Alternative Investments

Markets’ reaction to the Covid-19 pandemic triggered a major liquidation in risk assets from February into March. This combined with the failure of talks between Russia and OPEC to halt falling oil prices to cause one of the fastest stock market falls in history. Indeed, the declines were so sharp that New York Stock Exchanges circuit breakers were triggered three times in a single week in early March.

The massive policy response from global central banks was successful in halting and then reversing market losses. The recovery quickly gathered pace, and in Q2 2020 the S&P500 delivered its best quarterly performance in more than 20 years.

Trend following hedge fund strategies had to keep pace with rapid market declines and recoveries during the year. They began 2020 heavily skewed towards risk assets and so were exposed to the Covid-19 shock and market sell-off, before quickly turning their books onto the defensive. The record stimulus from central banks whipsawed this defensive posture but, again, managers reacted and recorded a strong December by participating in the risk-on markets.

Managers following high Sharpe ratio equity statistical arbitrage and mean reversion strategies had a similarly interesting year. These managers contended with a liquidation in Q1 2020, first triggered by selling on news that several US indices were cancelling their March rebalancing, and then by leveraged players dumping risk into the markets. However, in echoes of conditions during the ‘quantquake’ of August 2007, a period of record rebound meant that many managers had opportunities to capitalise.

Equity market neutral strategies had a difficult year with several factors losing money – including multi-year laggard value which continued to suffer – until a reversal of fortunes was triggered by the announcement of a successful Covid-19 vaccine and the result of the US election. Most traditional value strategies experienced a rally into year-end. Momentum strategies continued to profit but not without issues of their own as they witnessed two rapid, multi-standard deviation sell offs: one from May into June and another associated with vaccine announcements later in the year.

The ‘Covid-19 factor’, a basket of stocks that either benefitted from or suffered because of the lockdown and working from home measures taken across the globe, was an important driver of cash equity market neutral trading throughout the year.

ADIA’s Alternative Investments Department (AID) completed more transactions in 2020 than ever before, displaying its agility and maintaining a high operational tempo to capitalise on opportunities in a volatile, fast-moving market.

In 2019, AID reorganised its traditional hedge fund strategies into two distinct portfolios, Diversifiers and Return Enhancers, to enhance its allocation processes and increase visibility across its investments. This new structure proved advantageous during a year that highlighted the importance of flexibility and speed of execution.

During the early phases of the Covid-19 pandemic, AID’s large allocation to Diversifiers ensured the portfolio was well positioned to manage market swings, and the Department was also able to move quickly and at scale to support existing relationships and allocate to new managers. It is often during times of turmoil that capable managers excel and, by being ready to deploy capital during the various market dislocations of 2020, AID was able to both cement existing relationships and form new ones.

The Department’s Emerging Opportunities mandate, which sits outside the main hedge fund allocation, made several new investments during the year, expanding its insurance-linked strategies portfolio and building a diversified set of royalties investments. The team will continue its research into sources of return with low correlation to traditional asset classes that otherwise would not fit into ADIA’s portfolio.

Looking ahead to 2021, AID will continue to optimally position its portfolio in order to generate returns uncorrelated to more traditional assets classes, providing diversified and enhanced risk adjusted returns to ADIA’s overall portfolio. The Department will maintain its focus on working with both established and new funds, as well as top tier managers, particularly those with clear focus on repeatable processes, state-of-the-art execution and strong data capabilities.