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Hyperion: February 2023 Update

Hyperion Fund Update
25 Jul by Mason Resch

Hyperion: February 2023 Update

The resilience of consumer spending and labor markets continued to confound the plans of the
Federal Reserve (the “Fed”) for tighter financial conditions to tamp down inflation. The growing
realization amongst market participants that higher interest rates could be on the horizon led to
a weaker stock market and stronger interest rate yields during February. The S&P 500 Index
recorded a loss of -2.6%, as weakness occurring over the course of three days during the
middle of the month was the driver of the losses. Conversely, interest rates generally climbed
relentlessly throughout the month of February with the ten-year note climbing to near the
psychologically-important 4% yield. Also, the two-year note reached levels not touched since
2007.

The Directional Spread Strategy recorded a profit as our posture of holding multiple ratio put
spreads allowed us to realize gains during the mid-month S&P pullback. These different
spreads targeted varying levels of S&P declines, and we were able to monetize some positions
when Fed hawkishness led to investor nervousness and a drop in stock prices. By holding
spreads that could profit in both moderate and more dramatic declines, we were able to achieve
profitability during the middle of the month and retain the opportunity for further profits had the
pullback become more severe.

The tactical strategy continues to find value in credit spreads as outright options have dropped
in relative value. Even though volatility was low, the realized volatility was subdued as well.
When both realized and implied volatility (using the VIX as a proxy) are compressed, we can still
find many trading opportunities that allow for profitable trades. When the relationship becomes
skewed with realized volatility increasing too much, we often reduce our risk posture and wait
for the VIX to rise or market volatility to calm down.

We continue to use the phrase “Don’t Fight the Fed” as they have repeatedly stated their desire
for tighter financial conditions, even though asset markets don’t seem to appreciate how serious
they are about this. As economic growth is still strong, the Fed is choosing to focus on the other
facet of their dual mandate, price stability. This pursuit of lower inflation may eventually cause
disruptions in asset markets, but so far during their tightening cycle, the unwinding of years of
loose monetary policy has been surprisingly orderly. While this may continue, we anticipate
losses to surface in previously unexpected places, similar to the failure of two Bear Stearns
mortgage hedge funds in July 2007. As we look for these warning signs, we will continue to
seek out attractive risk/reward trade opportunities.

Disclaimer – Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. In some cases, managed commodity accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets.

ByMason Resch

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Category I QEP

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OR

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Situation One:

note: requires any of the 3 paragraphs below and any of the subsequent 12 paragraphs

  • Owns securities (including pool participations) of issuers not affiliated with such participant and other investments with an aggregate market value of at least $2,000,000.
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AND IS

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Situation Two:

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  5. A pension plan for the employees, officers, or principals of an entity organized and with its principal place of business outside the United States.