Farview’s Quarterly Letter
Q2 2024 and Farview Alpha’s First 12 Months
One Year of Performance – Our Perspective
Farview Alpha Multistrategy Fund finished the month of June 2024 with a net performance of 0.90%1, bringing year-to-date returns to 3.28%.
June 2024 also marks the close of Farview Alpha’s first year since inception, and we are pleased to report that the fund returned 6.23% (gross performance 7.35%) in its first twelve months, in line with the return targets we set for this strategy. This compares with the MSCI WORLD Index2, which posted a return of 20.2% over the last year, and the Barclays Global Aggregate Index3, which had a performance of 0.9% over the last year.
The fund achieved its results with minimal support from equities or fixed income, despite strong equity performance during the period, and had notably low correlation to both equities (~0% vs MSCI World Index) and fixed income (~0.2% vs Bloomberg Global Aggregate TR USD4) in the period. Furthermore, the fund's volatility was well below its objective, averaging around 1.33% over the last year. While low overall market volatility naturally contributed to the volatility of our fund, the more significant contributing factor to Farview Alpha's lower-than-expected volatility was the fund's enhanced diversification. Since inception, the diversification gains within our portfolio exceeded expectations as the correlations between the different strategies in our portfolio were lower than anticipated, resulting in a reduction in volatility that was approximately 60% below the average volatility of the individual portfolio constituents. Initially, we had projected a diversification gain of 40%, but the actual gain surpassed this estimate, demonstrating the robustness and effectiveness of the multi-strategy approach.
The fund's ability to achieve these returns with low correlation to equities and fixed income and lower volatility underscores the efficacy of our investment strategy and the careful portfolio construction. Moving forward, we expect the volatility to increase, and we will manage the portfolio allocation towards this goal, but cautiously. We remain committed to maintaining a disciplined approach to deliver strong risk-adjusted returns for our investors while being prepared to adjust our strategy to manage the expected rise in volatility as opportunities arise.
Performance in the 2nd Quarter of 2024
Farview Alpha posted a positive performance of 1.51% in Q2 versus the negative performance of -1.10% for the Bloomberg Global Aggregate and 3.54% for the MSCI ACWI.
During the first quarter of the year, strong CPI data raised inflation concerns, leading to declines in equities and fixed income, which benefited most of our strategies through the beginning of April, with the exception of our Credit strategies. April saw a split in performance with weak PMI data on April 23rd causing a reversal in the equity market, particularly affecting mega-cap stocks. Our Credit strategies turned positive, while our Macro strategies turned negative, with our allocation to global Equity Market Neutral strategies providing stability.
May presented challenges as our Macro strategy performance was impacted by market shifts, and while some Equity Market Neutral strategies turned negative in the latter half, they ended the month in positive territory due to their strong performance in the first half of the month. Rising real rates affected negatively our global Balanced strategy, but precious metals exposure delivered strong returns as silver and platinum rallied 16% and 11%, respectively. Credit strategies benefited from tight credit spreads in the period.
In June, strong contributions from global Equity Market Neutral continued. The addition of an Event strategy in mid-June coincided with value stocks outperforming, significantly benefiting the fund as well. The stabilization and rebound of value stocks in the last two weeks of June added further positive returns to the remaining portfolio.
Strategy Analysis
Equity Market Neutral
Our allocation to Equity Market Neutral strategies significantly contributed to performance this quarter. These strategies benefited from low correlations within equities and returns driven by company fundamentals, showcasing their resilience amidst significant factor and sector rotations. Since the market recovery in mid-May, Quality, Momentum, and Low Volatility factors have led, while Value and risk-on factors underperformed. In June, concerns about slowing growth led to risk-off outperformance, favouring Growth stocks and causing Value to be the worst-performing factor. However, in the last two weeks of June, Value began to stabilize and rebound, further supporting our strategies. This performance highlights the strategies' ability to maintain low factor and sector exposure while adapting to changing market conditions.
Our allocation to an Equity Market Neutral strategy in Asia was one of the top contributors to portfolio performance this quarter. This strategy includes holdings that have been benefiting from the AI market cycle, such as TSMC, which has seen increased demand for chips, and Pro Medicus, known for its radiology software Visage 7. Both companies significantly contributed to the performance of our Asia allocation.
Relative Value
Our Relative Value arbitrage allocation has provided positive returns to Farview Alpha, especially via the convertible arbitrage strategy. This fund benefited from tighter credit spreads and increased corporate activity through the restructuring of bonds held in the portfolio. However, low market volatility reduced contributions from volatility dynamic hedging. Convertible issuance for 2024 is robust, operating at an annual run-rate of over $100 billion, with more high-yield and investment-grade issuers entering the market, including Alibaba in May. The fund's carry is over 2.5% annualized, boosted by higher coupon issues. Looking ahead, with equity valuations near all-time highs and volatility subdued (as measured by the VIX), the potential for large single-stock moves is attractive and provides opportunities for volatility trading. Additionally, with the upcoming convertible bond maturities over the next 18 months, alpha extraction through negotiated special situation transactions is high and expected to remain so in the months ahead.
