Following a good start to the year, ALTIN’s NAV performed well during the first two months of the second quarter (+0.34% MTD as 30.04.2015, +0.79% MTD as 31.05.2015) and suffered in June (-1.94% MTD, estimate) as global financial markets declined dramatically and volatility increased towards month-end over the escalating uncertainty over a possible Grexit.
While the months of April and May were relatively benign, June was a different story. Nonetheless, ALTIN’s portfolio outperformed traditional asset classes over a month that was characterised by a positive correlation of bonds and equities, as illustrated by the MSCI World being down -2.5% in June and 10yr bonds in the US and Germany selling off about 2% on average.
With regards to the ALTIN portfolio, the main performance drivers for the second quarter were equity-based strategies, primarily Equity Hedge followed by Event Driven and Relative Value. Noteworthy detractors for the quarter were Macro and Protection strategies.
In Equity Hedge, geographical and sector diversification were beneficial for the quarter, with the main positive contributions coming from exposure to a Chinese equity specialist and from a biotech sector specialist. Elsewhere, there were positive contributions from bottom-up stock pickers across Europe and the US. Generally speaking short books detracted from performance for Equity Hedge managers during the second quarter. A large majority of stock pickers believe that future cash flows are being discounted inappropriately due to the prevailing low rates and thus maintain their short exposures in anticipation of a negative reaction by markets once the Federal Reserve finally decides to raise rates.
M&A within the healthcare sector remains a meaningful driver of performance for Event Driven managers. Following the large wave of tax inversions, all companies that inverted report very low tax rates and are in a powerful position to continue to make acquisitions. Additionally, the Supreme Court of the United States upheld the prevailing law that federal subsidy payments on federally run exchanges are legal, ending the uncertainty over the past year and keeping the Affordable Care Act intact. This will give more visibility to companies and allow them to pursue strategic M&A activity.
Within Relative Value, multi-strategy funds continue to perform positively with the bulk of the risk budget allocated to fundamental and quantitative equity strategies. Healthcare and technology equities have provided a large opportunity set for multi-strategy funds in Q2 from both the long and short sides. The allocation to credit and fixed income remains disappointing in absolute terms but rather resilient given the higher volatility in Treasuries. A position with a distressed credit specialist focusing on Emerging Markets provided a positive stream of returns for the quarter.
Macro and Protection strategies were the main detractors this quarter. Discretionary managers posted mixed returns and CTAs were down across the board as trend following strategies lost on equities, fixed income and commodities and consequently erased most of the gains generated in Q1. Essentially, trend following strategies suffered from the rising correlation between fixed income and equities. For discretionary managers the sell-off in stocks was the major detractor as they held long positions in European, Japanese and US indices. From a currency perspective, the decline of the USD over the period has also added to the relative underperformance of macro managers, which were mostly positioned with long dollar trades. Protection strategies also detracted as markets didn’t sell off violently in a widespread panic and in fact even rebounded during the quarter, stopping out short equity positions. Being long USD and long volatility bias also detracted from the performance of Protection funds.
With regards to individual positions, one of the best performers for the quarter was a value-biased stock picker based in Hong Kong. Chinese equities rallied strongly in April following the central bank lowering reserve requirements and outlining a programme to improve demand for local government debt. Interestingly, China A-shares had already rallied strongly in Q1, but what changed in Q2 was the Hong Kong H-shares surge fuelled by a significant increase in retail investor volume. However, after posting a very strong performance, Chinese equity indices suffered a sharp correction in June sparked by concerns of an IPO oversupply and bubble-like valuations. Initially officials didn’t comment, however strong action towards the end of the month drove a recovery across Chinese indices. Elsewhere biotechnology has continued to be a strong contributor, as valuations remain very mixed across the sector with some companies trading at extremely high valuations while commercially profitable companies remain relatively cheap for some stock pickers.
In terms of portfolio activity the portfolio is expected to remain stable for the foreseeable future as no large reallocations are planned which would change ALTIN’s risk profile. Profits were taken on some successful long ideas and proceeds invested in tail protection with a long volatility profile in the US and in Asia. Additionally, a macro manager with a thematic approach on emerging markets with the ability to play the zone from the short side was added. Following the strong rally in biotech a long-biased manager was replaced with a market neutral healthcare specialist. The relative liquidity of the portfolio should be beneficial in order to seize new investment opportunities arise going forward.
