Farview's Quarterly Letter
Q1 2024
Farview Alpha Multistrategy Fund entered 2024 in positive territory, returning 1.75%1 in the first quarter of the year. Positive returns came from three of our four underlying strategies, discussed below.
QUICK OVERVIEW OF MARKETS in Q1.
The first quarter of 2024 saw resilient economic data that further supported expectations of a “soft landing.” Equity markets reacted positively, with the MSCI ACWI up 7.4% in Q1 and the US performing particularly well with the S&P 500 up 10.6%, driven by the outperformance of the “magnificent seven” stocks. The period was more challenging for fixed income investors; “stickier inflation prints, resilient economic activity, and the Federal Reserve (Fed) backpedaling somewhat on its dovish December tone combined to drive negative returns for bonds”2. Market expectations for interest rate cuts shifted significantly, with expected US rate cuts in 2024 falling from six to three rate cuts in total; as prospects for aggressive rate cuts faded, yields increased and the Bloomberg Global Aggregate Index returned -2.1% in the quarter.
Against that backdrop, Farview Alpha entered 2024 in positive territory, with nearly all strategies ending the period in positive territory. Our fund’s returns come from unique sources of risk prema, discussed below.
Our Equity Market Neutral portfolio comprised just under 45% of Farview Alpha at the end of the quarter and returned 2.77% in Q1 2024, contributing 1.12% to Farview’s first quarter returns. Farview’s decision to overweight equity market neutral strategies is underpinned by observed trends in market volatility and internal stock correlations. With the S&P 500 internal correlations declining across various market caps and industry groups experiencing varying degrees of correlation shifts, the environment is ripe for stock picking and factor analysis. Farview’s focus is on equity market neutral strategies grounded in deep analysis of market internals, rather than broad macroeconomic trends; we are invested in three underlying funds in this category, each of which contributed positively to quarterly returns.
Our Asia ex-Japan strategy had one of its best performing quarters since inception as the region entered a period that rewarded stock picking. The strategy generated gains from calls on earnings revisions and was boosted by the more accommodative economic policy in China and improved sentiment in the region.
Our Equity Market Neutral Global strategy, our largest position, continued to merit its portfolio sizing with consistent returns and positive contribution. The strategy’s returns were garnered from diverse stock selection and sector attribution. While positioning is global, the Asia Pacific region was an outperformer for this fund in Q1.
Our Environmental-Focus Equity Market Neutral strategy generates a global portfolio that is diversified, liquid and filtered through an Environmental-focused ESG lens. Although the fund struggled to generate gains in the first two months of 2024, it ended the quarter in positive territory.
Our Global Macro strategy was our best performing strategy, up 5.39% in the quarter, contributing 0.6% to Farview Alpha’s returns. During the quarter we added around 1.5% to the strategy allocation to 12.5% to manage the overall portfolio beta. This strategy incorporates both discretionary and quantitative investing, both of which outperformed in the quarter. Profits came from long positions in global equity markets, gold, energy and soft commodities. The outlook for macro investors for the remainder of 2024 remains positive, with a number of macro catalysts expected to provide a favorable environment for investing. The team is monitoring certain macro factors and their potential macro impact in the coming year, including the trajectory of the US economy and ability to achieve a “soft landing”, the behavior of global central banks and whether there will be divergence from the behavior of the US Federal Reserve, equity valuations and “AI”, Japan’s monetary policy, and geopolitical volatility.
Our Relative Value Arbitrage portfolio ended the quarter at just under 25% weight in Farview Alpha and contributed 0.62% to Q1 returns. Both underlying funds ended the quarter in positive territory, with the Convertible Arbitrage strategy generating particularly strong returns in Q1. This strategy has benefited from a confluence of factors, including improved convertible basis, strong new issuance activity, notable corporate liability management, and a wall of upcoming corporate debt maturities. It enters Q2 with a focus on higher quality and shorter duration investments while attentive to special situations alpha. Our Credit Long/Short fund also produced gains in Q1, generating 31bps of return for Farview Alpha. While this strategy has continued to provide upside into 2024 from the tightening of credit spreads, we anticipate less favorable conditions in 2024 and discuss our positioning further in our letter.
Our Balanced Portfolio was the only detractor in Farview Alpha’s portfolio, detracting -0.16% from performance in Q1. January was a particularly difficult month for the strategy to navigate with the fund’s long-term inflation protections acting as a drag on performance. These positions contributed positively in February and March, although not enough to offset losses from the beginning of the year. March saw a return to positive performance from positions that comprise the team’s long-held views, with precious metals, equities and commodities exposures also contributing positively. The team continues to monitor global growth and inflation risks and the fund provides a good balance to Farview Alpha.
As we reflect upon Farview Alpha’s performance and positioning, and look ahead to the rest of 2024, we have decided to implement some exciting new changes to the fund’s portfolio to take advantage of the emerging opportunity set.
Opportunities in the Event Driven Space
One key development has been the identification of a new source of risk premium to be added to Farview Alpha’s portfolio. Thorough evaluation of investment strategies led to the decision to add merger arbitrage risk premium to Farview Alpha.
