The fund was up +4.83% during the month as gains from short positions in equities and commodities benefited the portfolio.
December was a wild month. Following optimistic sentiment at the beginning of the month as the U.S. and China agreed to a ninety-day trade truce, equities started to breakdown at a faster pace than seen in previous weeks. Weaker than expected data, the government shut down, and lighter trading volumes paved the way for a dismal holiday trading week as global equities ended December down more than 7%. In turn, the bond markets adapted to this weakness and yields declined. The U.S. 10-year yield fell significantly to end the year at levels not seen since January 2018.
The Federal Reserve delivered an anticipated 25bp hike in December which had little impact on the currency markets as this had been factored into current pricing. However, the U.S. dollar weakened versus the euro, Swiss franc, and Japanese yen due to mixed signals from the Federal Reserve and expectations that the Fed would be forced to slow the rate of hikes.
Commodities were not insulated from the volatility in markets. Gold rose more than 5% as a beneficiary of a weaker U.S. dollar and safe haven demand amidst growing economic unknowns. Crude, however, fell more than 8% during the month as planned production cuts did not ease supply concerns.Performance (as of 12/31/2018)
Markets never move in a straight line indefinitely and while December was full of equity weakness, the market turned its attention to the Federal Reserve’s response. In the early stages of a stock market correction there is a natural feedback loop. Equity weakness points to a dovish central bank outlook and a dovish central bank outlook serves as a calming agent to markets. When that is solely in reference to market sentiment and transitory factors, this process works exactly as needed. The idea of a dovish Fed is enough to settle the masses allowing markets to take in more information.
As we enter 2019, this process is supporting the stock market for the time being. The assumption that the Federal Reserve will act proactively has soothed some of the fears that we are entering into an equity bear market. However, we are in a new era of volatility. Markets are acutely focused on economic data and the ability for the data to indicate what is next for the stock market.
We opened new short positions in domestic equities including Nasdaq, S&P 500, and DJIA indexes as well as new short positions in international equities markets in Europe, Australia, Japan. We have also initiated a long position in the VIX. Our overall sector exposure has increased due to continued equity weakness.
We closed short positions across the yield curve in the U.S. and opened new long positions in the U.K., Canada, and Australia. Exposure in the fixed income sector has increased over the period as we exited short positions and added to long international positions.
During the month we opened a new long position in Japanese government bonds and closed a short position in Canadian government bonds. Our overall exposure to fixed income persists at historic lows and remains short U.S. and Italian bonds while long German and Japanese bonds.
In currencies we opened new long Japanese yen positions versus the euro and British pound. Our overall exposure to the sector decreased since November as the U.S. dollar uptrend has been under pressure amidst expectations of a more dovish Federal Reserve.
We opened new short positions in energy markets such as WTI, Brent Crude, Heating Oil and Gas Oil. Additionally, we opened new short positions in London Cocoa and Orange Juice. At the portfolio level, our exposure to commodities remained our largest risk.