The fund returned -0.46% in September. Losses in currencies, commodities and fixed income offset gains from equities.
The U.S. Federal Reserve (Fed) announced plans to reduce its balance sheet as early as October at its Federal Open Market Committee (FOMC) meeting. The Fed also hinted at an additional rate hike, boosting the implied odds of a December hike, according to Fed funds futures. Risk assets were unfazed and the global bull market in stocks accelerated throughout the month. Equity gains spanned U.S., European, Japanese and emerging market stock indices. In the United States, domestically focused small-cap and mid-cap stock indices outperformed based on renewed hopes for tax reform. Large caps and technology stocks transitioned from leaders to laggards as the dollar strengthened.
The Fed’s renewed hawkish bent sent U.S. interest rates higher across the board, reversing this year’s former trend of declining rates and a flattening yield curve. Rising yields sparked corresponding moves across currencies and commodities, including a rebound in the U.S. dollar against nearly all foreign currencies. Precious metals sold off as the “risk on” environment and higher interest rates lessened the demand for perceived safe haven assets. Other commodities moved independently, as divergent supply and demand fundamentals drove uncorrelated price movements across the sector. Volatility reached a new record low.Performance (as of 9/30/2017)
After years of easy money and balance sheet expansion, the U.S. central bank is transitioning towards tighter monetary conditions and balance sheet reduction. Risk assets reacted with relative exuberance, defying expectations for higher volatility in this new era of tighter money. However, we’re still in the early days of the tightening process in the U.S., and easy money continues to spill into global asset prices from foreign central banks. For now, the global equities bull market is alive and well, so we remain long risk assets in line with the market’s prevailing trends.
The portfolio’s recent reduction in equity risk has moved towards commodities and currencies. This adds a meaningful degree of diversification that we believe will lower our correlation with traditional asset classes. We believe the fund is well positioned to continue delivering equity-like returns over the long term, while taking on less risk and travelling an uncorrelated path.