Alternative Investments Commentary
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Alternatives: Stability During Volatile Times

May 2023

The HFRX Global Hedge Fund index marked time during April, rising just 0.3%, but despite minimal movement at the headline level there was some notable activity under the surface. On balance, both discretionary and systematic global macro/managed futures strategies fared well during the month, rebounding from a challenging first quarter. The HFRX Macro/CTA index rallied 1.3% during the month while the Systematic Diversified CTA index fared better with a 1.8% monthly gain. Year-to-date, both the Macro/CTA and Systematic Diversified CTA indices are lower by 1.1% and 4.0%, respectively, lagging the Global Hedge Fund index meaningfully. If sized appropriately, exposure to these types of strategies makes sense within the context of a broadly diversified portfolio as they perform best in trending markets, which tends to be the case when stocks or bonds are experiencing a drawdown.

Event driven strategies garnered attention during April as Microsoft’s (MSFT) proposed acquisition of Activision Blizzard (ATVI) failed to garner antitrust approval from the European Commission charged with signing off on merger and acquisition (M&A) transactions across the pond. The MSFT/ATVI deal had been under the microscope since mid-2022, and the likelihood of the deal closing was viewed as a coin-flip for some time. Many tried and true merger arbitrage strategies carried minimal exposure to this deal and were less negatively impacted by it breaking, evidenced by the HFRX Event Driven: Merger Arb index ending the month flat. Conversely, riskier special situations strategies that engage in more speculative rumored M&A transactions were more exposed to the deal, leading to a 0.5% monthly drop in the HFRX Event Driven index. While we entered this year constructive on the outlook for merger arbitrage strategies, at this point, we must acknowledge the challenges that await merger arb strategies in the form of a combative regulatory/antitrust environment, not just in the U.S. but also abroad.

Given our outlook that traditional asset classes will likely continue to experience elevated volatility in the coming month(s), we continue to believe exposure to alternative strategies is warranted as a tool to mitigate volatility and limit portfolio drawdown. Hedged equity strategies, managed futures, long/short credit, merger arbitrage, and convertible arbitrage, among others, all hold appeal if sized appropriately.

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