The fund was down -12.38% in January with a majority of the losses coming from short positions in equities.
January ended up looking completely different than our strong December. In the new year, markets shook off the government shutdown and slowing Chinese growth and rebounded sharply. Once again U.S. equities led the way.
Focus turned to central banks in the wake of market turmoil. The Federal Reserve did not hike in their January FOMC meeting as expected, however “patience” became the new buzz word from the Fed. This dovish language combined with talks about slowing or ending Quantitative Tightening was broadly cheered by equity markets while weakening the U.S. dollar. The Peoples Bank of China also pledged further stimulus while the ECB and Bank of Japan signaled continued support as growth and inflation projects remained bleak.
The energy complex also saw significant reversals to start 2019 as major oil benchmarks (WTI, Brent) rallied 20% in the month of January. The weaker dollar also contributed to a continued rally in gold, breaking through $1,300 an ounce for the first time since mid-2018.Performance (as of 12/31/2018)
Markets displayed significantly more volatility throughout 2018 than we had previously seen in this long bull run. Many issues that caused volatility in 2018 remain unresolved, specifically continued U.S.-China trade wars (deadline for additional tariffs 3/1), Brexit deadline (3/29), and global growth concerns (China slowdown, Italy in recession). Despite this, the US stock market started 2019 with a classic V-bottom reversal that essentially erased all of Decembers losses. As discussed in the recap, this was largely due to central bank support. While this was cheered in January, historically central bank support comes during times of market turmoil.
Despite significant losses this month the fund remains positioned to provide crisis alpha if the above events unfold poorly. While it has been uncomfortable to watch new positions from Q4 2018 contribute to negative performance, our long-term approach has kept us in many of those positions and avoided being whipsawed.
We closed a short position in the DJIA index and the Australian SPI 200, while moving closer to our stops in other U.S. equity markets as they rallied aggressively in January. Our overall sector exposure decreased due to strong global equity performance.
Fixed income saw its overall exposure increase as it was the only positive contributor for the month. Weaker growth and dovish central bank action benefited our long positions abroad. During January we added a long German Schatz position.
We closed several USD long positions including the JPY/USD pair, BRL/USD and NZD/USD. As the JPY rallied we initiated several long positions including CHF/JPY and CAD/JPY. Elsewhere we went long the sterling vs. the euro.
We closed short positions in Gold and Tokyo Gold as both markets continued to rally. In the energy complex we closed a long position in Natural Gas. Overall exposure remained relatively flat.