Stockholm (HedgeNordic) – The era of near-zero interest rates following the global financial crisis posed challenges for market-neutral equity strategies, as a tide of widespread winners left few losers to exploit. However, the recent normalization of interest rates has reignited stock dispersion, creating fertile ground for these strategies. Brummer Multi-Strategy (BMS), which historically allocates around 60 to 70 percent of its total risk to equity market-neutral approaches, capitalized on these conditions in 2024 – one of the strongest years for such strategies.
The multi-strategy hedge fund, which allocates capital across a broad range of teams running different strategies, saw equity market-neutral approaches contribute 11.2 percent to its gross return in 2024, while systematic macro and trend-following strategies detracted from performance. Long/short equity, the cornerstone of Brummer Multi-Strategy’s portfolio, was the primary driver behind its net return of 7.4 percent in SEK and 9.3 percent in USD in 2024. The BMS UCITS vehicle, which operates at a risk level approximately 1.5 times that of BMS AIF, ended the year with a gain of 14.7 percent in SEK and 16.7 percent in USD.
“We are pleased that the vast majority of the returns in our long/short equity book can be attributed to alpha or stock-specific sources of risk,” write the fund’s portfolio management team – Patrik Brummer, Kerim Celebi, and recent additions Adrian Brummer and Wilhelm Kleman. “Short alpha has also been an important driver of performance during the year.”
After a challenging 2023 for fundamental stock pickers – one of the reasons behind Brummer Multi-Strategy’s muted performance following a strong showing in the tough market of 2022 – the environment in 2024 proved more favorable for market-neutral equity managers. “It has been a conducive environment for stock-picking, with average pairwise correlations between stocks near historically low levels and cross-sectional stock volatility at a decent level, indicating significant dispersion between stocks,” says the team behind Brummer Multi-Strategy. “Idiosyncratic factors, rather than macroeconomic factors, have dominated the variance in stock returns.”
Systematic Trend and Systematic Macro
At the end of 2024, Brummer Multi-Strategy had allocated 72 percent of its portfolio to long/short equity strategies, with 22 percent dedicated to systematic trend-following and 6 percent to systematic macro. While systematic trend-following had been a strong contributor to performance during the challenging market conditions of 2022, it slightly detracted from returns in 2024. The systematic macro strategy bucket, a relatively recent addition to the portfolio and representing the smallest portion of total risk, also negatively affected performance. A systematic strategy trading developed markets added 0.7 percent to returns, which were offset by losses in a strategy focused on alternative markets.
Expanding the Number of Strategies and Re-entering Fixed Income
Historically managing an average of ten strategies within its portfolio, the team at Brummer Multi-Strategy is now focused on further diversification by increasing the number of underlying strategies to around 15. This shift comes after developing a more flexible infrastructure that allows the integration of new teams as pods. “By doing so, we believe we can create an even more stable and slightly higher base of return while maintaining the same level of volatility and risk/-return characteristics – specifically, being long volatility and able to deliver crisis alpha,” explains the BMS team.
As previously reported by HedgeNordic, the fund onboarded a London-based team led by Oliver Gilbert to manage an absolute return strategy focused on European-listed real estate securities. Additionally, the BMS team has expanded its portfolio by adding a long/short equity healthcare team in London and a fundamental long/short equity team in Stockholm with a generalist, market-neutral approach. Furthermore, Brummer & Partners is gearing up to broaden its strategy suite by venturing into the fixed-income space, introducing this new vertical to complement the existing strategies.
The team behind Brummer Multi-Strategy remains actively on the lookout for new talent and strategies. “The primacy for us is the quality of the talent rather than necessarily needing to add a certain strategy type for the sake of filling a blind spot,” says the BMS team, although they do have a “wish list” of potential additions. First, they are interested in directional risk with low correlation to systematic trend strategies, such as a discretionary commodity strategy. Second, the team seeks a strategy with positive exposure to short-term volatility to complement trend-following strategies, which tend to perform better during prolonged periods of market stress. “We are reviewing strategies that can deliver small but positive return in a rather uneventful year but excel in periods of sharp bursts of volatility.”
Looking Ahead: Uncertainties and Tail Risks in 2025
As the team noted at the end of 2023, their hypothesis entering 2024 was that the opportunity set for stock-picking would improve, which proved to be the case. Looking ahead to 2025, a range of uncertainties and tail risks loom, including the potential for a reflationary scenario that could prompt central banks to raise rates again, geopolitical tensions, political crises, and the ongoing challenges faced by many developed economies grappling with high debt levels and budget deficits. These factors may limit the scope for fiscal policy stimulus moving forward, according to the BMS team.
“In light of these uncertainties and tail risks, we believe it is crucial to maintain a robust portfolio that is market-neutral and well-diversified across different strategies, sectors and geographies,” concludes the team. “Additionally, having a highly liquid and nimble portfolio while continuing to be long the tails remains essential.”
