Fund Portfolio Commentary

Portfolio Commentary for the Absolute Strategies Fund is provided on a quarterly basis. Additional information can be found within the shareholder letters in the Annual and Semi-Annual Reports. If you are a financial adviser and would like to be added to our e-mail distribution list, contact us by e-mail.

“…We have maintained a negative beta bias with our positioning due to what we believe are excessive market risks. Massive bets against volatility combined with hastily rising interest rates seem to be a potential problem when pitted against the enormous leverage that exists in risk-parity and quant strategies. Many of the funds operating in this area are leveraged 6-1 or more. The total amount of capital making similar bets on low volatility may be over $2 trillion, according to a recent Bloomberg article, with $1.7 billion going into two retail ETF products in January alone. It would not be a surprise to see the entire quant domain reverse course…

…Many also seem blinded by the correlated risks associated with rising interest rates. The entire central bank scheme is built on too low, mispriced interest rates within global credit markets. They were pressed to an extreme. Nearly every corporation has loaded up on debt to buy back stock. As markets digest an increase in interest rates, the entire global liquidity meltup could eventually reverse. Everything is interconnected, and price/volatility will become a release valve…

Comment on recent (early February 2018)  market volatility and positioning:
As stated from our last commentary, we were positioned for this event. We have been hammering away at this risk routinely in our dialogue, and it should, at a minimum, serve as a warning for what could eventually materialize into a much larger problem. Sudden market unease begs the question, “Is this the beginning of the unwind, or will there be one final crescendo?” We do not know, but downside risks are as great as anything we can analyze historically. Our positioning remains flexible and we are seeking to take advantage of volatility. Should markets continue to fall, there may be a short term opportunity to reduce some of our net short exposure. Option positions have also been utilized opportunistically for both upside and downside tail risk and may exhibit larger than usual day-to-day volatility.

If markets are going to manage to recover and rally to new highs, it will need to happen soon. Either way, this latest event should serve as a glimpse of what is likely yet to come in the future. This is no different than the sub-prime and CDS crisis. It won’t happen all at once. The progression just takes time. [read all]