Accelerate Monthly -Scoring Big: Caitlin Clark’s Stardom and Nvidia’s Stock

June 15, 2024 — In every generation, an athlete comes along whose skill, personality, and resulting popularity transcend the sport.

Tiger Woods did it for golf. Michael Phelps did it for swimming.

Now the Indiana Fever’s rookie Caitlin Clark is taking the Women’s National Basketball Association to new heights.

Caitlin Clark is a professional basketball player who has gained widespread popularity due to her impressive skills on the court. Her unprecedented popularity has caused interest in the WNBA to skyrocket.

Clark’s WNBA debut game averaged 2.1 million viewers and peaked at 2.3 million, surpassing viewership of the Stanley Cup Playoffs. Her games set attendance and television viewership records for the sport, and in some cases, her popularity can be challenging to manage. For example, the Atlanta Dream, a WNBA team that shares the Eastern Conference with Clark’s team, moved their two regular-season games against Indiana to the NBA‘s Atlanta Hawks’ State Farm Arena, increasing capacity from 3,500 seats to 16,888. Clark is a bonafide star.

Unsurprisingly, Clark’s newfound stardom has the WNBA packed to capacity, trying to accommodate the surge in popularity. From selling out arenas to dominating media coverage, Clark’s popularity exceeds that of all other WNBA players combined.

The stock market has its own star, whose rabid fandom and media coverage have transcended the market while causing the S&P 500 to nearly burst at the seams.

Nvidia has taken the world by storm with its AI-leading chips. The company is at the forefront of the next technological revolution, and investors are scrambling to get a piece of it.

Nvidia’s popularity is so shocking that in a recent stock market session, its trading volume exceeded that of the following 20-most popular stocks combined. Traders’ penchant for the stock was more than six-fold that of former market darling, Tesla. It regularly trades multiples of the highly-popular S&P 500 index fund, SPY.

Source: Bloomberg, Eric Balchunas

Nvidia’s market capitalization recently surged above $3 trillion, making it the world’s second most valuable company, behind only Microsoft. Nvidia added $1 trillion of equity value in approximately six weeks. The speed and magnitude of the stock market wealth generated by the company is unprecedented.

The company’s co-founder and CEO, Jensen Huang, is now a certified celebrity. He gets mobbed for pictures and autographs wherever he goes. Crowds chant his name and scramble for selfies with the business leader. “Jensanity” is upon us.

It’s Nvidia’s world, and we are just living in it. Its stock is the Caitlin Clark of the market, and investors seem to care about nothing else.

While the company’s success is undoubtedly positive, creating a world-changing technology while minting new millionaires at the fastest pace on record, the stock’s popularity has created a quandary for investors.

Nvidia’s weight in the S&P 500 has surged to nearly 7%. Its shares accounted for 34% of the S&P 500’s ascent this year. The stock and the broad market index have a correlation of 0.96, meaning wherever Nvidia stock goes, the stock market follows.

Nvidia is the tail wagging the stock market dog, for better or worse. Lately, that dynamic has played out incredibly well, leaving the U.S. equity benchmark once again running circles around its global peers. Nonetheless, just as a downturn in Caitlin Clark’s performance (or an injury, God forbid) would tank the WNBA, any misstep from Nvidia could have a destructive effect on the stock market.

While Nvidia is an exceptional company, and its stock market ascent has been glorious, its overall influence on the stock market should be a cause for concern among investors. The company’s $3 trillion market capitalization exceeds almost every country’s stock market. Its influence on not only the S&P 500 in particular, but the world’s stock market as a whole, is unparalleled.

Given the unrivalled influence of Nvidia on investors’ portfolios, diversification is more critical now than ever. While Jensanity continues at a red-hot pace, allocators should be prepared for a scenario in which Nvidia’s stock falls back to earth, which would take the stock market with it.

Accelerate manages five alternative investment solutions, each with a specific mandate:

• Accelerate Arbitrage Fund (TSX: ARB): Merger Arbitrage
• Accelerate Absolute Return Fund (TSX: HDGE): Absolute Return
• Accelerate OneChoice Alternative Portfolio ETF (TSX: ONEC): Multi-strategy
• Accelerate Canadian Long Short Equity Fund (TSX: ATSX): Canadian Long Short Equity
• Accelerate Diversified Credit Income Fund (TSX: INCM): Private Credit

Please see below for fund performance and manager commentary.

ARB gained 0.1% in a relatively uneventful month for arbitrage.

