The fund returned a loss of -5.76% during the month as losses from equities and commodities offset gains in currencies and fixed income.
Equity markets were under pressure globally during the month. Much of this weakness has been attributed to tightening of global monetary policies, specifically by the Fed. Federal Reserve Chairman Jerome Powell ratcheted up these concerns early in the month when he said the central bank is “a long way” from neutral interest rates. These equity market moves were significant enough to cause us to exit our fourteen remaining long equity positions and enter ten new short positions during the month. This resulted in our equity exposure switching to net short for the first time in years.
Recent volatility has kept all eyes on equities; however, commodities, currencies, and fixed income are being impacted by shifting macro themes. In commodities, the equity sell-off caused gold to rally and benefit from safe haven status, while crude oil weakened due to renewed oversupply concerns. The U.S. dollar finished the month stronger versus its major counterparts and the Federal Reserve’s gradual rate hikes have caused U.S. yields to continue to outperform other developed markets, despite the selloff in equities.Performance (as of 10/31/2018)
As we mentioned last month, cracks continue to emerge in the equity markets. Over the past decade, we have occasionally seen equity weakness similar to October. However, this weakness has generally caused limited portfolio adjustments and equity markets have remained in an uptrend. October was different. We saw full trend reversals in many international equities. These portfolio adjustments have caused short term losses. These types of losses are as expected when we see significant position changes. The portfolio is adjusting to provide more “crisis alpha” if the equity sell-off continues.
Looking ahead, the domestic and international political backdrop will likely continue to drive market sentiment. Midterm elections in the U.S. and ongoing geopolitical tensions will likely set the tone for the remainder of 2018.
Global equities fell sharply during the month and erased all of their gains for the year. In the U.S., equities fell by nearly -7% and posted their worst monthly returns in more than seven years. Similarly, emerging market stocks continued to underperform while Chinese equities fell by more than -11% as tensions surrounding tariffs took hold.
During the month we experienced significant position changes. Domestically, we exited long positions in futures for the following futures markets:
Internationally, we exited positions in:
We also entered new short positions in:
The portfolio also reversed positions in the Nifty (India) and MSCI Taiwan, going from long to short during the month. Our overall exposure to the equity sector remained nearly unchanged; however, the portfolio direction change is significant. These changes leave our portfolio flat U.S. equities and short across the rest of the world.
Bonds are a key focus to macro markets at the moment with US yields breaking out of a range and continuing to rise. The knock-on effects remain unknown for the time being but the ability of markets to absorb higher yields may provide insight to the equity markets. Global bonds continue their lackluster performance, particularly in Europe where concerns over Brexit and the Italian budget have impacted performance abroad.
Our number of positions in fixed income remained unchanged as an initiation in US Utlra bonds was offset by a liquidation in German two-year Schatz.
Global yields were weighed down by overall risk off sentiment in the equity markets. The U.S. 10-year yield ended the month at 3.14% after having rallied earlier in the month due to continued positive U.S. economic data. As equities remain under pressure, the flat yield curve will likely remain a point of discussion amongst macro followers.
During the month we opened a new short position in Canadian government bonds. Our overall exposure to fixed income persists at historic lows and remains short U.S. and long Germany.
Volatility returned to the commodity sector in October. Oil fell by nearly -9% due to concerns about lowered demand while, gold rallied during the month due to “risk off” sentiment in equities. Softs were also a detractor as cocoa, coffee and sugar prices moved contrary to established longer term trends.
During the month we closed long positions in cotton and RBOB gasoline and a short position in London cocoa and Robusta coffee. We opened a new long position in palladium and new short positions in Kansas City wheat and canola oil. These adjustments reduced our exposure to commodities fairly significantly.