Investment

The year people beat the machines

by Cedric Dingens

2020 was a particularly good year for our alternative investment funds. All strategies – Long/Short Equity, Global Macro and Absolute Return – amply outperformed the financial markets and their benchmarks.

A rogue year

The year unfolded as a series of rogue waves, one-offs that plunged the world into multiple uncertainties.

Investors’ nerves were sorely tried, not just by the Covid-19 pandemic, which shut down economies across the planet, but also by the chaotic Brexit negotiations and the dystopian novel that was the US presidential election, which has only now come to its conclusion.

All of which explains why 2020 marked the resurgence of active portfolio managers and talent, after an 11-year bull market that had given computer-managed quant or index funds an easy ride.

Our winning allocations in 2020

Computer algorithms use historic market data to extrapolate behavioural rules and attempt to predict future trends. In this unprecedented year, with markets on a roller coaster ride and massive sector rotation, it is easy to see why quantitative managers and index funds struggled to stay on track. In contrast, Notz Stucki’s alternative strategies fulfilled their protective function, while also generating above-average returns. Our decisions of allocation underlay this success.

  • China. We had heavily overweighted the Chinese market and captured the full force of its rebound. Unlike the world’s other leading economies, which suffered the full force of lockdown measures, China quickly overcame the health crisis and was able to play the world’s saviour, churning out masks and returning to economic growth.
  • Long Short Equity. Last year’s volatility was generally good for long/short strategies, which successfully played both bull and bear runs. But while this was a good year overall for stock markets, which quickly made back March’s losses, results varied widely from sector to sector. Managers needed to pick the right horse and react fast to fast-moving events. 2020 felt very different if you were an airlines rather than a tech giant… In this environment, we profited from our preference for multi-sector funds and dynamic allocation rather than funds specialising in a narrow theme.
  • Global Macro. Long ignored because of their disappointing performances during the bull market, Macro funds bounced back in 2020, as volatility surged and star portfolio managers in the category seized the chance to place their bets and prove their talent.

Long-term commitment bears fruit

As 2020 has once again shown, there are portfolio managers with talent, star managers who can generate alpha and regularly outperform their peers. The challenge is to find them, pick them carefully and combine them in high-performance multi-manager portfolios. This has been our area of expertise for over 50 years.

It is a demanding business that needs specific skills. These cannot be improvised but require real commitment over the long term:

  • Perfect understanding of the strategies being used. Hedge fund managers apply a wide range of complex techniques and use sophisticated financial instruments. Picking managers and building a multi-manager portfolio therefore demands that our management teams perfectly understand the strategies being implemented, so they can judge whether they are valid and right for current market conditions.
  • Human factor is key. In the finance industry, often fixated on figures, our long years of experience have taught us that it is the human factor that counts. This is why, as well as rigorous quantitative analysis, we also carry out an in-depth qualitative analysis. We meet each of our managers, so we can get to know their teams, see how they are organised and understand their motivations. One of the criteria we always check is that they are personally invested alongside their customers, which ensures their interests are aligned.
  • Know the market. Unlike most traditional funds, hedge fund managers often voluntarily restrict the size of their funds. By keeping them to a manageable size they can get better performances as their strategies generally work better when the scale of bets is not too large. The good hedge funds are quick to close their fundraisings and it is therefore essential to have an excellent network of contacts to know when a new fund is being launched. Over 50 years, we have built a unique reputation in our market and are often one of the first doors these managers knock-on when they are starting up a fund.

What strategies for 2021?

With markets at highs, economies still shackled by the pandemic and a new president in charge of the world’s biggest economy, there are plenty of uncertainties to be going on with. Markets may well, then, remain volatile, prey to the jitters of investors.

Hedge funds may therefore again come to the fore. What will be the winning strategies? It is too early to say, but one thing is sure: it will be helpful to have an experienced partner with an established reputation.

 

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. Notz Stucki provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the Notz Stucki group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. 

© Notz Stucki Group

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