Fifteen deals were announced on the merger arbitrage side, and the Fund participated in three, including one subscription receipt arbitrage investment. Eight of the Fund’s merger arbitrage investments were completed successfully in May.

There were three SPAC IPOs during the month, and the Fund participated in one. In addition, ARB continues to allocate to SPACs in the secondary market that meet the Fund’s return threshold.

ARB is currently allocated 51% to merger arbitrage and 49% to SPAC arbitrage, with gross exposure of 149.6% (141.1% long and -8.5% short).

Five years ago, we launched HDGE, the first institutional-caliber exchange-traded long-short equity fund. Since its inception, HDGE has generated an attractive return with a beta of just 0.09 and alpha of +4.8% per year. Additionally, since inception, the Fund’s downside participation has been -2.5%, which means in months when equities fall, the Fund has risen more often than not.

In May, HDGE generated a 1.4% return in a mixed month for multi-factor long-short portfolio performance. While market neutral value and operating momentum generated positive returns of 2.3% and 3.0% during the month, the long-short quality, price momentum, and trend portfolios all declined, falling -3.1%, -3.0%, and -3.2%, respectively.

Nevertheless, all individual long and short factor portfolios were up in May (despite some short portfolios gaining more than their long pairs) and the Fund’s 60% net long positioning helped lead to a positive monthly return.

ONEC increased 1.4% in May, taking its year-to-date return to 7.2%.

The Fund’s return was led by the real assets bucket, in which infrastructure surged 3.9% and real estate jumped 2.8%. The inflation protection bucket also contributed positively, with gold adding 1.8% and commodities returning 1.5%.

In the credit portfolio, leveraged loans generated a 0.9% while the mortgage portfolio gained 1.3%.

The only allocation that detracted from the monthly performance was the managed futures allocation, which fell -0.3%. The rest of the Fund’s hedge fund allocations were positive, with risk parity, absolute return, long-short equity, and arbitrage returning 3.2%, 1.4%, 2.9%, and 0.1%, respectively.

With the goal of increasing returns of the Fund, ONEC made an asset allocation change, swapping its lower-yielding mortgage portfolio for a higher-yielding allocation to private credit.

ATSX gained 2.9% during the month, compared to its benchmark, the TSX 60, which was up 2.7%.

The Fund generated 20bps of outperformance above the benchmark despite a challenging environment for Canadian long-short factor portfolio performance. Nearly all Canadian factors were negative in May, with the trend portfolio being the sole long-short portfolio that was down less than -1.0%.

Accelerate launched Canada’s first private credit ETF, INCM, on May 15th. The thesis behind the Fund was threefold:

1. High yield — We view private credit yields as attractive for two reasons. First, private credit is the highest yielding major asset class, with yields 3–5% greater than junk bonds and preferred shares. Second, in a high (or normalized) interest rate environment, we believe the attractive returns earned by private credit will come at the expense of private equity, which will struggle with high financing costs.
2. Floating rate — Over the past five years, income investors were heavily allocated to bonds, which were a one-way bet on the direction of interest rates. That bet turned out poorly, with bonds suffering five years of negative returns as interest rates rose. No one expected their Canadian bond index fund to suffer a double-digit loss in 2022. Income investors have been too heavily weighted toward fixed-rate exposures, and a floating rate yield will help diversify income streams and reduce the bet on the direction of interest rates. Private credit helps diversify investors’ income through floating rate loans.
3. Diversification, quality, and liquidity — The traditional (illiquid) Canadian private debt space is in trouble. Most funds have an imprudent lack of diversification, along with a focus on very poor-quality credits. These two issues have created an environment in which the majority of traditional (illiquid) Canadian private debt funds are now gated, meaning they have halted redemptions and will not give investors their capital back. We launched INCM to offer a widely diversified private credit exposure (4,000+ loans), with a focus on high quality and liquidity. Private credit investors can eliminate gating risk by using INCM in their portfolios.

INCM just declared its first monthly distribution for June of $0.17 per unit, which equates to an annualized yield of 10.2%. Currently, INCM’s portfolio features 4,536 underlying holdings, of which 84.4% are senior secured loans and 91.3% are floating rate in nature.

Have questions about Accelerate’s investment strategies? Click below to book a call with me:

-Julian

Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this distribution is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate Financial Technologies Inc. (“Accelerate”) as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Past performance is not indicative of future results. Visit www.AccelerateShares.com for more information.