Our two hedged funds end October posting positive returns: SFRR (hedged Multi-strategy) returns +0.12% MTD (+22.21% YTD) and SFPG (Growth shares with hedges) was up +0.80% (+26.77% YTD). While SFQS (Quality Growth shares without hedges) fell -2.38% (+11.17 YTD), the MSCI World lost -2.51% in EUR (-6.26% YTD).
In October, markets rode the two main forces driving them: a positive market bottom backed by advances in vaccine investigation and Central Banks’ expansionary measures, and sharp corrections given the uncertainty surrounding the vaccine’s final launch. As mentioned in our previous commentaries, there are two main catalysers in stock exchanges: the development of a vaccine and the trillionaire USD injections in the economy.
As of the date of this commentary –November 9, 2020– although all US and global media have recognised Biden’s victory, Trump prefers to ignore the electoral results while markets disregard any turbulences this may cause. In fact, Biden’s victory, Trump’s refusal and a divided Senate (Republican majority is still to be confirmed) was the worst case scenario predicted by some analysts, but the truth is that the market bottom is much stronger than the political noise raging on the surface. With the elections over, vaccine advance announcements (which may have been withheld for electoral reasons: the big pharma companies get along better with Democrats) have been released and fiscal easing measures can be rapidly put in place without elections interfering (Republican and Democrat numbers were already quite close).
Another factor favouring bull markets is that Biden will most probably relax tensions in the US’s relationship with Europe and China: it is more than likely that the US will want to again lead the world instead of fighting against it.
We have managed this volatility in a very flexible manner in our portfolios. We started October with a low level of hedges, increased it as election day approached, and again lowered it as soon as market correction began when the first electoral results were announced. Our management of derivatives has continued to contribute positively to returns and to offer a solid protection to our portfolios, while our market thermometer accurately anticipated corrections.
Markets structure has been reshaped by the high number of derivative contracts traded and we have been developing the necessary technology and tools to adapt our investment strategies to the “new” markets which wholesale Central Bank intervention has given birth to. Ben Bernanke’s “Helicopter Money”, Mario Draghi’s “Whatever It Takes” and Shinzo Abe’s “The Three Abenomics Arrows” have indeed moulded financial markets. Understanding the macroeconomic climate and market structure is now more important than ever.
Our performance is based on the following three pillars, which have gained relevance this year:
- Investing in growing companies
- Efficient use of derivatives to decrease risks and capture excess returns
- Risk thermometer: flexible and dynamic management, based on factual observations of market risks and structure.
What to expect over the next few months? Gradual normalization of markets and economic trends, wide dispersion of results among Covid-19 winner and loser companies, changes in social and professional dynamics, uneven national recovery patterns depending on the countries’ political colour.
The two keys to a quick economic recovery are:
- Market and price freedom
- Legal certainty
Countries with the strongest commitment to these two principles will be the first to reach pre-Covid levels.