Performance of Funds and Strategies for December 2024
Andrei Movchan
Jan 17, 20252024: LESSONS AND GIFTS
The informal winter holidays are finally over (in Europe, everyone nominally works from December 27, but only today, January 16, is there hope of finding all counterparts in place and ready to do anything), which means that after three weeks of calm reflection, we can sum up the past year.
It's worth doing — the year was remarkable in many ways, and those who learn its lessons will find it easier to navigate the future world.
Strange things (at first glance) happened in 2024. Starting with politics: in the midst of what seemed to be the triumph of the leftist idea in the West, voter sympathies noticeably shifted to the right, and sensitive corporations immediately began to rid themselves of the most blatant acquisitions of the period of leftist dominance. In France, the bureaucracy has so far held on (for how long?); in Germany, the struggle has begun; in the USA, which has been a century ahead of the world, changes have begun. Only the UK (contrary to the trend) voted for socialism — the ascetic English, apparently, need another four years of Labour to finally wake up. Alas, Europe is not just lagging behind the USA — socialism in it is rushing to go into the last and decisive battle against all who can somehow support its economic efficiency. 2024 brought Europeans tax increases, the emergence of amusing tax inventions like the exit tax (want to leave — pay) and tighter regulation (although a year ago it was unclear where else to go).
In the economy, events were no less strange: 2024 will go down in history as the year of unfulfilled forecasts. US GDP grew significantly more than expected; inflation stabilized significantly higher than anticipated; the rate decreased much less than everyone assumed (moment of glory — a year ago we predicted that inflation would be higher than forecast and the rate would decrease more slowly, ultimately guessing its final value). China, where GDP growth predictably slowed down (and finally serious economists appeared, talking about the systematic overestimation of this indicator), nevertheless unexpectedly set a new trade balance record — $1 trillion; and the Chinese stock market, shaken by bankruptcies and scandals, regulated and inconvenient for foreign investors, nevertheless grew by 12% — however, all the growth occurred from September and was against the backdrop of the Fed rate cut, i.e., hopes for cheap money. The growth of the dollar against major currencies was also unexpected — a year ago, the leading rate cuts in the USA were considered a signal for its weakening, nevertheless, the dollar appreciated against various currencies: by 5% against the pound, Vietnamese dong, and yuan; by 6% against the Canadian dollar; almost 8% against the euro, Swiss franc, and Japanese yen; by 13% against the Australian dollar and South Korean won; by 15% against the Turkish lira and, finally, by 18% against the Russian ruble. Speaking of Russia: its economy refuted both optimistic and pessimistic predictions — the euphoria of 2023 did not repeat, inflation broke through even with a very high central bank rate (where else could it go with such an economic model!), but the economy holds, social security works — and the question is no longer how it adapts to a harsh model change, but how long its strength will last to exist in it.
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But the strangest things in 2024 were the investment markets: 2024 openly mocked academic investment knowledge, punishing professionals, cautious investors, and those who read too many books on how to invest money, and generously rewarding those who hadn't heard of procyclical and countercyclical assets, diversification, hedging, or intrinsic value.
You say gold is a defensive asset, more interesting the lower the rates and worse the markets? Here's a 30% gold growth amid a booming market and high rates. You think bitcoin is an opaque, intrinsically valueless asset driven only by excess liquidity, which already grew almost 2 times in 2023? How about a 136% growth in a year? What, big techs have grown too much and are trading at extraordinary multiples and need to be diversified from? The S&P 500 grows in 2024 due to the dominance of seven big tech stocks (out of 500!) by 24%, while its equal-weighted counterpart grows 'only' by 12.5%, and the Russell 2000 by 14%. You rightly concluded that Europe's economy is weak and investing in its companies' stocks isn't worth it? You were in a hurry — the FTSE grew by 8.3% in 2024, and the DAX by as much as 22.23%. You think that since the spreads on the debt market are very small (record small!), 2024 will be worse for risky debt than for reliable? Not at all — low-rated debt indices soar while TLT — a portfolio of US Treasury securities — loses 7%. Maybe you think that with the Fed rate cut, medium-term Treasury securities should rise in price? Okay, they do so in September, then fall again and meet the December rate cut with further decline, their yield hits records and remains higher than ever in 2024.
