The fund returned -10.51% in February, with the most notable losses coming from the equity, currency and commodity sectors.
After 15 consecutive months of positive returns, the S&P 500 Index fell amid a volatility blow up and increased concerns of global inflation. The climate challenged long-term equity uptrends.
Commodity losses were broad based in February as rising grain prices and falling metal and energy prices weighed on performance. In particular, global uncertainty boosted gold toward the start of the month but the precious metal ultimately ended February lower. Meanwhile, crude oil sold off due to concerns of oversupply. In grains, heavy rains in the Midwest led to a surge in corn prices.
The U.S. dollar seesawed amid the global equity sell off. However, the dollar moved against its long-term trend and ended the month higher compared to its major counterparts, as political uncertainties in Europe weighed on the British pound and euro currency. The Japanese yen also experienced a pullback from its established long-term trend, rallying against most major global currencies in February.
In February, the managed futures program experienced poor performance in equities. A majority of the losses came from exposure to other markets, including the US dollar and commodities. While Longboard maintains that a fully diversified portfolio should provide non-correlated returns, there are the rare occasions when many longterm trends reverse in tandem which lead to negative returns in multiple asset classes. The largest risk allocation in our portfolio was in commodities, which was twice the exposure we had in currencies and equities by month end.Performance (as of 2/28/2018)
Looking ahead, the path of interest rate hikes in the United States will remain in focus. New Federal Reserve Chairman Jerome Powell backs a normalization plan similar to his predecessor, however the market regime after the volatility blow up adds new complexity.
February was a stark reminder of how important it is to have robust risk management in place. While the performance in February was uncomfortable, it is not out of character following the significant gains the portfolio realized in 2017 and early 2018.
Longboard remains committed to our disciplined, rulesbased strategies as we seek further clarity on the health of equity markets.
Equities were in focus throughout the month with U.S. stock markets leading the way lower. At one point, U.S. equities fell more than 10% from the January highs, but ultimately recovered most of their losses. Cyclical and defensive sectors outperformed the overall market, while the energy sector underperformed.
We closed long positions in European equities, including Euro STOXX 50, FTSE 100 Index and DAX Index. We also closed a short VIX futures position. We remain long equities, but our overall exposure has decreased since January.
U.S. yields rose after upbeat employment data in early February, however the equity sell off sent U.S. 10-year yields temporarily lower. When equity selling subsided, bond yields rose for the remainder of the month. Hawkish Fed minutes caused U.S. 10-year yield to reach new highs not seen since 2014.
We opened new short positions in U.S. 30-year bonds. Our overall exposure to fixed income grew slightly, as the strength of trends increased.
The U.S. dollar strengthened versus most of its G10 counterparts. This was due to concerns that inflation would force the Fed to hike interest rates faster than expected. Elsewhere, the British pound and the euro currency both underperformed. Political turmoil around British Prime Minister Theresa May and continued Brexit concerns weighed on the sterling while anticipation of the Italian election helped to push the euro lower.
We closed long positions in the Australian and Canadian dollars versus the Japanese yen as well as the Brazilian real versus the dollar. Meanwhile we opened a long position in the yen versus the U.S. dollar. Our overall risk in currencies is positioned to capture the long-term downtrend in the US dollar.
Commodities generally weakened as the U.S. dollar ended the month higher. Oil slid in reaction to rising U.S. stockpiles while precious metals fluctuated with the U.S. dollar. After Rising grain prices adversely effected short positions in wheat and corn.
We opened new short positions in soybean oil and Tokyo rubber, and new long positions in soy meal. We also closed short positions in cocoa and long positions in feeder cattle. Commodities remain the largest risk exposure in the portfolio.