All-weather armoury: How multi-asset hedge fund Fulcrum is thriving amid 2020’s turmoil
Fulcrum Asset Management, a London-based multi-asset fund manager, has withstood 2020’s economic shock and continued unpredictability with an all-weather absolute return approach to trading and cross-asset view of markets.
The USD4 billion firm trades a range of diversified multi-asset funds, single asset portfolios and alternative beta strategies, managing about USD3 billion in its discretionary macro strategy, with USD1 billion in its quantitative vehicles.
“Our strategies are not bear market strategies – they are pro-cyclical in nature,” says Suhail Shaikh, partner and chief investment officer at Fulcrum.
Known for its multi-layered investment approach, Fulcrum’s expertise spans macroeconomic trading strategies, thematic equity investing, CTAs, carry investing, short volatility, behavioural finance and alternative risk premia – a well-rounded mix that Shaikh believes put the firm in good stead during Q1’s unprecedented market shock.
“When stock markets are going up 10 to 12 per cent a year, and the bond market has offered decent returns, people have questioned why they should pay absolute return hedge fund fees when they can get such great returns in traditional cheap markets,” he observes.
“I think you need one of these accidents, unfortunately, to remind people that those free returns from beta come with a risk, that suddenly they can evaporate two or three years’ worth of returns very quickly. The reality is that things like this do happen and will happen again.”
Since launching in 2004, the firm has tended to shun the 50/50 equity/bond balanced return portfolio, instead positioning itself with a 0.2 to 0.25 beta sensitivity to stocks.
“We have around a quarter of the stock market participation, but over the long term we’re offering similar returns with much lower volatility and better risk management.”
Trading the turbulence
Early on, Fulcrum suspected that the coronavirus outbreak was potentially far worse than the market had initially recognised, Shaikh explains. The firm’s expansive approach and cross-asset view of markets ultimately allowed it to build a wide range of trading ideas as markets grew increasingly turbulent as the Covid-19 pandemic quickly spread.
“We’re not an Armageddon-type fund, but we felt that there was enough risk, with options priced cheaply enough, to hedge against it,” he says. “We found a number of asymmetric ideas, where the prospect for gains was bigger than the downside, to implement in case things really got out of control.
“What really helped us during this period to protect capital was looking with a cross-market lens at equities, fixed income, currencies, commodities - everything together.”
The firm’s Diversified Absolute Return fund, a US ’40 Act strategy, is up 6.3 per cent so far this year, having gained 6.7 per cent in March – when other hedge fund strategies faltered - and 0.9 per cent in April. The Diversified Core Absolute Return strategy, a Luxembourg-domiciled SICAV, added 2.6 per cent in March and 0.4 per cent last month, to give it a year-to-date return of 1.4 per cent.
Fulcrum initially made money from selected FX and currency volatility bets, which had earlier seen 15-year lows in volatility for the yen and euro during February. Meanwhile, even as equity market volatility gathered momentum, there was considerable dispersion and dislocation between different markets reacting to the same news at different speeds, Shaikh explains.
“Rather than trying to predict how bad things would get, we looked at one market versus another, to see what had moved and what hadn’t. So therefore we could identify the risk reward in option A versus option B; we had views on the Australian dollar, the yen, precious metals, and expressed these views wherever options were cheap. We also had protection on equities.”
He continues: “The difference between some of our strategies is that in UCITS vehicles, you can’t trade commodities, and of course a lot of the trading opportunities were in the commodities space.
“In our US and Australian vehicles, where you can trade commodities, there were many option-driven ideas and opportunities that we were able to capitalise on. But even the slightly weaker performers who couldn’t have that commodity exposure were still up significantly, relative to the markets which were down massively.”
Reflecting on the fallout from March’s seismic market ruptures, Shaikh notes how Fulcrum’s “incredibly knowledgeable” team - most of whom worked together through the 2008 global financial crisis – drew on the expertise and team spirit fostered over the previous fifteen years.
“A lot of the playbook that we used, developed, and then refined after the 2008 crisis came back into the picture,” he explains.
Expanding on this point, he describes how thematic equities investing differs markedly from macro trading, as well as quantitative strategies and statistical arbitrage.
“You can’t just decide you want to do it and plough in - you need somebody who’s done it for 15-20 years and who can do it properly,” Shaikh adds.
“If you have access to the knowledge base of how CTAs trade, how risk parity funds trade, how quant portfolios react to volatility shocks; if you have all of the macroeconomic monitors to help you measure the pandemic, the economic impact, the consumer sentiment impact; you have the equity analysts, derivatives experts and option traders who can look cross-market to these sorts of opportunities, you are in a unique position.
“So we feel we have the right people, with the right skillsets, to best protect client capital and ideally make them some returns over this incredibly uncertain time.”
Building on this theme of uncertainty, Shaikh – who spent five years in the investment management division of Goldman Sachs before joining Fulcrum in 2005 - does not believe that the broader economic picture will become significantly clearer any time soon.
“There’s a lot of cheering happening right now, but the truth is we don't know how long we’ll be in lockdown and we don’t really know how we’ll come out of lockdown. Whether there will be a second wave or not depends to a degree on us knowing how much of the population has been infected,” he says. “There's a lot of uncertainty about all of these things.”
As for the prospects for Fulcrum’s strategy, Shaikh is buoyant despite the opaque market outlook.
He concedes the absolute return sphere, as well as the hedge fund sector as a whole, has struggled collectively over the past two or three years as equity markets continued to surge, with decidedly mixed performances in the industry ultimately attracting negative headlines and grumbles from investors.
But he adds: “We want to create an all-weather portfolio. We are not trying to build a portfolio that only makes money when the world implodes. If you simply create a tail-risk fund, the reality is that most of the time markets don’t blow up, and so you’ll be redeemed from sooner or later.
“That is by no means what we are trying to do - what we’re trying to do is make a decent equity-like return over the cycle, but with a very different risk profile,” he explains. “To do that we have to use an armoury of different options and defensive strategies.
“With stock markets down 20 per cent, for us to be up despite having 20 per cent of equities exposure, a lot of things have to go right.”