No wonder this paradoxical year was terrible for managers — acting 'by the rules,' it was simply impossible not to lose to benchmarks. The average hedge fund investing in stocks lagged behind the S&P 500 by half! Only absolute returns sweetened the pill — making a profit for investors in 2024 wasn't too difficult (unless, of course, you were following an extremely conservative strategy, where 2024 brought losses). But, of course, by the end of 2024, investors' faith in managers should have been shaken, while their faith in themselves — greatly strengthened. It is this faith, which will lead many investors to go all in on markets in 2025 'following' the success of 2024, that may turn out to be the main force affecting markets and protecting risky assets from correction (and, obviously, pressing on risk-free assets).
But we can try to at least partially solve the mystery of 2024.
The rise in gold prices reflects the ongoing purchases by the world's central banks (in 2024, the champions were the Central Bank of Poland with 90 tons and the Central Bank of Turkey with 75 tons of purchases). Central banks account for about 25% of global demand for metal (30% of newly mined gold goes directly to central bank vaults), other investments — about 15%. Only 6% of demand is for industrial needs (10% of mined metal). So the price of gold directly depends on the actions of central banks. It should not be forgotten that buying gold for them is also the release of liquidity into the market (and not just a reservation tool), so calculating their policy is quite difficult. The situation is exacerbated by the rising cost of production (today it's already about $1600 per ounce) and the fact that 10% of the world's gold is mined in Russia. In general, with a sharp change in the policy of the world's central banks, gold can collapse (as it did in the 80s), but predicting this, as well as the opposite, I definitely won't undertake.
The rise in stock markets (as I've said many times) can be explained by a combination of still large amounts of free funds among economic agents and sharply increased positive feedback in the markets over the past 10–15 years — various classes of investors (from robots and ETFs to retail) buy what rises and sell what falls. As long as markets grow, positive feedback supports them. The fastest-growing stocks (and partially the most hyped) will grow even faster because they are bought more and their weight in indices becomes greater; concentration grows, and there is no end in sight (rather, it should eventually come, and the same feedback will drive everything down, and fastest those who grew the most; but when that will be, no one knows).
The opposite-looking but essentially the same reasons caused the growth of those markets that should have been depressive: within the framework of global allocation, the money coming to the market went to all markets in accordance with the mandates of global funds and strategies — both the best and the worst got their share.
Aggressive borrowing by leading Western countries in bond markets (budget deficits are breaking records) caused an increase in the supply of government bonds and, naturally, a decrease in their value (in conditions where the world is so fascinated by risky assets), even despite the fall in the benchmark rate. The general euphoria made investors forget about risk (what risk — everything is growing!) and in pursuit of income, they chased even half-percent spreads, moving into low-rated bonds.
There is a very important lesson in all this:
No one can outsmart the market, which means a simple truth: you don't earn by being smarter than the market — you earn only if you learn something before the market; moreover, the market must necessarily learn the same thing but later than you. In modern conditions, when the market has ceased to be a field of competition for professionals playing by investment rules and has become a public bazaar with dominant positive feedback, you need to predict what delusion the market will fall into; because the truth no longer interests it, and predicting delusion is an impossible task.
The second important consideration — feedback increases risk concentration and volatility; while it works for growth, everyone wins; when it works for decline, everyone left in the market will lose. When will this be? No one knows, but (A) the further we go up the ladder, the closer this moment is, and (B) adherents of 'passive investment' and 'market participation' will be in it at that moment.
Of course, you can bet that the celebration will continue; but if not, what options remain? The answers are simple and still the same:
You can look for bottom-up investments (here at one end of the spectrum are actively managed fixed income portfolios, where the risk is low but the income is also not high; at the other end are venture investments, where few get high returns regardless of the market, but on average 75% of funds and probably 90–95% of private investors incur losses; many lose everything).
You can focus on investment advantage — either more knowledge in a niche, or more complex investment products and technologies, or unique ideas. Speaking of liquid markets, hedge funds mainly realize advantages there. So hunting for good hedge fund managers is the lot of those who fear passive investing and are not ready for independent bottom-up investments (the latter, by the way, is very reasonable — 99% of investors simply do not have the appropriate qualifications).
