Brief: This year’s Covid-19 stock market upheaval has revealed an “Achilles’ heel” in quantitative hedge fund models that use traditional factors such as momentum and value, as machine-based strategies have struggled against “unique new drivers of stock returns that don’t fit the academic models”, says Man FRM. 2020 proved to be a “blow to the head” for factor-based quantitative equity analysis, Man FRM observed in its ‘Early View’ commentary on Wednesday. Quant equity hedge funds which trade traditional factors have struggled amid the dominance of a new “Covid factor” this year, with “near-consistent disappointment” in the form of “losses at the start of the year, losses in the market sell-off, losses through the summer and, to compound matters, losses in November.” The note, written by Keith Haydon, CIO of Man Solutions and Adam Singleton, head of investment solutions at Man FRM, explored how shorter-term market upheaval – such as the dot-com crash of the early 2000s and the 2008 Global Financial Crisis – can often render factor labels like value and momentum redundant as they exhibit negative correlation during shocks. “Trying to force stock behaviour into one box or another can be a good idea in normal times, as it lets models identify distinct baskets of stocks out of a large universe that best explain each factor,” they wrote.
Brief : KKR & Co. is nearing a deal for a portfolio of U.S. warehouses, a sector that has received a boost during the pandemic as consumers increasingly turn to e-commerce. The transaction, which may close as soon as next week, values the roughly 100 properties at more than $800 million, according to a person with knowledge of the matter. Barclays Plc is arranging about $700 million in commercial mortgage-backed securities to finance the deal, which includes assets in markets including Atlanta, Chicago, Dallas and Baltimore, said the person, who requested anonymity because the talks are private. Representatives for KKR and Barclays declined to comment. While hotels and retail properties have been battered by the pandemic, investors have flocked to warehouses to capitalize as an e-commerce boom that was flourishing before the pandemic accelerates with shoppers increasingly buying from their couches. The warehouse portfolio set to be acquired by KKR is part of a broader wager by the company, increasing its exposure to the sector to about 30 million square feet. In recent months, through various funds, it has snapped up properties in metropolitan areas including Atlanta and Phoenix.
Brief: Investor appetite for emerging markets has been on the rise, boosted by hopes of a vaccine-led recovery from the coronavirus pandemic, and by Joe Biden’s victory in the US presidential election. According to a recent survey from Bank of America, half of fund managers favour emerging markets more than any other asset class for 2021. The MSCI Emerging Markets Index has risen by nearly 13 per cent in November. Emerging market debt is also growing in popularity, with EPFR data showing flows of USD3.5 billion into EM bonds during one week in November, the fourth largest weekly inflows ever. “EMD remains a relatively popular asset class for institutional investors globally,” writes the emerging markets debt team of US asset manager Eaton Vance. “The irony, however, is that fund flows in the sector are still driven by index-based strategies that ignore fundamentals, even as many investors have come to recognise just how crucial individual EM country fundamentals will be in surmounting Covid-19 challenges.” Benchmark-based approaches “may be sub-optimal”, warns Eaton Vance, adding that indexes are often highly concentrated, with ten countries accounting for 80 per cent of JP Morgan’s Government Bond Index-Emerging Markets’ index weighting. The asset manager, which is due to be acquired by Morgan Stanley, says: “This kind of concentration of a relative handful of larger EM issuers has been a major source of the index’s historical volatility… In contrast, outside of the GBI-EM there are 70 investable markets, with approximately USD1.1 trillion worth of local-currency market capitalisation.”
Brief: Arena Investors, LP ("Arena"), an institutional asset manager, today announced the final close of Arena Special Opportunities Partners I, LP and Arena Special Opportunities Partners (Cayman) I, LP with total committed capital of $519 million. The close exceeds the $300 million target that was set for the fund, which was launched in March. Arena's latest Fund invests in asset-backed, credit-oriented investments presented by the economic disruption and market dislocations from the COVID-19 pandemic. The fund has a flexible, global mandate with a majority of investors based in North America and Australia. "With an investment strategy grounded in our 20 plus years of experience investing globally across divergent economic downturns, Arena is well-positioned to find value in all economic environments, especially today's," said Dan Zwirn, Arena Investors Chief Executive Officer and Chief Investment Officer. "The COVID-19 pandemic has caused newfound disruption to both society and the global economy and moved trends we were already seeing forward by five to ten years, especially in the industries that have been most heavily impacted. While much has changed, our flexible approach has allowed us to adjust quickly and continually identify attractive opportunities to deliver value to our investors."
Brief: Billionaire hedge fund manager William Ackman, who cautiously hedged his portfolio before the historic market sell-off in March, has extended his gains to 62.8% for the year so far. Last month, Ackman’s publicly traded Pershing Square Holdings portfolio gained 13.4%, lifting the $11.4 billion portfolio to a net gain of 62.8% in the first 11 months of 2020, according to a performance review. Ackman recently told investors that the firm is having its best ever year and that he is “bullish” for 2021. But he warned of possible volatility ahead as the coronavirus continues to take its toll. To guard against swings, Ackman said he put on a new hedge -- roughly one third the size of the one he put on earlier this year -- as corporate credit spreads are very tight. He earned $2.6 billion in profits from the first hedge and plowed that money back into the market, buying more of the stocks he already owns at cheaper prices. This summer Ackman raised the biggest blank-check fund ever helping swell his firm’s total assets under management -- including all hedge funds and Pershing Square Tontine Holdings -- to $17 billion. The average hedge fund gained 1.2% through the end of October, according to Hedge Fund Research. November data is still being compiled.
Brief: Services company stocks, especially those linked to travel and leisure, have room to rocket higher next year as consumers venture out again after spending on goods but cutting back on services during the pandemic, hedge fund manager Dinakar Singh said. With vaccines against Covid on the horizon, Singh, who runs Axon Capital, expects a flood of pent-up demand for travel to see far-flung business clients and employees, visit grandparents and take vacations. “Things are going to be explosive,” Singh, who headed Goldman Sachs’ proprietary trading unit before forming his own fund in 2005, said at the Reuters Global Investment Outlook Summit. “There well could be a huge surge of pent up demand for activities that have been restricted because of the virus.” After personal savings rates climbed early in the pandemic, stocks broadly recovered. The Standard & Poor’s 500 index has gained 12% since January and has rebounded 60% from its March lows. Real estate values also have increased, so many consumers should be ready to splurge if they manage to get through the crisis with their jobs intact. While business travel may ultimately be reshaped by video conferencing, markets still may underestimate the near-term demand for travel and entertainment, Singh said.