Event Arbitrage Strategy Performance
Our recent allocation to the Event Arbitrage strategy has positively contributed to Farview’s performance, particularly due to two key deals: DS Smith and Hollysys. In the DS Smith acquisition by International Paper (position size: 5.65%), Suzano was initially looking to buy International Paper, which could disrupt the DS Smith acquisition. This led to significant uncertainty to this transaction leading most investors out. The team, after a fundamental analysis, decided to maintain exposure and when Suzano withdrew its bid for International Paper on June 27th, DS Smith rose by 14% while International Paper fell by 9%, reducing the spread from 31.2% to 4.8%. This contributed +80bps to the fund’s performance on June 27th, showcasing the value of deep fundamental analysis and high conviction. For Hollysys (position size: 5%), Ascendent Capital Partners received all Chinese regulatory approvals, boosting the stock by 17.6%. The spread tightened from 27% to 4.1%, adding +85bps to the fund. The team’s local network and deep understanding of the parties’ incentives were crucial in maintaining the position and leveraging this opportunity. Currently, the team sees a larger, more attractive set of opportunities, with over 20 additional deals in the investable universe and many in the favourable 5%-30% spread-to-close range. These developments highlight the strategic value and positive impact of our Event Arbitrage allocation, reinforcing our ability to capitalize on unique opportunities and generate significant returns for Farview Alpha.
Macro Strategy
Our Macro strategy detracted from performance this quarter, particularly from market reversals that occurred after the CPI release on May 22nd as the Fed indicated that rate cuts were not imminent, and led to losses in the quantitative portfolio. Long USD positions and long and short commodities and fixed income positions were detractors, while equity performance was mixed in this portion of the portfolio. Conversely, discretionary managers posted gains from strategic positions in government and corporate bonds and tactical trading along the US yield curve. They remained light in commodities, which was a key driver of losses in the quantitative portfolio. Despite the negative contribution, our Macro strategy, which has a strong momentum bias due to its systematic allocation, showed resilience. The flexibility provided by their discretionary managers allowed us to outperform other systematic managers during this period.
Balanced Strategy
Our Balanced strategy detracted slightly from performance in the quarter, a relatively impressive result given the fund’s negative view on markets in a bull market. In May, positive corporate earnings, easing geopolitical tensions, and improved US inflation data boosted equities and bonds. Early gains were tempered by rising yields and increased volatility later in the month. The fund performed well, with strong contributions from precious metals, Chinese stocks like Alibaba, and tech holdings such as TSMC and Amazon. Rotating from UK inflation-linked bonds to US TIPS was beneficial, but derivative positions and energy equities detracted from performance. The fund increased its risk slightly by adding 5% to equity exposure, boosting TIPS holdings, and increasing precious metals. Additional protective assets, including more credit protection and yen exposure, were added to balance the portfolio. Despite cautious positioning due to upcoming uncertainties, the fund finds attractive risk-reward opportunities in growth assets and benefits from low protection costs, maintaining a balanced portfolio.
Looking Forward
Farview Alpha’s portfolio has demonstrated strong resilience in different market conditions, market direction and factor leadership. Looking forward, we believe these characteristics continue to be fundamental to navigate what can be a challenging macro scenario as growth moderates and multiple event risks can materialize. Persistent inflation should continue to limit the ability of bonds to balance equity allocations as their correlations should continue to be positive.
Looking forward, the portfolio is positioned to take into account the following point of views:
Preference for Systematic Macro over Discretionary Macro: Uncertainty about the broader economic outlook, especially in the US, is challenging for investment strategies that rely on predicting market future trends. In contrast, systematic models that follow set rules without relying on predictions seem more appealing in this environment. Also, as markets evolve and new opportunities arise these strategies are well positioned to capture the upside.
Like Equity Market Neutral: The investment environment is still favourable for equities but these can vary by region. Stock prices and valuations have become less correlated, and there's been more variation in stock performance. This is evident from the mixed performance of sectors like technology, which has shown resilience, compared to more volatile sectors such as energy and commodities. This is due to a slowing equity rally, differing economic conditions, and expectations of central bank policy changes. This environment is favourable for Long/Short Equity managers. With high valuations and recent momentum, there are good opportunities for neutral investment strategies that don't rely on market direction. The main risks we are monitoring include delays in central bank policy changes, sudden shifts in equity momentum, and geopolitical events. Given these potential headwinds, we prefer not to pay for beta exposure. The current environment, characterised by elevated yields, further underscores the challenges for market beta, reinforcing our focus on low-beta Long/Short managers.