In 2025, we will do just that: two of our funds are essentially fund of funds, seeking the best managers; two more use niche advantages (special knowledge in the high-risk bond sector and a unique option strategy), finally, the ARQ fund is a proxy fund on the broad market with professionally done hedging.
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But strategic reasoning will not replace our daily actions, nor our investors' results. In this sense, December was successful for the group's products, but the year left mixed feelings.
Our flagship and most conservative fund ARGO SP brought investors from 0.44 to 0.58% in December against the backdrop of its benchmarks falling from 0.16 to 1.74%. Its annual result for investors (from 5% in the most 'expensive' class to 6.5% in the most 'affordable') is on par with benchmarks (only the global bond index stands out, showing minus 1.44%). Over its 9-year operation, the fund outperforms its benchmarks by 1–2.5% annually (and that very unfortunate global bond index by as much as 4–6% annually). The result could have been even better if not for the fall in the value of medium-term US Treasuries at the end of the year, but this is a reversible situation.
Shares of LAIF SP added 0.43–0.58% in December (and FLAG FUND gave a growth of 0.45%) against the backdrop of a 0.6% drop in Barclay’s options index and zero change in the HFRX Absolute return Index. The strategy closed another year with 52 profitable weeks. Shareholders of the funds in 2024 increased the value of their shares by 7.82–10.55% (depending on the class), Barclay’s options index made 6.9% (but with what volatility!), HFRX Absolute return Index — 4.8%.
For ARQ, against the backdrop of the S&P 500 falling by 2.4%, the value of shares decreased by 1%. This is a good result, especially if you remember how much more the sectoral sub-indices of the S&P 500 fell (for example, the energy subsector collapsed by 9.5%). ARQ closes the year with a profit of 4.37 to 6.05% depending on the class (from 5 to 6.73% annually since inception). But, as always, I caveat: results over a horizon of less than 3–5 years do not matter — this is a long-term investment fund, every drawdown should be perceived as an opportunity to increase investment in the fund. Some of our investors did just that — from January 1, the fund received 10% new money and another 20% is expected to enter on February 1.
The GEIST SP fund increased the value of shares by 1–1.2% in December, approaching the unattainable S&P 500 by 3.5–3.7%. Alas, for the entire 2024, GEIST SP's results are much more modest — plus 9.15–11.1%; the fund significantly lags behind the S&P 500, 1–3% behind the HFRI Equity Hedge index, outperforms the MSCI Emerging Markets Index by 1–3% and the MSCI All Country ex USA Equity index by 4–6%. We are not satisfied with such a result (and you, I'm sure, aren't either); the good news is that the portfolio of funds in GEIST SP behaves very correctly, its size is growing, and in 2025 we should show an even more significant result, especially if the S&P 500 stops its insane concentrated growth.
The COSSACK fund has not changed its tradition of outperforming relevant markets. Plus 0.16% for December is 0.5–1.5% better than comparable indices, and the annual result of 8.35% is more than three percent ahead of the HFRI Fixed Income – Credit index, 1% better than the JP Morgan EMBI+, and lags only slightly more than half a percent behind the Bloomberg Global High Yield Index (but historically the fund wins a substantial 4% annually against it).
The FISTR strategy, also investing in debt instruments, seems to have finally managed to get rid of the main problems that dragged on until recent months; — in December, it showed a decline of 0.69 to 0.73%, but this is significantly better than the reference markets (and this strategy, however good it may be, depends on debt markets with high correlation). At the end of the year, the strategy has a small profit, it lagged about 1.5% even behind investments in short-term Treasury bond ETFs, but judging by its performance in recent months, 2025 should be significantly more successful.
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The year 2025 began with a correction of major markets, including (continuing paradoxes) the US Treasury market. Does this mean the beginning of a reversal, we do not know. We continue to play the role of Cassandra and receive the same portion of disbelief (thank goodness it's not those times, and we're pelted with sarcastic comments, not rotten vegetables). But remaining optimistic is the right of investors. As managers, we must be ready to preserve clients' assets in the worst situations, and we are ready for this. In 2025, we will work as before — carefully, maximizing the profits of funds and strategies as much as possible. Everything will be fine, the only question is — how fine? We will find out the answer in a year.
