Founder and CEO of liquid-alt ETF firm is 'pounding the table' on strategy's return and diversification potential
The Accelerate Arbitrage Fund, a liquid-alternative ETF managed by Accelerate Financial Technologies, was launched on the TSX under the ticker ARB on April 7. That means its impressive returns have fewer than six months of performance history behind them, so Canadian retail investors and advisors might be forgiven for overlooking it as a possible portfolio holding.
But that thinking ignores the fact that the underlying strategy has roots going back to the 2008 global financial crisis, when Accelerate’s founder and CEO was just getting his at-the-terminal education in the art and science of running arbitrage strategies.
“I cut my teeth doing merger arbitrage, relative value arbitrage, convertible arbitrage, and SPAC arbitrage, among other things of that nature,” Julian Klymochko told Wealth Professional. “In 2012, my previous firm launched an event-driven arbitrage fund; I’ve been running that strategy since January 2012. For years, we ran the strategy successfully as a two-and-20 type hedge fund that was exclusively for accredited investors.”
A master plan to democratize alternatives
Even as he garnered recognition and success from helping institutions and wealthy clients earn handsome profits, he realized how unfair it was to offer some of the best investment strategies only to the rich. That thinking led to the launch of Accelerate in 2018, with the aim of democratizing alternative investment in Canada.
“Our mission was to bring access to these institutional-calibre strategies in easy-to-use alternative ETFs,” Klymochko said. “We wanted to be the leader in delivering these to people in a package that offers liquidity, transparency, and low cost.”
A lot of media coverage around alternative investing has traditionally gone to private equity, venture capital, and real assets, as well as long-short funds. While they’ve historically received comparatively little press, arbitrage strategies are a tried-and-true fixture in the world of institutional investment, according to Klymochko, with practically ubiquitous representation across endowment and family office portfolios. Retail fund investors, meanwhile, have largely been confined to traditional long-only exposure to stocks and bonds.
But Canada’s securities regulators set the stage for change in 2019 with a regulatory shift that allowed the creation of a liquid-alternatives market in the country. With the alternative mutual funds and ETFs that have launched since then, financial advisors and retail investors can now potentially create portfolio allocations that more closely mirror the likes of the Yale University endowment and multi-billion-dollar pension funds.
“That’s important specifically in this time period, where we went to the most volatile market basically of all time,” Klymochko said. “Interest rates are at their lowest levels in about five hundred years; yields are at all-time lows. At the same time, investors still have high expectations in terms of what they want to earn from their investments.”
An August survey from New York-based Schroder Investment Management found that around the world, investors are expecting average annual returns of 10.9% over the next five years; the ones from Canada, according to the firm, set their expectations at 9.55%. Analysts’ consensus forecasts for the 60-40 portfolio fall far short of that, Klymochko said, clocking in at just 2.9%.
“We’re encouraging investors to consider perhaps a 50-30-20 allocation, including 50% in stocks, 30% in bonds, and a 20% diversified sleeve of alternative investments,” he said. “A basket of those trades just provides a completely different exposure where absolute returns can be generated, irrespective of where markets and interest rates go.”
Still, many investors may shy away from alternatives, equating them with risky high-roller bets based on their traditionally lofty minimum investment thresholds. But as Klymochko points out, that universe covers wide swaths of assets and strategies, which can be located along different spectrums of risk, transparency, and liquidity. That means before making a judgment on a specific alternative vehicle, an investor would do well to pop open the hood.
‘We’re still seeing tremendous opportunity’
In the case of ARB, he said Accelerate makes a point of running it as a low-volatility arbitrage strategy, as opposed to others with possibly more jagged returns owing to higher levels of leverage. ARB’s current toolkit of investing tactics includes merger arbitrage, which seeks to profit from the successful completion of announced mergers and acquisitions. More recently, it has been favouring SPAC arbitrage, a strategy built on the actions of so-called “blank check” companies that present a viable alternative to the traditional IPO process.
In a nutshell, arbitrage strategies aim to profit from the spreads in companies’ prices between the time an acquisition is announced and the time it is finalized. The current volatility in financial markets, Klymochko said, has churned up a rich opportunity set of deals with very wide spreads, opening the door for double-digit annualized returns with very low to no risk.
“Our target return for the Accelerate Arbitrage Fund is four to eight per cent annualized returns and providing three per cent dividend for investors. So dividend plus growth,” he said. “But in the four to five months we've been around, we're already up about twelve per cent, far exceeding our return target.”
Because of the nature of arbitrage strategies, Klymochko said they can do well in a rising-rate environment, as opposed to traditional bond strategies that could “get smoked” in such a scenario. The vast majority of yield generated by ARB, he added, comes in the form of capital gains, which creates a more tax-efficient option than standard fixed-income portfolios.
“In terms of a go-forward basis, we're still seeing pretty tremendous opportunity in the world of arbitrage,” Klymochko said. “We've been pounding the table on the potential in the space for a long time, and we’re spreading more awareness about it through our blog posts and podcast content, so I'd urge all retail investors to learn more about it.”