Stockholm (HedgeNordic) – 2022 experienced a “perfect” inflation storm due to an unprecedented amount of monetary and fiscal policy stimulus during the pandemic, war, and supply chain disruptions, among other factors. Central banks’ aggressive inflation-fighting efforts sent financial markets into chaos, with equities, bonds, and other asset classes incurring deep losses. The multi-manager, multi-strategy fund of Brummer & Partners managed to weather this “perfect” storm in 2022, ending the year up about seven percent (and 12 percent in the two times levered version).
“2022 was in many ways an extraordinary year, with inflation printing at its highest level in over 40 years and central banks behind the curve, playing catch up,” says Kerim Celebi (pictured), the portfolio manager of Brummer Multi-Strategy. “The surge in inflation has to a large extent been caused by there being too much money in the system in relation to the total amount of output that can be produced by labor,” according to Celebi. This was largely due to the coordinated monetary and fiscal policy stimulus during the pandemic in 2020 and 2021.
“Our strong performance from last year illustrates the diversification benefits that market-neutral multi-strategy firms can bring to the table.”
“An unprecedented amount of money was printed and pumped into the economy, which led to a huge surge in demand and spending growth and consequently to incomes and wage inflation,” argues Celebi. “This, coupled with the supply chain disruptions due to the pandemic, the war in Ukraine, energy shortages and so forth, created a “perfect” storm for inflation.” The aggressive tightening of monetary conditions by central banks around the world to fight inflation triggered waves of losses across most asset classes.
“The macro environment continues to be highly uncertain and volatile with tightening monetary conditions,” believes Celebi. “Although this type of more uncertain and likely more stagflationary environment is difficult for those trying to profit from beta, there are plenty of alpha opportunities for high-quality market-neutral multi-strategy firms,” according to the portfolio manager. “Our strong performance from last year illustrates the diversification benefits that market-neutral multi-strategy firms can bring to the table.”
A Dynamic Multi-Strategy Portfolio
Brummer Multi-Strategy, which maintains a well-diversified portfolio of strategies managed within Brummer & Partners, gained 7.0 percent in 2022. The leveraged (2xL) version ended the year up 12.2 percent. “We had a very good year both in absolute and relative terms compared to other multi-manager firms,” says Celebi.
Brummer Multi-Strategy allocates to different teams in-house across three strategy types: long/short equity, systematic macro, and systematic trend. “The main goal from a portfolio construction perspective has been to continue making the portfolio more robust by improving diversification, increasing the amount of idiosyncratic risk, as well as making sure that we are sufficiently long the tails,” explains Celebi.
One discretionary macro strategy was replaced by two largely market-neutral systematic macro strategies that take relative-value bets between various countries and instruments within all the major asset classes. “This change improves the breadth of both markets and macro ideas traded,” says Celebi. “Our macro allocation is now better diversified with a larger degree of idiosyncratic risk, which is better aligned with our investment objectives.”
Celebi and the team running Brummer Multi-Strategy reduced the directional risk in the portfolio during 2022. “We changed the portfolio structure in the sense that the directional risk should primarily be driven by the two systematic trend-following strategies trading developed markets and alternative markets,” says Celebi. “Both of these strategies are typically long volatility and can be profitable in many different scenarios, particularly during bear markets.”
“The portfolio today is even more robust and better diversified with a larger degree of idiosyncratic risk which is very important in the context of a highly uncertain macro environment.”
The majority of the risk in the portfolio is idiosyncratic and stems from very liquid and mainly market-neutral relative-value strategies with tight risk control, according to Celebi. “The portfolio today is even more robust and better diversified with a larger degree of idiosyncratic risk which is very important in the context of a highly uncertain macro environment.”
Brummer Multi-Strategy’s existing portfolio is designed to navigate the current complex, cloudy, and highly uncertain macroeconomic environment. “The environment will likely continue to be characterized by higher volatility and dispersion both within and between various asset classes and countries,” reckons Celebi. “For us, this large degree of uncertainty means that diversification between strategies and geographies, market neutrality, having a highly liquid and nimble portfolio, and being long the tails will continue to be important.”
