May +0.89% NET YTD +5.68%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
May was a month defined by momentum and a broad risk on environment following a dismal April for the equity market. Stock markets bottomed in April and continued their upward trajectory in May, fueled by persistent optimism around trade negotiations and arguably improving economic data.
In sharp contrast to the risk-on tone of public markets, The Hyperion Fund delivered solid, steady gains, affirming our role as a diversifying force in investor portfolios. While many market participants leaned further into crowded trades and expanding valuations, our disciplined, conservative strategy continued to perform, without relying on equity beta.
We are proud to report that we generated positive returns despite our negative correlation highlighting the robustness of our risk-managed, non-correlated process. Our approach remains grounded in capital preservation, tactical flexibility, and a clear-eyed view of macro uncertainty.
Key Drivers of Performance
- Tactical Short-Term Trend Signals: Several of our systems identified meaningful short-term setups in the equity and volatility markets, which provided convexity during intra-month market jitters.
- Risk-Off Hedging Strategies: Our optionality overlays, designed for tail risk protection, paired back losses as market breadth narrowed and intraday volatility spiked late in the month.
- Disciplined Capital Allocation: Our strict position sizing and risk-adjusted trade construction enabled us to avoid the pitfalls of chasing momentum while still capturing asymmetrical returns.
Volatility Dynamics
While equity indices rallied sharply in May, the VIX (CBOE Volatility Index) told a more nuanced story. After drifting below 13 in early May, reflecting extreme investor complacency, it briefly spiked above 15 mid-month as geopolitical headlines and unexpected inflation data triggered a short-lived repricing of risk. However, the index quickly reverted back toward its lows, finishing the month just under 13. This kind of suppressed realized volatility coupled with occasional, sharp intraday reversals is emblematic of an unstable equilibrium, where surface calm masks growing structural imbalances underneath.
For many, this low-volatility regime invites excessive risk-taking. But for us, it underscores the importance of preparedness. Our long volatility exposures were not reliant on a sustained spike in the VIX, but rather on targeted asymmetries, in volatility term structures, skew, and correlation breakdowns. These allowed us to harvest convexity and maintain a balanced risk profile, even as traditional volatility metrics remained subdued.
Long Volatility: Resilience Amid Complacency
Despite the broader environment favoring short volatility strategies, driven by tight credit spreads, low realized volatility, and relentless equity momentum, our long volatility exposures delivered positive convexity and meaningful risk mitigation throughout the month. This outcome was not the result of a broad-based volatility spike, but rather a reflection of our targeted construction: long vol trades were carefully allocated in time frames of the market where dislocations and structural fragility still persist, managing our overall beta to the market.
Importantly, our long vol book is not a blunt instrument tied to equity VIX levels alone; rather, it is designed to respond dynamically to dispersion, correlation breakdowns, and volatility-of-volatility, factors that remain alive beneath the surface of a seemingly calm market. In May, these exposures provided both portfolio protection and only minimal negative carry, a rare combination in a short-vol environment.
Looking Forward
While May’s rally rewarded risk, we remain vigilant. Forward equity returns are increasingly front-loaded, and we believe fragilities, geopolitical risk, fiscal drag, inflation uncertainty, are all being underestimated. Our mandate is not to predict the next move in equities, but rather to build a portfolio that thrives when consensus breaks down.
Several forward-looking risks remain under appreciated by markets:
- Narrow Market Leadership: Despite headline gains in the indices, performance has become increasingly concentrated in a small number of mega-cap stocks. This kind of narrow breadth often precedes periods of increased volatility and market fragility.
- Stubborn Inflation Pressures: Although inflation has moderated from its peak, core prices, especially in services, remain sticky. The Fed’s path to rate cuts is becoming more uncertain, and any upside surprises in inflation could reignite volatility across both equity and bond markets.
- Global Fragilities: Geopolitical tensions remain elevated, particularly with regard to China, Taiwan, and continued unrest in the Middle East. Meanwhile, several major economies, including Germany and Japan, are exhibiting recession-like conditions, which could weigh on global demand and trade.
- Liquidity Illusions: Investor confidence in persistent liquidity is high, but the market remains vulnerable to a reversal in flows, especially given the growing presence of passive and systematic strategies that reduce marginal liquidity during stress events.
In short, we believe this is an environment where discretion, prudence, and uncorrelated positioning are essential. While the crowd chases upside, we remain focused on protecting capital, maintaining convexity, and seeking opportunities that do not depend on the direction of the stock market.
As always, our focus is on long-term capital stewardship. We are grateful for your continued trust, and we welcome your questions, conversations, and referrals.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
