Going into December we were doubly long and nervous. December traditionally is less liquid as trading desks close their positions for year end to clear their balance sheets. As we are still finishing our legal documents to launch the Fund, we added LPA § 3.10 “Year End Liquidation”, which instructs the Investment Manager to liquidate positions if the Fund’s Performance is greater than 20% after fees on November 30th. On Tuesday, December 29th we were able to do just that and liquidated our positions leaving modeled performance unchanged for the month.
Moving forward into 2016, we are concerned about divergent central banks and the underestimate by the markets and Fed on how constrictive a 25bp tightening is when rates have been at 0% for over seven years. The People’s Bank of China, the Bank of Japan and the European Central Bank need to be more authoritative with the markets as the Fed begins to tighten, otherwise the central banks run the risk of losing control. The central banks are challenged by the deleveraging caused by higher rates and need to keep the markets from selling assets to further accelerate the deleveraging. A 25bp increase when rates are zero, is 25/0 which is mathematically undefinable. In defining the real impact of rates rising from zero leverage becomes the multiplier, making a +1bp tightening impactful and a +25bp tightening constrictive. Positions are forced to liquidate as funding costs of 25bp is too expensive leveraged many times. In sum, we feel the Fed should not have tightened, and if they had to tighten, they should have tighten no more than 10bp. Since the central banks are divergent, the best opportunity for asset growth is in Europe as the ECB will continue quantitative easing until the sovereign countries reduce debt and stimulate their economies. Both the US and China and possibly Japan run the risk of deleveraging. The central banks need to maintain control, keep interest rates low and generate economic growth to support asset prices and pay off sovereign debt. Lastly, a stronger US$ might help US assets as global investors flee their weakening currency to find shelter in the US markets.
Modeled performance since inception, May 2012, net of all fees is +254.92%
In 2012 modeled performance (7 ½ mo.) net of all fees was +12.46% with a 10% Hurdle rate
In 2013, modeled performance net of all fees was +19.73% with a 10% Hurdle rate
In 2014, modeled performance net of all fees was +56.42% with a 10% Hurdle rate
In 2015, modeled performance net of all fees is 72.02% with an 8% Hurdle rate