Next Edge AHL Fund: Commentary

FUND COMMENTARY – DECEMBER 2018

December marked a tumultuous end to a volatile year, which turned out to be the worst since the credit crisis in many financial markets. The Fund was fairly well positioned and gained +6.30% (Class A Units) principally from fixed income and equity trading while incurring small losses in agriculturals trading. With equity markets so volatile, demand for the safety of fixed income was high and developed market bonds rallied.

Long positions in Japan, Australia, and America, were top performers, while small losses were incurred by a short in Canadian bond futures where there was specific news from the Bank of Canada (“BoC”) noting concerns surrounding falling oil prices and ongoing trade wars, implying a reduced probability of future rate hikes. As equity markets sank, it was clearly helpful that the Fund entered December net short. A short futures position in the Russell 2000 Index (RUT), edged out short US energy equities as being the most significant to performance. They were somewhat offset by losses incurred on remaining longs in US food and healthcare company stocks.

Currency trading was also mixed but weakly positive; a short position in the Canadian dollar against USD profited from loonie weakness stemming from the BoC comments, while a short in the Japanese yen, which was switched later in the month, triggered losses as capital fled to the traditional safe haven. Commodities performance was mixed but overall positive. There was significant dispersion between base and precious metals which fell and rose respectively as investors flocked to safety while equities tumbled. Gains from long palladium and short aluminum positions were partly offset by losses in other metals and short silver, which was switched at month end. Silver, in particular, saw a sharp reversal, gaining 9% in December, while palladium continued to appreciate due to strong demand.

Energy trading made a small contribution to performance. The US natural gas price’s rollercoaster ride continued in December, collapsing around 30% from its November close, driving losses on the Fund’s long position. This was offset by a range of oil-related shorts as crude oil continued its steady decline with prices falling another 10%. Agricultural trading was the only area where the Fund finished in the red for the month. Losses were driven by a short cocoa position as well as a losing long corn position.

