The BlackPearl Masters Fund finished down 8.05% in March, a historical month for equities in which the spread of the COVID-19 virus caused the ASX All Ordinaries Accumulation index to sell off by -21%. The sharp fall in stocks was the fastest in history while volatility reached unprecedent levels surpassing levels reached in the GFC.
Source: MST Marqee Research – March18, 2020 MSCI, RBA, Refinitiv
The share market falls happened in tandem with many government bond yields making new lows while Central banks quickly moved interest rates back to zero and resumed quantitative easing. Fiscal stimulus packages were rolled out quickly in order to try and sure up demand while many companies came to market with capital raisings in order to stay afloat. At the same time oil prices fell dramatically as OPEC negotiations fell apart with the USD Brent Crude price falling 55%.
Looking at a sector level, selling pressure was indiscriminate across the board with Energy being the worst performer down -38% while REITS were -35% and Banks finished -29%. Consumer Staples -4% and the Healthcare sector -6% were relative outperformers, though both still finished lower.
At a fund strategy level, it was not surprising that our volatility strategy was the best performer for the month finishing up +15.52%. We have written about the volatility strategy before but to recap the strategy focuses on trading options and futures on the VIX index which is a measure of the 30-day implied volatility of options over the S&P 500 index. We use the strategy as essentially an insurance policy for the portfolio similar to an insurance policy you may buy on your house. The majority of time we don’t need it, but when equities sell off sharply like they did in March the insurance policy can become very valuable and helps to cover losses in other parts of the portfolio.
Unlike a standard insurance policy which costs you money every year you buy it, the VIX strategy is set up in a way where during calm or rising markets it can still generate small to mid-size returns while at the same time having the ability to really produce outsized returns in times of market stress.
The other two strategies that worked very well for us in March were our Global long short value strategy and our Global long short macro strategy, both finished higher by over +10% for the month. The value strategy managed to purchase significant amount of cheap out of the money put options over indices and stocks in February as their early analysis of the virus situation in China indicated that there was a possibility that the Virus might spread globally. These options increased in value substantially as markets sold off while at the same time the strategy benefited from many of its short positions falling significantly more than the market. Like the value strategy the macro strategy made most of its returns in March from shorting fundamentally weak stocks as well as short index futures.
On the flip side there were a number of strategies that had significantly weak performance during the month, which was predominantly driven by high exposure to net long positions, energy stocks, high beta growth stocks as well as taking off hedges to early. Fortunately, many of these strategies have seen significant recoveries in April as many of the quality long stock positions they hold have made large recoveries.
Looking forward we plan to rotate the fund’s positioning to more growth-oriented strategies which will benefit from any sustained recovery while still keeping a number of hedges on in the fund to protect against any further downside in the markets. We believe the significant accommodative monetary and fiscal policy should be very supportive for equity markets once social distancing restrictions have been fully lifted.