Stockholm (HedgeNordic) – The market environment in 2022 was ripe for the agile, diversified and active investor, as market participants had to navigate and respond to a multitude of risks – inflationary surges, interest rate hikes, recessions and war, among others. AIM Diversified Strategies, a fund that invests in hedge fund strategies run by giants such as Citadel Advisors and D.E. Shaw & Co., has enjoyed its best year so far by taking a less diversified and less active approach – relative to the already inactive nature of fund of funds investing.

AIM Diversified Strategies run by Helsinki-based AIM Capital advanced 11.3 percent in the first eight months of 2022, currently on track to beat its best annual performance of 8.7 percent achieved just last year. How did AIM Diversified Strategies manage to navigate this year’s turbulent and uncertain market environment? Foresight, preparation and conviction.

“We’ve had a view, for some time now, that the macro environment is likely to become significantly more challenging due to changes in the inflationary and monetary policy regimes as well as due to structurally lower growth,” explains Miikka Hautamaki, CEO and Managing Partner of AIM Capital. “We thought this is likely to have profound implications for the markets and also for hedge fund alpha.”

“Multi-strategy managers have been our dominant allocation and also the largest contributor to returns.”

The AIM Capital team expected this environment to favor multi-strategy and macro managers over equity and credit long/short managers. “A few years back we also decided to add exposure to managers that may benefit from higher inflation and commodity market volatility,” says Hautamaki. “These are some of the factors that explain our strong year-to-date performance.”

“Our allocation to CTA strategies has been somewhat underweight, which we in hindsight regret.”

“In terms of contribution by strategy group, multi-strategy managers have been our dominant allocation and also the largest contributor to returns. Our overweight allocation to multi-strategy managers has obviously been a right choice,” reaffirms the AIM Capital CEO. With perfect hindsight, the performance could have been even better, reckons Hautamaki. “Our allocation to CTA strategies has been somewhat underweight, which we in hindsight regret,” he acknowledges. “CTA strategies have been able to capture the changing investment regime far better than we estimated.”

Focus on Manager Selection

Most hedge funds typically offer monthly, quarterly or even yearly liquidity. This frequency of redemptions means that funds of hedge funds face a slow portfolio adjustment process. “Our portfolio changes and even rebalancing is less frequent than the industry norm,” Hautamaki explains the portfolio adjustment process employed by AIM Diversified Strategies. “We’ve aimed at building a concentrated portfolio of exceptional managers and believe that “over-diversification” can limit returns and the benefits of diversification diminish quickly in this asset class.”

“We’ve aimed at building a concentrated portfolio of exceptional managers and believe that “over-diversification” can limit returns and the benefits of diversification diminish quickly in this asset class.”

That, however, does not mean that the portfolio maintained by AIM Diversified Strategies is static across all market environments. “The portfolio changes are likely to be more dramatic if we see a prevalent change in the investment regime,” argues Hautamaki. “In such a scenario, we would look to ensure that the portfolio remains aligned with the intended risk and return profile,” he emphasizes. This process requires time and effort for careful manager selection. “We track and analyze hundreds of hedge funds globally and we spend a lot of time trying to actually understand the risk and return drivers of different managers,” explains Hautamaki.

With the world facing so many sources of uncertainty, the current market environment is a difficult terrain to navigate for most investors and money managers. Research conducted by Hautamaki and his team “has found a strong positive correlation between cross-asset volatility and hedge fund manager performance dispersion with persistent momentum.” This means the opportunity set for good hedge fund managers further improves with higher cross-asset volatility, according to Hautamaki. “In other words, as global markets contend with high inflation, recession risks, and monetary policy tightening, we believe that the long-term opportunity set for some strategies and managers is above historical trend and will remain high for an extended period.”

“As global markets contend with high inflation, recession risks, and monetary policy tightening, we believe that the long-term opportunity set for some strategies and managers is above historical trend and will remain high for an extended period.”

“Some strategies and managers are inherently better positioned for these types of macro outcomes. We are very excited about the opportunity set going forward,” concludes Hautamaki. “We have in our portfolio a group of managers that have navigated periods of volatility successfully in the past.”

Foresight, Preparation, and Conviction on HedgeNordic.