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Hyperion Fund – December Letter

Hyperion Fund Update
28 Feb by Mason Resch

December 2021 Update

Dear Investors, Partners, and Friends,

News of the Omicron variant of the Covid-19 virus unsettled markets early in the month of December as this new strain spread from South Africa to many other countries.  Traders’ nerves were rattled as Omicron was found in the United States and quickly spread, displacing the Delta variant as the dominant version of the virus circulating domestically.  Fortunately, this variant has so far proven to be less virulent than prior ones even if it is significantly more transmissible. This positive aspect of these developments buoyed markets despite the announcement from the Federal Reserve Board of Governors (“Fed”) to accelerate the reduction of asset purchases. Considering persistently high inflation indicators, such a step from the Fed was not a surprise. The announcement did cause intra-month volatility, sending markets higher, only to have that rally quickly erased in a three-day decline.

The Strategies were able to navigate the swings in the S&P to record a monthly net gain of +.95%, ending the year with an uncorrelated return of +8.39%.  The fund profited from the early and mid-month index declines as ratio put spreads and butterfly put spreads became profitable. These types of trades, with some intrinsic protection built in, allow the portfolio to sustain a degree of market volatility while retaining significant profit potential.

The Tactical Program continued to hold smaller than average positions due to the increased volatility.  Early in the month, we exercised extreme caution as many unknowns surrounding the Omicron variant presented an unfavorable risk/reward scenario for downside positions, even though premiums were elevated.  The swings in volatility itself did not present much clarity about the near-term market oscillations, a situation where we tend to be conservative. 

As stock markets moved erratically during the month, the VVIX Index (which

measures the volatility of the VIX) remained elevated and registered the third highest reading since March 2020, underscoring the nervousness that remains in the markets. Recently, the number of stocks on the NYSE hitting new 52-week lows has increased to the highest levels seen since March 2020, despite the “broad” indices continuing to hit new all-time highs.  The dichotomy between the index advances and the underlying individual stocks is becoming more pronounced as just a handful of stocks are contributing to the index gains, while the majority of issues languish. This situation has persisted for some time now and leaves the markets beholden to this small subset of companies in these indices, where any future weakness in those stocks would quickly impact the overall index.

Cheers to the New Year and as always, thank you for entrusting us with your investment.

ByMason Resch

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Accredited Investor Status:

  • any individual with sophisticated experience in financial and business matters, and whose own net worth, taken together with the net worth of his spouse, exceeds $1,000,000, including a Self-Directed Individual Retirement Plan (IRA).
  • any individual with sophisticated experience in financial and business matters, who had an individual income in excess of $200,000 in each of the two previous years, or joint income with my spouse in excess of $300,000 in each of those years, and who reasonably expects to reach the same income level in the current year, including a Self-Directed Individual Retirement Plan (IRA).
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  • any insurance company as defined in Section 2(13) of the Act.
  • any investment company registered under the Investment Company Act of 1940.
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  • any trust, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000 and whose purchase is directed by a sophisticated person.
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Qualified Eligible Person Status

A person or entity is considered to be a qualified eligible person (“QEP”) pursuant to Commodity Futures Trading Commission Regulation 4.7 if the following criteria under eitherCategory I QEP or Category II QEP are met. Please check those that apply.

Category I QEP

  • A “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (the “Investment Company Act”).
  • A registered futures commission merchant.
  • A registered broker-dealer.
  • A registered CPO who has been registered and active as such for two years or who operates pools which, in the aggregate, have total assets in excess of $5,000,000.
  • A registered CTA who has been registered and active as such for two years or who provides commodity trading advice to accounts which, in the aggregate, have total assets in excess of $5,000,000.
  • A registered investment adviser who has been registered and active as such for two years or who provides securities investment advice to securities accounts which, in the aggregate, have total assets in excess of $5,000,000 deposited at one or more registered securities brokers.
  • A commodity pool operator, commodity trading advisor, or investment adviser of an exempt pool; Or I am a principal of the CPO, CTA or IA; Or I am an employee of the CPO, CTA, or IA that is other than a clerical, administrative or secretarial employee, and who participated in the investment activities of the CPO, CTA or IA for at least 12 months.
  • An employee of, or an agent engaged to perform legal, accounting, auditing or other financial services for, the exempt pool or the commodity pool operator or commodity trading advisor (other than an employee or agent performing solely clerical, secretarial or administrative functions with regard to such person or its investments); and, I am an accredited investor and I have been employed or engaged by the exempt pool, commodity pool operator or commodity trading advisor for at least 24 months.
  • An entity as to which a notice of eligibility has been filed pursuant to CFTC Regulation 4.5 and which is operated in accordance with such rule and in which all unit owners or participants, other than the commodity trading advisor claiming relief, are QEPs.

