In Q2 2021, the Picton Mahoney Absolute Alpha Fund (“the Fund”) was successful in providing positive returns independent of markets. Our analysis indicated daily portfolio returns contained no statistically significant beta exposures to any of the PMAM asset classes. The Market Neutral strategy was the largest contributor to positive portfolio returns. Portfolio risk as measured in terms of standard deviation of daily returns remained at the lower end of our expected range.
Part of the reason for this low level of observed portfolio volatility was the large degree of diversification observed across portfolio elements. We observed a strong negative correlation between both the Market Neutral strategy and the Arbitrage strategy relative to the Special Situations strategy. For this reason, from a risk perspective, we continue to favor a slight overweight allocation to the Special Situations strategy relative to the other two active strategies within the portfolio. Over more extended time horizons we expect these negative correlations to dissipate and revert to values closer to zero among portfolio strategies, we do not rely upon or expect to see negative correlations.
On the surface, the macro environment is less important to the management of the Fund, however, we do make use of our macro-economic framework to guide both risk management and return seeking behavior at the portfolio level as well as within the underlying strategies. To that end, the largest macro events of Q2 were related to bond yields and the U.S. Federal Reserve.
After their dramatic rise in Q1, longer term bond yields fell through Q2 which offered a rebound in longer duration equities relative to the more cyclical equity markets and sectors. The reflation theme continued for the first part of the quarter and then suffered a bit of a setback with mixed returns across many asset classes during the last part of Q2. The most notable event towards the end of the quarter was the confused market reaction in the aftermath of the June Federal Open Market Committee meeting along with the release of an updated “dot plot”. Markets are attempting to process the impact of transitory inflation, supply chain bottle necks and what a post peak growth, post peak stimulus economy might look like.
Given the uncertain outlook, diversification will continue to be the most prudent approach and a tool we will utilize in our portfolio management process.
Overall, we are pleased with the behavior of the Fund and the characteristics of sourcing returns from non-directional, uncorrelated strategies. The Fund has an important context vis-à-vis portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 30, 2021. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value.
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