|April 2022 Fund Update|
Dear Investors, Partners, and Friends,
Markets were roiled by numerous crosscurrents in April, as interest rates increased (the yield on the ten-year note approached 3% for the first time since 2018) and equity prices fell precipitously. In a relatively steady decline, the S&P 500 Index (“S&P”) recorded its worst month since March 2020, and also its worst start to a year since 1939. One source of the relentless selling was in high-flying tech stocks (Amazon, Google, and Netflix for example) that dragged the Nasdaq lower as well. Volatility also climbed, but perhaps not as high as would be expected given the almost 9% drop in the S&P in April.
The Directional Spread Strategy was able to use ratio put spreads across various expirations to record a net gain in April. The consistent nature of the decline allowed for small profit opportunities in short windows as the selling never reached a panic- type crescendo. Evidence for that can be seen in the VVIX (the volatility of volatility index), which stayed well below the highs from earlier in the year even though the VIX climbed to 34, not far from the 38.94 peak for the year reached in January.
This dichotomy indicates that the selling, while large in magnitude, was more orderly than in recent declines. The Tactical Strategy was traded more conservatively in April as many of the underlying market issues became readily apparent. The S&P quickly breached downside support levels, indicating that the market decline could quickly accelerate. By keeping put positions smaller and more short-dated, we recorded a slight net loss for the month as premiums collected were impacted by hedging costs. As the market decline did not induce a major VIX spike, option premiums did not expand as much as anticipated and therefore created a less-favorable risk-reward environment for trading.
For the reasons discussed above, the Volatility Capture Strategy, was not able to capitalize on any significant spikes in volatility. The trade was on for nearly the entirety of April as the system continued to forecast higher vol but the lack of capitulation in the market left the trade with few opportunities. The Russia-Ukraine conflict still rages on, with no sign of abating, and China continues to expand their lockdowns in pursuit of a “Covid Zero” policy. These are two of the major factors that are having ripple effects throughout world economies: food, energy, fertilizer, and other raw material shortages have led to inflation and scarcity in many places. The near-term impacts of these issues are causing markets to weigh the many potentially disastrous outcomes. In the face of this epic instability, the Federal Reserve is expected to continue its aggressive push to control inflation but may instead be inviting a very recessionary environment as a result of their monetary policies.
We anticipate that markets may be over-estimating the amount by which the Fed will be able to tighten as the early impacts from their actions begin to choke off markets. This reaction may bring about an early end to this rate-hike cycle, contributing to a longer-term crisis ahead. We will continue to seek out profitable trading opportunities in this difficult environment, providing much needed diversification and non-correlation to our investors.
Lastly, I have had some questions from investors recently regarding short term interest rates. Although in the last couple of years there was little to no incentive for us to purchase short term treasuries with the cash balance of the fund, those times have changed. As of March of this year we have been purchasing 13-week bills with the bulk of the fund’s equity and we will continue to do so. Our current 13-week bill matures on June 16th and we will be rolling to a new position at the current yield at that time. That yield is appreciated 100% by the investors of the fund. So, as short-term yields rise, as will the return on our cash.
As always, thank you for supporting the Hyperion Fund and entrusting us with your investment capital. information below.