The fund returned +3.72% in December with gains from the commodity and equity sectors which more than offset minimal losses in currencies and fixed income.
Equity strength continued as upbeat data and the Republican tax package met expectations that U.S. economic growth would remain elevated for the time being. Against this backdrop, the Federal Reserve hiked interest rates and reaffirmed its commitment to normalizing the balance sheet.
Commodities outperformed other asset classes during the month with strong uptrends in base metals. Oil products strengthened as global pipeline issues caused supply concerns. Our exposure to commodities remained the largest risk allocation in the portfolio, followed by our long positions in global equities. Limited or contained trends in currencies and fixed income have kept exposure low in those sectors.Performance (as of 12/31/2017)
As a strong year for equities ends, skepticism continues around the sustainability of stock valuations. Although inflation remained elusive and geopolitical concerns persisted, the S&P 500 rallied every month of 2017.
Looking ahead, many uncertainties loom on the horizon. Macro investors are keeping an eye on the implications of the year-end tax cuts in the United States. Meanwhile, Brexit negotiations in Europe and global geopolitical tensions are likely to continue to make headlines well into the New Year. Even so, equity markets appear resilient, volatility remains at historically low levels, and broad market trends provide long-term trend followers opportunities for diversified revenue streams. We remain committed to our systematic, rules-based approach as new market developments unfold.
Energy and material sectors led U.S. equity markets to new highs, as rising commodity prices boosted valuations. Globally, the United Kingdom outperformed with new agreements in Brexit negotiations. However, Eurozone equities fell on the back of a stronger euro. 2017 was a strong year for global equities as the sector enjoyed its best performance since the global financial crisis.
Directional positions within the equity sector remained intact. However, we did not open any new positions. Instead, we slightly reduced overall exposure going into January. We remained long global equities, as the strength and scope of longterm trends persist for now.
Commodities generally strengthened. Base metals outperformed as optimism surrounding U.S. growth potential bolstered copper. A commitment by OPEC to limit supply through 2018 and news about cracks in pipelines caused oil to strengthen. Meanwhile, reduced demand for natural gas held prices down until the colder weather hit in late December. Quieter, end-of-year trading sessions contained prices in agricultural and soft commodities, with wheat and live cattle selling off slightly.
We opened new short positions in platinum, silver, New York cocoa and rapeseed, along with a new long position in cotton. We closed long positions in oats and live cattle. These changes slightly increased our overall commodity exposure.
Expectations for fiscal stimulus allowed for U.S. dollar strength at the start of December but ultimately the U.S. dollar ended the month lower when compared to its major counterparts as further communication from the Fed was interpreted as dovish.
We closed long positions in the euro versus the British pound and short positions in the New Zealand dollar versus the U.S. dollar. Meanwhile, we opened long positions in the British pound versus the Australian dollar and opened short positions in the U.S. dollar versus the South African rand. These changes slightly increased our currency exposure going into January.
The U.S. yield curve, the spread between 2- and 10-year treasuries, fell again to end the year around 50 basis points. These historically low levels gained much attention among market participants. Despite the Federal Reserve’s recent interest rate hike, stubbornly low inflation and concerns about the Fed’s ability to reach targeted inflation levels caused yields to remain subdued.
We opened new short positions in eurodollars and Australian 3-year bonds. However, our fixed income exposure remained on the low side of its historical range, with a lack of long-term trends persisting in global fixed income.