A major market rally in the last two months of 2023, in both the equity and bond markets, has left the impression that it had been a good year for financial assets. But without these two months, the results would have been quite lacklustre. Many investors are nevertheless now showing considerable enthusiasm for 2024, anticipating that central banks will soon begin a series of interest rate cuts. But we have our doubts.
Our results for 2023 reflect a prudent approach at a time when the markets lacked direction and were highly volatile. In this way, we successfully protected capital, but this defensive approach, and a few negative outcomes in the M&A and convertible bond segments left the fund flat for the year. In response, we have undertaken a number of initiatives to drive better results in 2024.
Financial markets are generally expected to be quieter during the summer months, providing just the right level of volatility for us to profitably manage our various arbitrage strategies. This period prepares us for the fall, when market volatility is at its highest, with all the risks that this entails.
The third quarter of 2023, however, proved to be the exception to the rule. Equity markets initially performed well in July, but just when many market participants might have been tempted to let their guard down, the markets turned around and logged a quick correction in the first three weeks of August. And September would prove to be even more volatile.
Far From a Smooth Ride
In the financial markets, there are certain events that can grab all the attention, but in the process they may hide a somewhat different reality. On equity markets, for example, last quarter’s sudden infatuation with artificial intelligence drove up all stocks closely or even remotely related to this industry. As a result, the second quarter produced major gains in some of the stock market indexes. But this masked a tenser situation in many sectors, as the March banking crisis continued to fuel fears among investors. As for the convertible securities market, it hit a rough patch, for no apparent reason.
In the midst of a banking crisis
It is not uncommon that something out of the ordinary will occur and suddenly change the trend in markets. Such abrupt changes are usually accompanied by high volatility. The first quarter of 2023 certainly provided a good example, when a run by depositors on a regional bank in California, the Silicon Valley Bank (SVB), triggered a sharp reversal in the upward trend in bond yields and a precipitous drop in stock prices over just a few trading sessions.
Our year began well enough, with our fixed income arbitrage strategies performing very well. Our other strategies were generally performing as expected, apart from a few developments in M&A transactions, which are discussed below.
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