After reading Janet Yellen’s speech on Friday, it became clear bank reserves are plentiful. In the past, the Fed could raise or lower short term interest rates by affecting the equilibrium price when excess bank reserves were scarce. Currently, the Federal Reserve is using the interest received on its $4 trillion balance sheet to pay interest on excess bank reserves to push fed funds above its equilibrium rate of 0%. Our thesis is, the Fed does not want to risk fighting the market to raise interest rates further above 0% and will wait for the US economy to strengthen to make bank reserves scarce again. Our concern is the US economy needs to be much stronger until it uses all available bank reserves. Therefore, we believe the Fed should be more accommodative and widen the yield curve by unwinding their balance sheet to support the banking system. As their balance sheet lessens, the Fed will need to pay less on excess bank reserves and fed funds will move back to 0% - until the US economy strengthens and excess bank reserves are scarce again.

The fear the Federal Reserve has for cheap money leading to inflation is ruled by domestic economic models that no longer are relevant in a global 21st century economy. In short, the miracle of global capitalism is driving the cost of products down while increasing utility. In the 21st century, central banks need to be concerned about deflation and the economic model that will predict inflation will be scarce excess bank reserves rather than full employment.

On Wednesday morning, August 31st we bought the Euro$ at 1.1130 to hedge our short position in a synthetic option. To hedge our risk going into the employment numbers on Friday, by being long $Yen we sold the German Dax in case the US$ starts to strengthen. Also, if the market felt the Fed was going to tighten we believe lower US equities prices will down global equity markets. We are currently long $Yen, short the German Dax and in a synthetic option on the Euro$.

In 2012 modeled performance (7 ˝ 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 +72.68% with an 8% Hurdle rate
In 2016, modeled performance net of all fees is +33.61% with a Graduated 10% Hurdle Rate

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Disclaimer:

The Unicorn Macro Fund, LP (“Fund”) operates under the SEC rules of 506(c) of Regulation D. This rule allows general solicitation as long as all purchasers of the Fund are accredited investors and the Fund takes reasonable steps to verify that purchasers are accredited investors. The 506(c) rule benefits funds that perform better than their peers, because for the first time, Regulation D funds can post their results publicly.

The Fund trades both long and short positions in a variety of global markets and its performance is not correlated to any one market. Performance of the model of the Fund is measured by Net Asset Value (NAV) which is net of all fees, is unaudited, and may include the use of estimates. Individual results will vary based on the timing of an investment and past performance is no guarantee of future results and there is a possibility of loss.

The modeled results are based only on capital appreciation from macro style trades. The results do not include dividend reinvestment or any other form of cash flow and are taxed as ordinary income. All trades have a risk/reward objective of at least 3 to 1 and each full position risks no more than 2% of assets. There will be times when market conditions may alter these objectives. Since the inception of the model our trading of the methodology has become more precise.