- Sean Rapley
October - December 2022 - Luke's Global Fund Performance Update
Luke's Global Fund achieved the following returns over Q2 2023:
FY Q2 2023: Fund return of -5.1% vs S & P 500 return of 7.1%
Year to date: Fund return of -6.1% vs S & P 500 return of 1.4% (excluding currency gains).
Our portfolio as at December 31, 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 December 31, 2022 is outlined in Figure 2 below. The majority of losses outlined in Figure 2 relate to foreign exchange losses over the quarter, as the market sentiment reverted from inflation regime to goldilocks regime.
Figure 2 – Contribution Analysis Bar Chart
The most significant contributors to our underperformance were short term trade positions, following the 42Macro portfolio construction composition. These included UNG (natural gas), JDST (levered short gold mining explorers), PFIX (long dated treasury inverse ETF), EFX ETF (Short developed markets), and SH (short S & P 500), and VIXY (short dated VIX ETF).
A number of these trades violated our recently established risk management policies regarding short positioning, which we will discuss later. Upon reflection, to suffer such a big drawdown over the quarter with such a defensive portfolio was something.
REVIEW OF PORTFOLIO BREAKDOWN
The breakdown of the portfolio is outlined in Figure 3 below..
Figure 3 – Portfolio Macro Segment Pie Chart
The high cash position (+70%) is reflective of our opinion that we are in an inflationary bear market. More than 30% of our portfolio is in short dated US treasury ETFs, yielding around 4%.
FOMC Chair, Jerome Powell pivoted to a more hawkish stance on December 14, 2022, stating the FOMC is focusing on the tight labour market, and will be looking for evidence of a sustained slowdown in wages growth before ending this rate cycle.
China also ended it’s zero COVID policy, which may lead to a period of goldilocks regime is the Chinese re-opening provides stimulation to a flagging global economy. this will depend on whether the CCP announces any significant stimulus spending. It may lead to positive commodity tailwinds, which is also bearish for US dollar exposure.
Net Liquidity (US Fed account balance sheet - US Treasury General Account + Reverse Repo Program) as outlined in Figure 4 below, improved from a low in October. With $95 Billion USD in quantitative tightening per month anticipated over the next 3-6 months, we expect Net Liquidity to continue declining through the second half of FY 2023.
Figure 4 – Net Liquidity
In the three months to December 31, 2022, we exited out of our position in Datadog and reduced our position in Crowdstrike.
We increased our position size in short dated US Treasuries to gain exposure to risk free returns of up to 4%.
We added and closed short positions over the quarter. All of our short positions were poorly timed and inconsistent with our short positioning risk management policies. We subsequently reduced our short positions over the quarter.
COMPANY NEWS & REPORTS
There was little to report in relation to our holdings.
KEY LEARNINGS THIS MONTH:
We repeated the errors of Q1 2022, as we decided to follow 42Macro recommended positioning, contrary to the lessons of Q1. 2022.
Following the findings of Athanasios P. Fassas and Nikolas Hourvouliades, would have prevented the portfolio drawdowns of Q3 2022. To avoid this mistake again, we will fade any shorting guidance not supported by the following policy:
Short positions shall only be taken as hedge against macro regime risk, and shall only be implemented when the following conditions apply:
Applying the above constraint will only allow short positioning when realised volatility falls substantially below the 3 month forward implied volatility. When realised volatility falls this far below VIX 3M, the VRatio has typically reverts to < 1.0 during bear market regimes.
It has been a tough quarter, but we these are the times that make us better risk managers. Fortunately, this is an infinite game, and we look forward to what 2023 holds.
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.
We will maintain our current frequency of quarterly updates, given our current time constraints.