Financial Alternatives
Hedge funds were handed a breadth of opportunities in 2021, as economies continued to recover from the deepest and sharpest global recession since the 1940s. The resulting elevated, and often unpredictable, volatility led to positive performance for the majority of managers.
Funds with exposure to “risk-on” assets performed strongly as equity markets regularly scaled new all-time highs and commodity markets (excluding precious metals) rallied sharply. Among the strongest performers were capacity-constrained, fundamental equity-focused managers, who managed to adeptly navigate various challenges during the year.
For others, though, capturing alpha in 2021 was often complicated by an environment in which markets were driven more by swings in investor perception than by fundamentals. Many of the strongest performing equities and sectors in 2020 were among the best short-selling opportunities in 2021, as investors chose to discount the rising risk of inflation, near-term supply chain issues, and persisting COVID-19 directives. Several of the most successful managers benefited from this paradigm by refocusing on areas of cyclical value.
Relative Value strategies posted a strong performance in 2021. Strong capital markets activity during the first quarter created good opportunities in convertible arbitrage, SPACs and corporate credit. Structured Credit strategies also performed well as residential and commercial mortgages benefited from the tail end of government support policies and from the reopening of global economies. Fixed Income Arbitrage strategies fared less well, as bouts of volatility in interest rates forced some to unwind highly leveraged positions and mark to market their losses.
It was also a challenging year for Discretionary Macro strategies, despite a positive first half fuelled by higher rates and a rally in value/cyclical equities. Sentiment shifted noticeably in June, when the Federal Reserve’s surprise hawkish pivot on inflation prompted a massive flattening in developed market rates. Other global central banks then followed suit in October, materially increasing rate volatility and resulting in losses for managers.
“Funds with exposure to “risk-on” assets
performed strongly as equity markets regularly
scaled new all-time highs and commodity
markets (excluding precious metals) rallied sharply.”
CTAs and Systematic Quant Macro managers were able to capitalise on strong commodity trends for much of the year, particularly for energy markets as rising demand was met by supply shortages. This resulted in double-digit returns in some cases by managers most able to capture these moves in both traditional and alternative (smaller) commodity markets.
ADIA’s Alternative Investments Department continued to refine its structure during 2021 by combining the two sub-pools for its main hedge fund allocation and reorganising its team responsibilities accordingly. This change enables the Department to further concentrate on its highest-conviction managers, with the objective of delivering uncorrelated returns to equities and bonds.
The Department managed this “single pool” in an agile way throughout the year, displaying its ability to act quickly, and in size, to attractive and unique time-bound opportunities in dislocated markets.
Looking ahead, the Department will maintain its focus on allocating to hedge fund strategies with predominantly low beta, while ensuring it continues to foster and build out its relationships with the industry’s best-in-class managers.