Source: Man Group Database and Bloomberg

1. Next Edge AHL Fund (the “Fund”) returns are net of all fees and expenses associated with Class A Units and Class F Units charged from December 28, 2009 (trading start date.) Returns for 2018 are unaudited. Therefore, performance statistics containing 2018 figures shown in this material are subject to final confirmation. The historical annualized rates of return as of December 31, 2018 for the Next Edge AHL Fund Class A Units as of are 1-yr -5.35%, 3-yr -3.57%, 5 yr 2.19%, 10-yr N/A, and CARR-0.34%; for Class F Units are 1-yr -4.11%, 3-yr -2.34%, 5 yr 3.57%, 10-yr N/A, and CARR 1.02%. The Fund obtains exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, without limitation, stocks, bonds, currencies, short-term interest rates, energy, metals and agricultural commodities (the “Underlying Assets”) managed by AHL Partners LLP (the “Investment Manager” using a predominantly trend-following trading program (the “AHL Diversified Programme”) The AHL Diversified Programme is implemented and managed by the Investment Manager.
The AHL Diversified Programme is also accessed by Man AHL Diversified plc. Man AHL Diversified plc is an open-ended investment company organized under the laws of Ireland and listed on the Irish Stock Exchange.While it is intended that the Underlying Assets will be managed with the same investment objectives and strategies used by the Investment Manager in managing the assets of Man AHL Diversified plc, their investments may not be identical and the returns of the Underlying Assets will differ from the returns of Man AHL Diversified plc. Differences in performance will be due to a number of factors including but not limited to fees, taxes, currency hedging, foreign exchange, variations in trading programmes and allocations, cash flows and asset size. The leverage, strategy and investments of Man AHL Diversified plc have varied over time and as a result performance in any future period will vary.The information about the performance of Man AHL Diversified plc is not, and should not be construed to be, an indication about the future performance of the Underlying Assets or the Fund. The charts depicting Performance Attribution, Sector Exposure, Key Market Attribution, Var and Net Exposure Monthly Comparison are derived from Man AHL Diversified plc.
2. World stocks: MSCI World Net Total Return Index. The historical annualized rates of return as of December 31, 2018 are 1-yr -8.71%, 3-yr 6.30%, 5-yr 4.56%, 10-yr N/A, and CARR 7.61%.
3. Managed Futures: Barclays BTOP50 Index. When 12 months of performance data is unavailable for a calendar year, partial year to date is shown. The indices shown are not benchmarks as they are not representative of the Fund’s investment strategy. They shall be used as a comparison of investing in other asset classes only. The investment strategy of the Fund is similar to the above indices as it involves investing in stocks; but the Fund also invests in bonds, currencies, interest rates, energies, metals, credit and agriculturals. The historical annualized rates of return as of December 31, 2018 are 1-yr -4.50%, 3-yr -3.27%, 5-yr 0.15%, 10-yr N/A, and CARR 0.17%.
4. Sharpe ratio is calculated using the risk-free rate in the appropriate currency over the period analyzed. Where an investment has underperformed the risk-freerate, the Sharpe ratio will be negative. Because the Sharpe ratio is an absolute measure of risk-adjusted return, negative Sharpe ratios are shown as N/A, as they can be misleading. Financial statistics that assume a normal distribution of returns from an investment strategy such as volatility, correlation and Sharpe ratio, may underrepresent the risk of sizeable rapid losses from such investment strategy.
5. In a correlation matrix the values can vary between minus one (perfect negative correlation), through zero (no correlation), to plus one (perfect positive correlation.)
6. The sector attribution percentages above are to be used as indications only. The percentages are estimated and generated from the underlying AHL Diversified Programme system and do not take into account the fees/interest/commission charges on any particular account. Differences may also occur due to slippage variation, portfolio changes, FX movements and post execution adjustments. Therefore, the sum total of these sector indications will not necessarily equate to other reported performance for the month in question.
7. The chart shows long-term risk allocation calculated at the start of the reporting period versus the current sector risk allocations calculated at the end of the period. The current sector allocations give an indicative value of the relative risk of the positions taken within each sector at a given point in time; this number takes no account of correlations across sectors. The long-term risk allocations are designed to reflect the expected long-term risk exposure to each sector relative to the other sectors in the portfolio. The portfolio structure and constituents are regularly reviewed by the investment management team and sector allocations will change accordingly.
8. Exposure values represent the delta notional value of positions expressed as a percentage of fund capital. Where applicable, fixed income exposures are adjusted to a 10-year bond equivalent. Currency exposure within this table only reflects that of the Currency sector traded by AHL and does not include FX hedging or cash management. For credit default swaps, a short position represents buying protection and a long position represents selling protection.
9. The key market attribution gives an indication of which markets have contributed most to the overall performance, both positively and negatively. Therefore, only the key markets are represented.
10. From January 1, 2010 to the present date, the performance of the Next Edge AHL Fund – Class A Units (net of all fees and expenses.)
11. From November 1, 2006 to December 31, 2009 the performance of Man AHL Diversified (Canada) Fund – Class A Units (net of all fees and expenses with dividends reinvested.)
12. This information is on the underlying programme and not the Fund. AHL Diversified Programme represented by the performance of Man AHL Diversified plc from March 26, 1996 to October 31, 2006 (hedged from USD to CAD using the relevant 3 month risk free rate differentials and net of all fees and expenses.) The Investment Manager manages the assets of the AHL Portfolio in accordance with the AHL Diversified Programme. While it is intended that the Underlying Assets will be managed with the same investment objectives in managing the assets of AHL Diversified Programme, their investments may not be identical and the returns of the AHL Portfolio will differ from the returns of AHL Diversified Programme. Differences in performance will be due to a number of factors including but not limited to fees, expenses, taxes, currency hedging, foreign exchange, variations in trading programmes and allocations, variations in notional exposure, investments not being identical, cash flows and asset size. The leverage, strategy and investments of AHL Diversified Programme have varied over time and as a result performance in any future period will vary. AHL Diversified Programme is valued weekly, however, for comparative purposes, statistics have been calculated using the last weekly valuation for each month.
There are inherent limitations in any comparison between a managed portfolio and a passive index. Each index is unmanaged and does not incur management fees, transaction costs or other expenses associated with a private fund. There are risks inherent in hedge fund investing programs.
Note to Investment Professionals: The information in the Monthly Report is being provided to current investors in the Fund and is being provided to their registered dealers for informational purposes only. This is not sales literature and cannot be used as such.
Opinions expressed are those of the author as of the date of their publication, are subject to change and may not reflect the opinion of all members of the Company. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations at the date of their publication. We undertake no obligation to update or revise them. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those implied in the statements.
The Fund is not a trust company and does not carry on business as a trust company and, accordingly, the Fund is not registered under the trust company legislation of any jurisdiction. Units of the Fund are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under provisions of that Act or any other legislation.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States or to U.S. persons except pursuant to an exemption from the registration requirements of those laws. The AHL Portfolio is not directly available to Canadian investors but rather, the Fund provides exposure to the AHL Portfolio. Calculations are based on net asset values after deductions for fees and operating expenses, which are not the same as those to be charged or incurred by the Fund. Therefore, differences in returns of the Fund versus the AHL Portfolio may occur due to a number of factors such as: taxes, fees and expenses, foreign exchange, cash flows, currency hedging, variations in trading programmes and allocations and asset size. The information provided herein is for information purposes only and does not constitute a solicitation, public offering, advice or recommendation to buy or sell interests in the Fund, the Portfolio, shares or any other Next Edge product. Please refer to the Fund’s prospectus for more information on the Fund as any information provided in this Report is qualified in its entirety by the disclosure therein. Past performance is not an indication or guarantee of future performance. Access the latest performance and other information on the Next Edge Capital website: www.NextEdgeCapital.com.
*Source: Man Group Database as of September 30, 2018
**Part Year