The Picton Mahoney Absolute Alpha Fund Class F (“the Fund”) produced a return of -4.2% in the second quarter of 2022. The Fund continues to provide returns mostly independent of market direction; our analysis of daily portfolio returns over the most recent time frame indicates a few small beta exposures to several PMAM asset classes in Q2 2022. This very mild beta exposure coincided with increased portfolio volatility in several of the underlying active strategies.
The portfolio experienced an unusual occurrence of losses across most of the underlying strategies. Given our view of these strategies as well as the supporting historical evidence, we believe this is unlikely to continue.
The largest contributor to negative performance was the active Event-Driven Fixed Income strategy with modest losses across the proprietary Factor Risk Premia and active Market Neutral Equity strategy. The decline in performance was related to negative alpha generation as opposed to a stress event involving forced deleveraging. Therefore, and unfortunately, our tail risk hedges provided minimal benefit due to the lack of capitulation event in the equity markets and a somewhat range bound level of CBOE Volatility Index (VIX) through the quarter.
Portfolio risk as measured by standard deviation of daily returns has increased slightly through the quarter and is now moderate relative to our anticipated long-term range. We saw a decrease in the diversification across the core strategies which resulted in the increase in portfolio volatility. The modest increase in volatility is expected given the ongoing heightened macroeconomic and geopolitical risks.
Increased hawkishness across global central bankers along with expectations of slowing economic growth have caused a significant amount of volatility in markets. Most asset classes lost value through Q2 due to their sensitivity to interest rates via valuation levels or economic growth.
We have previously noted that the macro environment is less important to the management of the Fund. However, the events of Q2 serve as a reminder why it is important to have diversification as a key component of a portfolio construction methodology along with tail risk hedging tools. The ongoing environment of slowing economic growth and increased attention to global central bank activity tends to suggest a higher level of tail risk hedging is appropriate, this continues to be our view.
Given our current outlook, diversification will continue to be the most valuable tool we utilize in our portfolio management process.
Overall, we believe this short-term correlation and underperformance of strategies is temporary in nature and believe sourcing returns from non-directional, uncorrelated strategies is the best long-term strategy. 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 13, 2022. 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.
This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
The offering of units of the Picton Mahoney Authentic Hedge® funds are made pursuant to an Offering Memorandum only to those investors in jurisdictions of Canada who meet certain eligibility or minimum purchase requirements. Prospective investors should consult with their investment advisor to determine suitability of investment.The offering of units of the Picton Mahoney Authentic Hedge® funds are made pursuant to an Offering Memorandum only to those investors in jurisdictions of Canada who meet certain eligibility or minimum purchase requirements. Prospective investors should consult with their investment advisor to determine suitability of investment.
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