Stockholm (HedgeNordic) – Multi-strategy managers acknowledge that different investment strategies have different return characteristics and that performance can vary across strategies and time. Therefore, they can build well-diversified portfolios with a more predictable and less volatile return stream than an individual strategy may have under different macroeconomic conditions. This is also the goal of Brummer & Partners and its active, multi-strategy vehicle Brummer Multi-Strategy.

Brummer Multi-Strategy (BMS) is a multi-strategy hedge fund investing in strategies managed within the Brummer & Partners group. Market-neutral long/short equity sector specialists helped BMS achieve its second-best annual performance in 2020. The two new market-neutral sector specialists in financials and industrials launched last year have also started out well, contributing positively in a challenging market environment for stock pickers. But in this year’s volatile, uncertain and inflationary environment, performance has so far been driven, to a large extent, by systematic trend-following strategies. Brummer Multi-Strategy gained 7.7 percent and BMS 2xL advanced 14.5 percent over the first three quarters of the year.

The Brummer Allocation to Trend-Following

“Brummer Multi-Strategy’s return this year has to a large extent been driven by the trend-following strategies, generating crisis alpha and being profitable across nearly all asset classes,” says Kerim Celebi, Portfolio Manager of Brummer Multi-Strategy. The systematic trend-following strategy trading developed markets advanced 47 percent in the first nine months of the year, while the systematic trend strategy trading alternative markets gained 24 percent. “Our portfolio has profited from strong trends in both developed and alternative markets (more emerging markets focused) with e.g. strong upward trends in rates, the U.S. dollar, power markets and various commodities, and the strong downward trend in equities.”

“Brummer Multi-Strategy’s return this year has to a large extent been driven by the trend-following strategies…”

Brummer Multi-Strategy had an allocation to trend-following below 20 percent at the beginning of 2021 and 32 percent at the end of last year. At the end of August this year, BMS had a 39 percent allocation to systematic trend at the end of August. “We significantly increased our allocation to the systematic trend followers in both developed and alternative markets already last year mainly from a risk management standpoint,” says Celebi. “We wanted to increase the crisis alpha component in the portfolio given the many warning signs we saw, in particular with inflation spiraling upwards and central banks being deep behind the curve, and a larger degree of uncertainty in the macro environment.”

“We wanted to increase the crisis alpha component in the portfolio given the many warning signs we saw…”

A new systematic macro strategy launched in June this year that utilizes a cross-sectional relative value approach using both technical and fundamental/macroeconomic input data to trade alternative markets has also started out well in 2022. “We also added a systematic macro strategy trading developed markets, predominantly relative value focused as of 1st of October,” confirms Celebi.

Systematic Versus Discretionary

One key benefit of a multi-strategy vehicle such as Brummer Multi-Strategy is the ability to get exposure to both discretionary and systematic strategies, which offers a significant potential diversification benefit due to their lack of correlation – particularly during tail events. Systematic and discretionary strategies have their virtues and pitfalls and may differ in many ways. A genuine multi-strategy approach that combines both discretionary and systematic strategies can offer diversification, crisis alpha and a more consistent return stream across a wide range of market environments.

“A systematic strategy has the advantage of not being governed by emotions, relying on a rigorous research process and strong risk management…”

The advantage of systematic strategies lies in the lack of emotions in the decision-making process. “A systematic strategy has the advantage of not being governed by emotions, relying on a rigorous research process and strong risk management while being able to express far more trading ideas than a discretionary manager, hopefully benefitting from superior diversification both in terms of ideas and markets traded,” emphasizes Celebi.

Quant Strategies Going Forward

Systematic trend following strategies may have proved their worth once again in the difficult market conditions of 2022. Celebi believes the return prospects of quantitative strategies and which strategies may be the most promising will, to some extent, depend on the type of market environment that materializes. “Our systematic trend following strategies are agnostic and can be profitable in many different scenarios, especially during crises. They are designed to profit from trends (up or down). They are typically long volatility and generally thrive during periods of great change,” considers Celebi.

“Our other systematic strategies, macro relative value in particular, are designed to benefit from dispersion as they rely on relative value,” Celebi comments. An environment where countries and instruments within different asset classes are moving in different directions due to differences in economic activity, inflation, and different monetary and fiscal policies, “should, in theory, be conducive for these strategies,” according to Celebi.

“Many factors continue to point to higher volatility and increased dispersion both within but also between asset classes and countries, which should in general be conducive for the systematic strategies in our portfolio,” Celebi says and concludes by emphasizing that “being liquid and well diversified will continue to be key.”

This article features in HedgeNordic’s “Systematic Strategies” publication.