The Arbidyne Absolute Return Fund implements a long/short investment process which aims to produce consistently positive returns in multiple market cycles. Our primary focus is Australian and US equities; and complement this strategy with global index futures, currencies and government bonds when opportunities present.
Net performance in October was 0.14%
Net performance since fund inception is 0.09%
Commentary
Quite a disappointing month of performance as we were playing defence while the market decided to go on a strong run with the S&P 500 up 6.8%. Our local ASX underperformed it’s US counterpart up only 2.16%.
Our modelling suggests we are in the final phase of a major stock market bubble, as everyone except us has become an investment genius. Retail participation is at an extreme as when people see their friends and neighbors getting rich they can’t take it anymore and finally jump into the market. Unrealistic valuations are rationalised by new narratives and as prices rise they become self-reinforcing. Ever riskier behaviour is rewarded as the warnings are dismissed and ignored as the market moves start becoming wilder. In a nutshell, stories of “get rich quick” cause people to lose their minds.
The most dangerous words in investment are “It’s different this time”. Until it’s not.
Last month we warned about the rising level of inflation, and this morning the US CPI inflation was up 6.2% in October over a year ago. That’s the highest inflation in 31 years. The Fed target Fed is just 2%
Stocks, home prices, wages, job openings, crypto currencies, and now inflation are hitting all-time highs, with food and energy prices rising strongly. Supply chain disruption continues to be a problem. At the same time the Federal reserve is running the loosest financial conditions in history.
The bond market is waking up to the data and pushing the yields higher. With higher inflation you want a higher yield to be compensated for the decrease in purchasing power of the money you’ll receive in the future.
And are now seeing central banks around the world waking up to the overwhelming data that ‘transitory’ inflation is perhaps going to be more persistent.
The takeaway here is you don’t fight rising inflation with ultra-low interest rates, large quantitative easing injections and holding rates at ultra low levels. Central bank inflation denial is now under serious threat.
At a policy announcement last month, the Bank of Canada (BoC) became the first central bank from a G7 country to exit quantitative easing and signalled it could begin hiking interest rates in April, three months earlier than previously thought.
New Zealand became the second developed market central bank to hike rates by 25 bps to 0.5%
Then the Australian RBA ended it’s yield curve control enacted in May 2020 last month sending the short end rates spiking.
According to Callum Thomas from TopDownCharts, prompted by rising inflation and risk of persistent inflation we have seen 73 interest rate hikes by 35 central banks over the last 12 months, so there is a clear indication that rates are moving higher globally. The BOE, ECB and FED behind the curve. At some point these 3 major central banks may be forced to realise their policy mistake and change course, or risk inflation spiraling out of control.
When the price of money goes up, it will affect everything. If you are looking for a market black swan, we believe higher interest rates are it and it is starting to happen now.
At the time of writing, China’s Evergrande has just defaulted, but this has not really been a surprise given the credit crunch that’s been happening in China. The question that has not been resolved is if this default will spread contagion to wider markets.
Going forward we expect rates will continue to rise and the market will experience a period of higher volatility as risk assets are forced to reprice to the higher yields. Our portfolio is positioned for higher volatility and higher interest rates.
Gold which has been described by the famous Jim Grant as ‘the Reciprocal Of Faith In Central Banks’ has started to push higher. This is also happening at the same time when the US Dollar is strengthening which suggests that the move in gold should continue higher going forward. Our portfolio is positioned to take advantage of this move.
We have also have a small exposure to the crypto space which is currently in a small profit, but if the markets start to roll over we expect the crypto space to suffer the same weakness and we will exit the trade around break even level.
We also have exposure to higher energy prices as there has been a serious underinvestment in the space. US oil, gas and mining investment is down 49% from its 2014 peak. While we support the transition to renewable energy, the move is going to take decades and thus energy prices will likely remain high in the foreseeable future. We believe there is a real risk that oil prices push over $100/barrel in 2022 as economies reopen, travel increases and supply fails to meet growing demand.
We continue to be bullish on the soft commodity space, and have exposure to higher fertilizer prices. We expect to see the trend of higher food prices continue going forward.
Our aim is to grow your wealth whilst managing risk. Investing is a marathon, not a sprint and new opportunities in the market are always going to present themselves. Our aim is to find trades where the upside outweighs the downside, and then diligently execute our trade plans; profitable trades then tend to be a byproduct of this process.
If you have any questions or comments, please drop us a line at info@arbidyne.com
For new clients:
Since we are running individually managed accounts, new clients will not always have the same positions as our master tracking account when they first join, and as a result may not see the same monthly performance. This is because we cannot always buy new accounts into the same positions that were entered into before they joined the fund. We consider this on a case-by-case basis and evaluate whether it is in the individual client’s best interests to enter into existing positions. New accounts should see their accounts begin to track our performance benchmark approximately 3 months after joining.
DISCLAIMER: This information has been prepared by Arbidyne Pty Ltd.. This information is general in nature and nothing in this letter should be considered investment advice. The commentary reflects Arbidyne’s views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Arbidyne as to their accuracy or reliability. To the extent permitted by law, no liability is accepted by Arbidyne for any loss or damage as a result of any reliance on this information.