Like Merger Arbitrage: The increased corporate activity should offer more opportunities for merger arbitrage. Interest rates reduce the risks for financing those transactions and with resilient global growth and easier lending, corporate confidence is growing. There is a significant amount of corporate cash and capital in private equity ready for use, and delayed acquisitions from 2022 set to proceed. US election uncertainty may delay some deals, but M&A prospects in AI, digitalization, energy transition, and re-onshoring remain strong. Tightening margins and slowing profit growth also support M&A. High-quality, complex deals with premiums over 15% are rising and despite regulatory challenges, few deals are cancelled. Merger deals offer an average spread of 6.5%, higher than most credit yields with lower volatility.
In closing, we are proud of the performance Farview Alpha has generated for its investors in its first year, and continue to strive to provide our clients with a diversified and stable return stream able to take advantage of changing market conditions in the months ahead.
Important Disclaimer: This information is solely intended for the use of professional clients only. It is not for general public distribution. This is a summary of some of the key features of the Farview Alpha Multi-Strategy Fund. Prospective investors should read the applicable offering memorandum, articles of association or other constitutional document and the applicable subscription agreement relating to the purchase of shares or interests in such Fund. This document provides a general overview of strategies proposed by Farview Investimentos (“Farview”) (references to “this document” in this Important Information section shall include this presentation document and any associated documentation, including cover email or cover letter documentation, delivered with it). This document is qualified in its entirety by reference to the applicable offering memorandum, articles of association or other constitutional document and the applicable subscription agreement relating to the purchase of shares or interests in such Fund. Recipients should form their own assessment and take independent professional advice on the merits of investment and the legal, regulatory, tax and investment consequences and risks of so doing. In preparing this document, Farview has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise used in the preparation of this document. Farview, and any Fund, accept no responsibility to any person for the consequences of any person placing reliance on the content of this document for any purpose. Neither Farview nor any Fund is under any obligation to update the information contained in this document. Past performance information contained in this document is not an indication of future performance. This document has not been audited or verified by an independent party and should not be seen as any indication of returns which might be received by investors in any Fund. Where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded by any recipient of this document as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to any risk factors stated in this document, could cause actual results to differ materially from those in any Forward Looking Information. There can be no assurance that any Fund’s investment strategy or objective will be achieved or that investors will receive a return of the amount invested.
This document has not been reviewed or approved by any regulatory authority. This document is not intended to be, nor shall it be construed as, an offer, or a solicitation of an offer, to buy or sell shares or interests of whatever kind, nor to buy or sell shares or interests in any Fund. In the United Kingdom, this communication is being made only to, or directed only at, persons who are: (i) investment professionals within the meaning of Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("FP Order"); (ii) high net worth companies and certain other entities falling within Article 49 of the FP Order; or (iii) any other persons to whom such communication may lawfully be made. It must not be acted, or relied, upon by any other persons. It is not anticipated that shares or interests in the Fund (“Interests”) will be registered under the US Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any of the states of the United States. Accordingly, Interests will not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any US Person (as defined in Regulation S promulgated under the Securities Act) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and any applicable state laws. Interests may be offered outside the United States pursuant to the exemption from registration under Regulation S promulgated under the Securities Act and inside the United States in reliance on Regulation D promulgated under the Securities Act. It is not anticipated that the Fund will be registered under the US Investment Company Act of 1940, as amended (the “Investment Company Act”). Any subscriber for Interests that is a US Person will be required to certify that it is an “accredited investor”, as defined in Regulation D promulgated under the Securities Act, and a “qualified purchaser”, as defined in the Investment Company Act. Direct or indirect acquisition or ownership of Interests by US Persons without compliance with applicable US securities laws or in contravention of the relevant provisions of the constituent documents of the Fund will be prohibited. FARVIEW INVESTIMENTOS LTDA. (“Farview”) is a company duly authorized by Comissão de Valores Mobiliários (CVM) to carry out the activity of managing securities portfolios, in the category “asset manager” and institution adhering to ANBIMA’s self-regulation codes. Farview does not sell or distribute shares of investment funds or any other financial asset. Farview is not responsible for errors, omissions or inaccuracies in the content of the information disclosed nor for investment decisions made based on this document.
Performance is net of all fees and expenses, although it has not been audited. The manager has taken the initiative to cover all costs (not related to investment manager fees), such as auditor fees, directors fees, administrator fees, among others, until the assets under management of the fund reach a specific target.
A market cap weighted stock market index of 1,652 global stocks and is used as a common benchmark for 'world' or 'global' stock funds. The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI. The index includes securities from 23 countries but excludes stocks from emerging and frontier economies.
The Barclays Global Aggregate Index is a flagship measure of global investment-grade debt from 24 local currency markets. This index includes a wide range of securities, such as government, corporate, and securitized bonds, providing a broad measure of the global bond market's performance.
The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-eight local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Indexeligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, COP, MXN, PEN, and ILS). A component of the Multiverse Index, the Global Aggregate Index was created in December 1998, with index history backfilled to January 1, 1990.