March 23, 2020 | By: AGFiQ

AGFiQ Market Neutral Anti-Beta Strategy Update

3 min read

Bill DeRoche, Chief Investment Officer and Head of AGFiQ Alternative Strategies, AGF Investments LLC

In this highly volatile equity market environment, we would like to remind our clients about the characteristics of our hedging strategy, the AGFiQ Market Neutral Anti-Beta Strategy. During the recent market sell off the strategy has performed as expected and overall portfolios have benefited significantly from this allocation. We want to ensure that our clients are aware of how the strategy may perform moving forward so you can make adjustments to your portfolios as may be needed.

Strategy Overview

The strategy’s objective is to seek performance results that correspond to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Thematic Market Neutral Anti-Beta (CAD-Hedged) Index. The strategy strives to achieve this objective by holdings long positions in low beta stocks and short positions in high beta stocks. At the time of rebalance, the strategy holds 200 equally weighted long positions and 200 equally weighted short positions in equal dollar amounts. Sector weights of the long positions are offset by the sector weights of the short positions. The net result is a portfolio that has a negative beta, a measure of volatility relative to the overall market, with the performance of the strategy driven by the performance difference (spread) between the long and short portfolios. The strategy seeks to generate positive returns when the long low beta portfolio outperforms the short high beta portfolio. In normal market environments, when the market moves higher, the strategy would be expected to underperform due to its overall negative beta. Conversely, when the market moves lower, the strategy would be expected to outperform again due to its overall negative beta.

Historical Performance in Typical Markets

Typical markets have displayed lower volatility when trending higher, thus the performance difference (spread) between the long and short portfolio has also been lower. Conversely, typical markets have displayed higher volatility when trending lower, thus the performance difference (spread) between the long and short portfolio has also been higher.  We measure this asymmetry in up markets versus down markets through a measurement called the up-capture and down- capture ratio.  The up-capture ratio measures the performance of a strategy during up months in the market (in most cases the S&P 500) as a percentage of the market’s return.  The down-capture ratio measures the performance of a strategy during down months in the market (in most cases the S&P 500) as a percentage of the market’s return. 

Historically, since inception (September 13, 2011) through December 31, 2019, the strategy has exhibited an up-capture ratio of -36.74%.  This translates into the strategy on average being down 3.67% when the market is up 10%. Historically, since inception, the strategy has exhibited a down capture ratio of -100.84%.  This translates into the strategy on average being up 10% when the market is down 10%*.  The investment thesis for the strategy is to give up a some of the upside to hedge a significant portion of the downside.

Performance in Recent Market Selloff

In the current environment, we are experiencing extreme volatility to both the downside and the upside, not the asymmetry we typically experience. As a result, we are concerned not only for continued drawdowns in the market but significant moves to the upside as well. Consequently, the concern is that the strategy could behave differently in this environment. Allocations to the strategy during this drawdown have performed as expected and overall portfolios have benefited significantly from this allocation. The concern now is how the strategy will perform if the market were to significantly move to the upside.

We do have some live history that we can analyze. Shortly after the strategy launched in September 2011, the Anti-Beta Strategy* experienced an almost 20% drawdown in October 2011 as the market rallied sharply and high beta financially levered companies significantly outperformed low beta stocks.

How Are We Positioning AGF Portfolios in the Current Market Conditions?

To mitigate the risk of underperformance during an aggressive recovery we will be reducing our hedge to the strategy in the near term in some of our portfolios. The result will be to temporarily transition our Anti-Beta Strategy position to cash in some cases. This will maintain a less than fully invested exposure to the equity market while we seek to protect against equity market moves to the downside while reducing the risks of significantly underperforming on movements to the upside.

Unless otherwise specified all information is in US dollars. Past performance is not necessarily a guide to future performance. The value of investments and income from them can fall and rise. Investments denominated in foreign currencies are subject to fluctuations in exchange rates, which may have an adverse effect on the value of the investments, sale proceeds and on income.
Important Information
*The performance shown represents the actual performance of the US-domiciled AGFiQ US Market Neutral Anti-Beta Strategy, which has a similar investment strategy as the Canadian-domiciled AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF. The indicated rates of return are the historical annual compounded total returns including changes in price, reinvestment of all dividends, distributions and expenses; and do not take into account income taxes payable by any investors that would have reduced returns. Some performance results reflect expense subsidies and waivers in effect during certain periods shown. Absent these waivers, results would have been less favorable. While the U.S.- domiciled AGFiQ US Market Neutral Anti-Beta Strategy has a similar investment mandate to the Canadian domiciled strategy AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF and is managed by the same investment advisor, AGFiQ US Market Neutral Anti-Beta Strategy is regulated under applicable US laws and differs in the expenses, tax treatment, currency hedging and use of derivatives from AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF, all of which may impact returns. AGFiQ US Market Neutral Anti-Beta Strategy is not being marketed or distributed in Canada. The performance of the U.S.-domiciled AGFiQ US Market Neutral Anti-Beta Strategy is for illustrative purposes only and does not reflect the actual past performance of the Canadian-domiciled AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF nor is not intended to reflect future value of, or returns on investments in that strategy or the Canadian-domiciled AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF.
The commentaries contained herein are provided as a general source of information based on information available as of March 23, 2020 and should not be considered as personal investment advice or an offer or solicitation to buy and / or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein.
The information contained herein was provided by AGFiQ. and intends to provide you with information related to the strategies at a point in time. It is not intended to be investment advice applicable to any specific circumstances and should not be construed as investment advice. Market conditions may change impacting the composition of a portfolio. AGF Investments LLC, AGF Investments and Highstreet Asset Management Inc. assume no responsibility for any investment decisions made based on the information provided herein. AGFiQ Asset Management (AGFiQ) is a collaboration of investment professionals AGF Investments Inc. (AGFI), a Canadian registered portfolio manager, and of AGF Investments LLC a U.S. registered adviser. This collaboration makes up the quantitative investment team.
This document is for use by institutional investors only. Not for Onward Distribution.
Publication date: March 23, 2020.
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