Liquid Alt Funds in 2020

The roller-coaster market ride of 2020 was a great testing ground for the recently created category of ‘liquid alt’ funds. Here are those alternative strategies that stand tall at the end of the ride.

Table A

The data supplied to us by Fundata in Tables A and B shows the most remarkable performer to be Wavefront Global Diversified Investment Class F. At the end of the two negative months of February and March 2020, it managed to produce a positive return of 23.4%, at a time when the S&P 500 and S&P/TSX were both down by 30%.  After that, from April to the end of 2020, it managed to add another 8.7%, finishing the one year from February 1st, 2020 to January 31^st, 2021 with 34.2%. 

All the funds in Table A managed to finish the troubled months of February and March 2020 in positive territory. Other remarkable players in that period are Waypoint All Weather Alternative Fund F (2^nd place), Arrow Global Advantage Alternative Fund F (8^th) and CI Munro Alternative Global Growth Fund  F (10^th). The CI Munro fund managed to stay just above water through the turmoil and finished the one-year-period with a 36.7% return.

In Table B, we witness funds that suffered significantly in the storm, while many didn’t manage to cover their losses. If we take for example the Friedberg Global-Macro Hedge Fund U$ (1^st place), it did not quite manage to recover the whopping loss of 47.8% at the end of the downfall, subsequently recovering 86.6% t the end of 2020. But even that was not enough to cover the loss, since the fund would have rather needed a return of 91.4% to accomplish that. It ended the one-year period with a negative -2.5%.

Table B

Other funds, though they have suffered in the market drawdown, have managed to pull themselves back up successfully. It is foremost the case for Picton Mahoney Fortified Active Extension Alternative Fund F (5^th) and Venator Alternative Income Fund F (6^th). The first fell by -25.7%, but finished the one year with a comfortable 15.1% gain, the other one, fell by -21.8%, but pushed itself back up to a 7.7% return. 

Choosing The Right Strategy
At the outset, one could expect all alt funds to show, on the one hand, strong resistance in a down market, falling significantly less than the major stock market indices, and on the other hand a more subdued rise in the market’s recovery. In other words, one would want them to show less volatility than stock indices. But that is a misunderstanding. Some funds are designed to do just that, but others, not. “An investor needs to fully understand the alternative category in terms of the different volatility strategies it offers. All strategies are not necessarily low-volatility,” warns David Picton, president, CEO and portfolio manager at Picton Mahoney Asset Management.

Picton Mahoney’s portfolio lineup is a very good illustration of this advice. The firm’s Fortified Active Extension Alternative Fund F listed in Table B, is an equity fund designed with a beta 1 expectation, meaning that it will closely correlate the equity market’s ups and downs while trying to generate positive alpha by using tools typical of the alternative category like shorting and leverage. And that’s exactly how the fund behaved. An investor who doesn’t want to suffer the roller coaster ride of equity markets should avoid such a fund and rather chose another one like Picton Mahoney’s Fortified Market Neutral Alternative Fund F (not in the Tables) which is designed to exhibit a beta of 0. Or he could invest in the Wavefront Global Diversified fund which is designed “to be negatively correlated to stock markets during negative market stress and to be uncorrelated during a bull market,” highlights Robert Koloshuk, managing principal at Wavefront Global Asset Management.

Picton Mahoney’s fund managed to keep its head above the water by about 2% through the two months of February and March 2020 and finished the year with a positive 13% return. It did so by applying a systematic long and short strategy in the sole category of equities.

Ian Tam, Director of Investment Research for Morningstar Canada, goes further, adding that “due diligence in the liquid alts space is imperative. Unlike traditional mutual fund categories, we’ve found that the risk and returns of funds in liquid alt subcategories are generally non-homogenous, and hence a side-by-side comparison of vehicles will not necessarily point to a clear-cut winner.”

Model-Driven
Wavefront’s remarkable performance stems from a very different approach that integrates different factors (momentum, carry trade, deep value) across a highly diversified asset class comprising equities, currencies, global sovereign bonds and commodities (agro, energy, metals). 

“We didn’t foresee the March drawdown, admits Koloshuk; still it was not a shot out of the blue. When markets were reacting to information about Covid, our model responded to the evolution of price changes and adjusted accordingly.  In the recovery, the model picked up that prices would normalize, and it readjusted.” A very interesting feature of the fund is that equities barely contributed to the strong rebound of the fund, only by 3.6 percentage points. The main contributors have been agricultural commodities by 10 percentage points, along with currencies and commodities, confirming Koloshuk’s claim that the fund is uncorrelated even to bull markets.

Waypoint’s All Weather Alternative fund is concentrated exclusively in Canadian equities, hedged with short and long options. It even avoids the major sectors of energy and materials. “We try to do only a few things very well,” comments Max Torokvei, CEO and partner of Waypoint Investment Partners, who adds that the firm’s strategy of concentrating only on short and long volatility is unique in Canada. The fund uses a portion of the income from dividend stocks to purchase small quantities of put options that act as insurance on the whole portfolio.