Special Newsletter
March 19, 2020
RETURNS SCORECARD
Further to our mid-March newsletter below, we share the Total Returns of our investee funds since their record drawdown in March 2020.
Regards,
Stega Investment Team
13-month Return since Mar. 2020 lows (%)
DARKEST HOUR: COVID-19
March 19th 2020
OBSERVATIONS
After taking into consideration of the extreme declines that occured over the past 3 weeks, it’s becoming clearer that the COVID induced crisis is likely to exceed:
2008 Global Financial Crisis
2001 Dotcom bubble
1987 Black Monday
In line with the markets, we expect Quantedge & Prulev to register their biggest ever decline of above 30% for the month*. Our loss estimates are based on direct discussions with the investment managers as neither of the funds release an official mid-month update.
* Actual March 2020 losses were - 29% for Quantedge and - 34% for Prulev.
TURNING POINT
The “COVID Curve” by Oxford University & Global Change Data Lab
As of this moment, unprecedented actions taken by governments to curb COVID infections would likely lead to a global recession. We see this as a classic event-driven situation, hence we would postulate that any signs of reaching a ‘peak’ in global COVID infections may signal that the worst is behind us. ‘Peaking’ of infections provide governments the leeway to gradually remove severe restrictions and allow much needed recoveries to commence.
As such, we found this graph which we nicknamed the “COVID Curve” particularly useful in tracking the speed of reported infections across countries. The log graph maps the total number of confirmed cases in each country over time once the 100th confirmed case is recorded in a country.
Using China as an example, we find its COVID Curve starts to flatten (or plateau) around Day 20 as indicated by the falling number of new cases. By maintaining this ‘plateau’, China is able to remove draconian restrictions and gradually re-open businesses which led to its stock market rebounding from being the worst… to the best performing market in the world within a span of 6 weeks despite a slower pace of recovery in its real economy.
Currently, U.S and major European economies are in the steep climbing phase of its COVID curve which resulted in a massive sell off in the markets. Once a plateau is within sight, a recovery of its financial and real economy should begin.
POSSIBLE OUTCOMES
Current extreme market turbulence are marked by steep fluctuations (both record move ups and downs) which lead us to believe that investors are still trying to find an equilibrium for this unique pandemic.
If the COVID curve reaches a plateau in most major countries over the next couple of weeks, we expect to see a sharp recovery taking place. Correspondingly, we should expect a longer recovery period if most countries take a longer time to plateau. Regardless of the scenario, markets always recover over time which reinforces our super long-term investment approach.
Once a recovery is underway, our underlying funds show a strong propensity to rebound especially after devastating down months; realizing anywhere between + 50% to + 150% in the following 13 months owing to cheap asset prices across the board. Even if a recovery is delayed, we expect our longer term returns to continue outperforming the general market despite the occasional speed bumps.
Lastly, we encourage those who have the will & capacity to add in this environment to reach out to us directly for one-off waivers of the minimum additional investable amounts across both Altiquant funds.
Best regards,
Stega Investment Team
Devastating months & rebounds
FURTHER READS
SUMMARY OF SELECTED HEDGE FUND NEWS FOR MARCH 2020
Bridgewater Associates - All risk parity funds are down by its annual vol. / risk target for the month
Oaktree Capital - Buy when its cheap instead of trying to time the lows
Markov Consultancy - Quant Funds In The Coronavirus Market Rout: Risk Parity
1. COVID CURVE:
2. OBSERVATIONS
Bloomberg: U.S. Recession a Coin Toss as Chances Climb to 53% Within Year
Bloomberg: Morgan Stanley, Goldman Declare Global Recession Under Way
CNBC: Not every bear market is accompanied by an economic recession, but chances are high
3. TURNING POINT
The Economist: Control of the coronavirus gives China the world’s best-performing stock market
The Economist: Economies can rebound quickly from massive GDP slumps—but not always
4. POSSIBLE OUTCOMES
Stega: From the lows (Mar 2020)
Note: We used ‘Next 13 Month Returns’ to account for the 1 month delay in subscribing into the Fund post recording its low