefitting from the elevated levels of volatility. Machine learning strategies were also positive, while short-term futures strategies, commodity-focused systematic funds and index rebalancing strategies detracted.
Aurum’s event driven funds contributed positively during Q3. The quarter started off negatively, impacted by volatility in merger spreads and a subdued deal flow, a typical trend during the mid-summer months. A deal in the semiconductor sector experienced significant volatility, as one of the parties terminated the deal immediately after it had received regulatory approval. The deal break negatively impacted performance, though losses were tempered by positive regulatory announcements about a deal in the gaming sector.
However, as the quarter progressed, positive momentum for event-driven funds was firmly established. A significant highlight was the UK’s Competition and Markets Authority’s decision to greenlight a previously blocked acquisition in the gaming sector, albeit in a restructured form. This, coupled with other favourable regulatory developments across sectors like pharmaceuticals, gaming, and software, led to a tightening of spreads. The announcement of a notable deal in the software sector further underscored the active deal-making environment, rounding off the quarter on a high note.
Equity long/short funds had a mixed quarter, though contributed positively overall. The quarter started positively, with the funds benefiting from the overall strength of global equities, notably with Japan-focused managers outperforming their European and US counterparts. Despite some headwinds from weakening global equity markets, the funds were resilient, generating alpha primarily through strategic short positions in communications and real estate sectors. However, challenges arose from losses in net long positions, particularly within the IT, financials, and consumer discretionary sectors. These losses were somewhat offset by gains in short Japanese equity positions.
This Post represents the views of the author and their own economic research and analysis. These views do not necessarily reflect the views of Aurum Fund Management Ltd.. This Post does not constitute an offer to sell or a solicitation of an offer to buy or an endorsement of any interest in an Aurum Fund or any other fund, or an endorsement for any particular trade, trading strategy or market. This Post is directed at persons having professional experience in matters relating to investments in unregulated collective investment schemes, and should only be used by such persons or investment professionals. Hedge Funds may employ trading methods which risk substantial or complete loss of any amounts invested. The value of your investment and the income you get may go down as well as up. Any performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable indicator of future results. Returns may also increase or decrease as a result of currency fluctuations. An investment such as those described in this Post should be regarded as speculative and should not be used as a complete investment programme. This Post is for informational purposes only and not to be relied upon as investment, legal, tax, or financial advice. Whilst the information contained in this Post (including any expression of opinion or forecast) has been obtained from, or is based on, sources believed by Aurum to be reliable, it is not guaranteed as to its accuracy or completeness. This Post is current only at the date it was first published and may no longer be true or complete when viewed by the reader. This Post is provided without obligation on the part of Aurum and its associated companies and on the understanding that any persons who acting upon it or changes their investment position in reliance on it does so entirely at their own risk. In no event will Aurum or any of its associated companies be liable to any person for any direct, indirect, special or consequential damages arising out of any use or reliance on this Post, even if Aurum is expressly advised of the possibility or likelihood of such damages.