OR

Category II QEP

There are two situations under this Category II QEP: Situation One or Situation Two (Non-US Person).

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.
  • Has or has had on deposit with a futures commission merchant, for my own account at some time during the six-month period preceding the date of this sale in the exempt pool, at least $200,000 in exchange-specified initial margin and option premiums for commodity interest transactions.
  • Owns a portfolio comprised of a combination of the funds or property specified in the two paragraphs immediately preceding this paragraph in which the sum of the funds or property equals at least one hundred percent, each expressed as a percentage of the minimum amount required thereunder. (An example of a composite portfolio would be $1,000,000 in securities and $100,000 in exchange specified initial margin).

AND IS

  • an investment company (i.e., mutual fund) registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act not formed for the specific purpose of investing in the exempt pool.
  • a bank as defined in Section 3(a)(2) of the Securities Act of 1933 (the “Securities Act”), or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act acting for my own account or for the account of a qualified eligible participant.
  • an insurance company as defined in Section 2(13) of the Securities Act acting for my own account or for the account of a qualified eligible participant.
  • a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000.
  • an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, and the investment decisions are made by a plan fiduciary, as defined in Section 3(21) of such Act, which is a bank, a savings and loan association, an insurance company, or a registered investment adviser; or that the employee benefit plan has total assets in excess of $5,000.000; or, if the plan is self-directed, that investment decisions for, or the decisions as to the types of investment alternatives under, the plan are made solely by persons that are qualified participants.
  • a private business development company as defined in Section 202(a)(22) of the investment Advisers Act of 1940.
  • an organization described in Section 501(c)(3) of the Internal Revenue Code, with total asset in excess of $5,000,000 (e.g., charitable organization, foundation, etc.).
  • a corporation, Massachusetts or similar business trust, or partnership, other than a pool, which has total assets in excess of $5,000,000 and is not formed for the specific purpose of participating in the exempt pool.
  • a natural person whose individual net worth, or joint net worth with my spouse, at the time of purchase in the exempt pool exceeds $1,000,000.
  • a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with my spouse in excess of $300,000 in each of the two most recent years and has a reasonable expectation of reaching the same income level in the current year.
  • a pool, trust, insurance company separate account or bank collective trust, with total assets in excess of $5,000,000, not formed for the specific purpose of participating in the exempt pool, and whose participation in the exempt pool is directed by a qualified eligible participant; Provided, that except where the pool, trust, insurance company separate account or bank collective trust would constitute a qualified eligible participant under Situation Three below, no more than 10 percent of the fair market value of the assets of such entity are used to purchase units in exempt pools.
  • any entity in which all of the unit owners or participants are persons that meet any of the criteria listed under Situation One above.

Situation Two:

  • not a United States Person for purposes of CFTC Rule 4.7. For the purposes of this paragraph, the term “United States” means Unites States, its states, territories or possessions, or an enclave of the United States government, its agencies or instrumentalities. The following persons are not considered to be “United State persons”:
  1. A natural person who is not a resident of the United States,
  2. A partnership, corporation or other entity, other than an entity organized principally for passive investment, organized under the laws of a foreign jurisdiction and which has its principal place of business in a foreign jurisdiction,
  3. An estate or trust, the income of which is not subject to United States income tax regardless of source,
  4. An entity organized principally for passive investment such as a pool, investment company or other similar entity Provided, that units of participation in the entity held by United States persons represent in the aggregate less than 10% of the beneficial interest in the entity, and that such entity was not formed principally for the purpose of facilitating investment by United States persons in a pool with respect to which the operator is exempt from certain requirements of Part 4 of the Commission’s regulations by virtue of its participants being non-United States persons,
  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.