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  • Sean Rapley

July - September 2022 - Luke's Global Fund Performance Update

Luke's Global Fund achieved the following returns over Q1 2023:

July: Fund return of -3.3% vs S & P 500 return of 9.1%

August: Fund return of -0.7% vs S & P 500 return of -4.2%

September: Fund return of 3% vs S & P 500 return of -9.3%

Year to date: Fund return of -1.4% vs S & P 500 return of -5.3% (excluding currency gains).

Our portfolio as at September 30, 2022 is outlined in Figure 1 below:

Figure 1- Portfolio Pie Chart

Note: All cash is currently held in US dollars.


Our contribution analysis for the three months to September 30, 2022 is outlined in Figure 2 below:

Figure 2 – Contribution Analysis Bar Chart

Our top two contributors over the three months were short positions, namely SARK (short – ARKK) and EFZ ETF (short developed markets ETF). The top two detractors were also short / hedge positions, in the form of PSQ (short NASDAQ 100), and VIXY(short date VIX futures). The breakdown the performance according to macro segment is outlined in Figure 3 below, however, we note that it is somewhat misleading, as it includes significant currency gains, which hide the declines experienced in the Deflation segment of the portfolio.

Figure 3 – Contribution Analysis Bar Chart - By Marco Segment

There were some significant lessons we learned over the three month period in relation to managing risk in inflationary bear markets, which we touch on in our ‘key learnings’ section.

Review of Portfolio Breakdown

The breakdown of the portfolio is outlined in Figure 4 below. We note that, as of September 30, 2022, the entire Deflation segment of our portfolio consists of short dated US bonds, with an average maturity date of less than 6 months, and is currently yielding 3-3.5% pa. As a result, our effective cash position is 80% as at September 30, 2022.

Figure 4 – Portfolio Macro Segment Pie Chart

The high cash position is reflective of our opinion that we are in an inflationary bear market, which tend to have a long duration, and consist of a number of downward legs and ripping bear market rallies. We believe this bear market has some way to go. Leaning on the research of 42 Macro, we do not expect risk markets to bottom until the US Federal Reserve pivots. Pivots typically take the form of the following three scenarios:

a) Pause in rate hiking.

b) Panic, where there is a severe dislocation of markets, similar to 2020.

c) Pivot, where the Fed switches from hiking to cutting.

Over the past 70 years, equity markets have only ever bottomed three times (out of 14) before a pivot. Each time, it occurred just one month prior to the US Fed pivot. Given this, we see the best approach going forward is to wait for the US Fed to pivot before deploying meaningful capital towards risk assets, given the worst outcome in doing so is missing the bottom by one month.

We note also, that Jerome Powell made it quite clear there will be no pivot for the foreseeable future during his Jackson's Hole speech on August 26, 2022. Strong US economic data over the quarter re-affirmed our belief that Jerome's hawkishness is genuine.


In the three months to September 30, 2022, we scaled into short positions in July to early August, and exited the short positions by the end of October. We exited out of long term positions in Snowflake, Datadog, and Sea Ltd in mid August.

We exited our inflation hedge position in US Oil ETF (USO) in September.

We exited our long bond portfolio in September.


Upstart Holdings

Upstart's business model is reliant on striking competitive consumer loans using its AI platform. However, tightening liquidity and higher rates are impacting both demand and customer conversion. I

Revenue declined by 17% on the prior quarter, and loans on their balance sheet swelled by nearly $400 million. Our position size is relatively small, but we will not be looking add to this position until liquidity improves.


Datadog released their Q2 2022 results on August 4, 2022. Key Takeaways:

  1. Revenue $406 million, with 12% growth on prior quarter.

  2. Cost growth at 18%.

We closed our position in Datadog, purely on valuation grounds, after stress testing the valuation at 4.5-5% yields. We will re-enter the position at some point in time, post-pivot.

Crowdstrike Holdings

Crowdstrike Holdings released their Q2 2023 results on June 2. Key Takeaways:

  1. Revenue $535 million, with 11% growth on prior quarter.

  2. Cost growth at 9%.

We reduced our position in Crowdstrike Holdings, purely on valuation grounds, after stress testing the valuation at 4.5-5% yields. We will re-enter the position at some point in time, post-pivot.


Short positioning.

We learnt the hard way that bear market rallies can be vicious, and it is all too easy to place a short position at the wrong time. We can see an example of poor short positions we had taken in PSQ in Figure 5 below. As one can observe, our short positions were opened when the VIX was relatively elevated, and we closed our positions when VIX was generally depressed.

Figure 5 - Case Study - NASDAQ 100 Short Positioning Review / Lessons Learned

In a research paper by Athanasios P. Fassas and Nikolas Hourvouliades, “VIX Futures as a Market Timing Indicator”, which concluded that VIX Futures can be an effective tool in predicting S & P 500 index bottoms. The research paper key finding is that S & P 500 bottoms tend to occur when the VIX Futures fall into significant backwardation.

We have subsequently implemented a process to better manage our short positioning through this bear market, utilising VIX Futures data, avoiding placing short positions when VIX is elevated, and closing short positions when VIX Futures go into significant backwardation over the 3 month forward contracts. Interestingly, VIX Futures went into significant backwardation on September 24, 2022, which we utilised to exit our most successful short positions, SARK (short ARKK ETF), SH (S & P 500 short ETF), and RWM (short Russell 2000 ETF).

Long Bonds

Our long duration bond positions had been a drag on returns since early in 2022. We wrongly held these positions in anticipation of accelerating deflation into the second half of 2022, which turned out to be incorrect. When inflation is above 5%, long bonds become correlated to equities, and lose their utility as a hedge.

A time will come when inflation “normalises” (perhaps above 2.5%), where long bonds can re-establish their inverse correlation to equities, but this is unlikely to occur without a recession in the United States. We are nowhere near reaching this point.

Lastly, apologies for the delay in producing this update. Unfortunately, life got in the way, with work, family commitments, and the loss of a dear friend. Remember to treasure the the moments you have with your loved ones, as one never knows if they will be your last.

If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.



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