Merger arbitrage provides a diversified risk premium to the portfolio, compensating for uncertainties until the merger’s conclusion, encompassing deal completion risk, regulatory and legal challenges, market volatility and operational risks. The current merger arbitrage risk premium is around 6% (on average) which would result in annualized returns of close to 11% adding the risk free rate.
In the last two years, M&A volumes had fallen and antitrust challenges were high, resulting in volatile spreads; but now the direction has turned and we see opportunities. The uncertainty in interest rates and economic growth combined with increased regulatory actions were headwinds in the period of 2021-2023; however, these headwinds are turning into tailwinds for the strategy in 2024.
Morgan Stanley Global Equity & Credit Research recently published an extensive 80-page analysis, titled "The Return of M&A,"3 which has sparked significant interest across the investment community. This report forecasts a buoyant outlook for mergers and acquisitions (M&A) in 2024, projecting a notable increase in activity that could serve as a significant boost for the year. Morgan Stanley expresses confidence in a structural acceleration in the M&A sector, anticipating volumes to surge by 50% in 2024, underscoring a potential shift towards a multi-year secular recovery.
Morgan Stanley's bullish stance on M&A is grounded in a comprehensive approach that combines top-down, bottom-up, and qualitative analyses. The firm suggests that the period from 2021 to 2023 witnessed subdued M&A activity, not reflective of underlying fundamental and macroeconomic conditions, hinting at a significant period of catch-up over the coming years. Despite potential regulatory challenges, Morgan Stanley's survey of the M&A landscape suggests that regulation will not critically hinder this positive trajectory. The anticipated increase in M&A activities is also attributed to pent-up demand following two years of exceptionally low activity, a sentiment echoed by many of Morgan Stanley's sector analysts. This confluence of factors sets the stage for a vibrant M&A environment in 2024, marked by renewed vigor and strategic realignments across key industries.
M&A volumes started to pick up in the second half of 2023, and the conditions are set for a strong 2024.
Despite the growing opportunities in merger arbitrage, the risks and opportunities are not evenly distributed making us prefer Europe versus US and complex versus “safe” deals. The U.S. market is expected to continue facing challenges, notably due to heightened antitrust scrutiny and the uncertainties surrounding elections. Consequently, we are inclined to shift our capital allocation towards Europe, a region that not only offers a reprieve from these specific U.S. challenges but also presents unique dynamics capable of driving target prices upwards.
Despite the notable interest from crossover and systematic managers in short-duration deals with a high likelihood of completion—which tends to compress spreads—there exists a trend towards leveraging by some, particularly multi-strategy hedge funds, to amplify returns. However, such strategies bear the risk of significant drawdowns should deals not materialize as expected. In contrast, our strategy leans towards embracing the complexity of deals where, despite a lower probability of completion, the wider spreads more accurately mirror the associated risks. This approach allows us to navigate through and capitalize on the nuanced European M&A landscape, focusing on opportunities where the risk-reward profile aligns with our strategic objectives.
In an analysis of the European market and mid-cap sectors, we identified an environment that has fostered rising M&A activity and lower regulatory risks. We have identified a high performance strategy managed by a specialized team that Farview will access through a cost-effective share class. The fund, a European-focused Event-Driven Fund, will be added to our portfolio in the coming weeks; we will cover this strategy in more detail in our Q2 letter.
Farview Alpha will exit Credit Long/Short
However, after a recent period of outperformance, we have decided to exit our Credit Long/Short strategy. The strategy now faces a challenging opportunity landscape with historically tight spreads in context of a potential economic slowdown as well as limited opportunities for differentiation due to ease of company refinancing and deferred distress situations. While Farview avoids taking directional bets, the current market conditions make low beta portfolio maintenance costly and we plan to shift capital away from this Relative Value Arbitrage strategy to the European Event Driven strategy.
ORGANIZATIONAL UPDATES
We are pleased to share that our partner, Marcel Borelli, has recently co-authored a book entitled "Investimentos: O Guia dos Céticos." This publication is an extension of our core philosophy here at Farview Investments, emphasizing a skeptical and analytical approach to investment strategies. Marcel's book provides an in-depth exploration of critical, informed perspectives necessary for navigating today's complex investment landscapes. We believe this resource will be invaluable not only to our team but also to our esteemed investors, as it aligns closely with the principles that guide our investment decisions. We encourage you to explore this insightful work to further enhance your understanding of our methodologies and the investment philosophy that underpins our success.
We have made no changes to our team or service providers since in the first quarter of 2024. However, during the quarter, we successfully updated the regulatory status of our Brazilian feeder fund, Farview Global Alpha FIF FIM IE RL to the new regulation CVM 175, which allows qualified investors to access our strategy.
We thank you for your continued support.
It's important to note that the reported 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 auditing, directors, NAV calculations, among others, until the assets under management of the fund reach a target volume
J.P.Morgan, “Review of Markets over the first quarter of 2024,” Monthly Market Review, 2024.
Morgan Stanley Global Macro Forum: “The Return of M&A”; as of 3/11/24