Performance of funds and strategies in September 2024

Andrei Movchan

Oct 21, 2024

NOT SO FAST!

The last episode of our series called "investment management" ended with my note in the letter, which dryly stated: The Fed lowered the rate by 50 basis points, markets reacted sluggishly. I also remember writing something about the market's excessive expectations regarding further rate cuts. From this point, we will start a new monthly letter.

Almost the entire September was marked by market euphoria from the rapid rate cut, mainly in debt markets; but equity markets also showed significant growth, and unusually for recent times, non-U.S. markets outpaced U.S. markets (but this was mainly due to China's steroidal growth from an unprecedented announced economic aid package — speculative growth and unlikely to be long-term).

October hastened to bring the disappointment we expected — the labor market report forced the Fed to utter the magical "further reduction can wait," pushing debt markets back almost to July levels.

The yield curve became even flatter due to the decline in short-term yields (the three-month paper, which in August yielded 5.3%, now yields 4.6%) and the return growth of yields in the middle part of the curve (the "ten-year" after the rate cut announcement was at 3.6%, and now it has risen to 4.07%). 30-year bonds also slightly decreased in price — to a yield of 4.4%, but they are always quite volatile (in mid-September they dropped to 3.9%, but they were at this level at the end of December, and at the level of 4.4% they have been every month of 2024 until August — and now again).

As we expected, market volatility began to increase — the VIX settled above 15 in September and often goes beyond the 20 mark. We continue to think that in the current situation its place is between 20 and 30, and we are waiting for the markets to realize this as well.

It seems we were right once again, and there will be no more than a 1% reduction this year (rather minus 0.75%), but what to do with such cherished knowledge is unclear to us: markets moderately go up and down at every turn of statistics, and the overall trend of rate reduction is already clear to everyone, and its interpretation by investors remains positive (remember, I wrote about this optimistic model: "If the economy weakens, the rate will be reduced — good, if the economy does not weaken, profits will be higher — that's also good"?). When will the interpretation change? We don't know, but experience suggests that it's a matter of time — the market cannot move on one emotion forever.

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In such a market environment, it was difficult for our funds to show poor results; only the fund GEIST SP was still caught by the problem from August (remember the 40% drop of one of the funds in the portfolio?). As a result, GEIST SP shares showed minus 0.7% and the gap from the S&P 500 increased by another 2.5%. On one hand — an unsuccessful result; on the other — with an index growing at a rate of 25% per year, none of the hedge funds can keep up with it (but when the S&P 500 stagnates or falls, it is easy to outperform it significantly). But these reflections are for consolation, and in reality, we are actively working on improving the performance of this fund.

The rest of the funds do not disappoint.

Shares of ARGO SP rose by 1.07–1.21% over the month. At the end of three quarters, the fund is on track for a 6–7.5% annual return (depending on the class), which fully meets its objectives.

LAIF SP gave a growth in share value of 0.61–0.82%, and FLAG brought 0.6% (volatility slightly increased, and as we promised, the strategy began to deliver high results).

Shares of ARQ added 0.71–0.88%. In the first year of its strategy, the fund brought investors a net return of over 6% despite higher expenses and an unfilled portfolio at the start of operations. In the second year, we expect a significantly higher result, and current figures confirm these expectations.

Cossack showed a return of 0.64% — not too high compared to the September movement of low-rated bond markets, but the fund does not have a high short-term correlation with this market. However, since the beginning of the year, Cossack has earned investors 6.24%. And there's still a whole quarter ahead.

The FISTR strategy is gradually "improving" — in IBKR accounts for September, investors received +0.56%, on the omnibus +0.44%. The infrastructure is still not perfect, but the improvement process is ongoing.

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My next monthly letter promises to be more interesting: by the time it is written, we will know not only the Fed's position following the new meeting but also the outcome of the U.S. presidential elections and the content of the UK budget message. We will see how long-term the effect of the state economic aid program in China is. We will already be in the pre-Christmas season when successful portfolio managers are actively summing up results and trying to realize accumulated profits. Let's see what the end of October and the beginning of November bring us: all Movchans’ Group products are designed to optimally respond to political changes and shifts in economic sentiment.

Have a good month and successful investments!