What a Year It’s Been!
No doubt most investors will be pleased to finally have 2022 behind them. Throughout the year, much was made of the downturn in equity markets – and rightly so, with the S&P 500 ending the period down almost 20%. But we can’t forget the bond markets, which were ravaged by rate hikes during the year. The Canadian Universe Bond Index, which includes over 900 different bonds and had posted positive returns almost every year for decades, slumped 11.7% in 2022. As a result, there is no safe haven for investors looking to count on a balanced portfolio. Fans of portfolios built on an asset allocation of 60% in equities and 40% in bonds – the traditional portfolio – suffered major, almost unprecedented losses.
The last quarter saw our hedge fund deliver on one of its primary roles: preserving our investors’ capital. All the traditional asset classes once again posted negative returns in the third quarter, although the declines were less dramatic than in the first two quarters of the year. The Amethyst Arbitrage Fund produced a good positive return in the third quarter due to its diverse range of non-directional arbitrage strategies.
This was also the case in the first quarter. But it should be recalled that in the second quarter, the central banks admitted that they had underestimated the inflationary risks. This sent bond prices into a rarely seen downward spiral that forced us to chalk up some significant losses. We were confident that we could recover from much of that drop, given the nature of our arbitrage strategies, and this is what transpired. Much of the ground lost has now been regained. Although 2022 will probably be remembered for the losses incurred by many investors, we are confident that, in the end, the Fund will post positive results. Here follows a discussion of what happened in the third quarter, along with a sense of what the last quarter of the year may bring.
Markets Sink
The stock markets were in flux throughout the first quarter. With the exception of Toronto’s S&P/TSX index, which managed to stay afloat, all the U.S. and European indices posted significant losses. Although the markets recovered rather well in the first two weeks of March, they then fell further, and the second quarter proved to be even worse. But the rout in the stock market was only compounded by the debacle in the bond market.
What a Quarter!
Not often do we see the equity and fixed income markets both post losses ─ even small ones ─ in the same quarter. But that was the case last quarter, and the losses were significant: approximately 5% on the S&P 500 and Dow Jones indices, and over 9% on the Nasdaq. Canada’s stock market nevertheless posted a healthy gain of over 3% due to the heavy weighting of the commodities sector. But it was the exception.
The situation was even worse in the bond markets. A sharp rise in bond yields, which peaked in March, resulted in negative returns of around 7% on the bond indices. Conservative investors who held balanced portfolios of stocks and bonds in this period suffered sizeable losses.
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