January 2022 Update
Dear Investors, Partners and Friends,
We finally saw the market react or believe in what the Federal Reserve has been forecasting for the last six months in regards to the need to hike rates by posting the worst January loss since 2009. The reaction came in a particularly violent fashion with large moves up and down and now a new, very wide, range has been set. January, in my opinion, just set the tone for the year. For participants in the market, this will be the year of the Federal Reserve, similar to 2018 wherein the market finished down over 5%.
If you zoom in on any week of trading around a highly anticipated Fed announcement you can see, on a smaller scale, very similar trading to what we witnessed in January. Most meetings in recent memory have ended rather dovishly and so you tend to see a sell the rumor, buy the news type of cycle happen over and over again. The trading leading up to and following these announcements is often aggressive and moves within a range, a few trips from top to bottom, before breaking out the upside to slowly grind until the next catalyst occurs. The exceptions are times like the 4th quarter of 2018 when the Fed had little to no choice but to raise rates. Despite making their intentions clear the market responded to the tough love in an extreme way and ultimately set all new records for the largest daily swings in the SP500 both up and down. Records that stood until the beginning of the pandemic in 2020.
These rather wild gyrations can be difficult to trade even on the short time frames that we focus on. If you have a large down move that breaks and closes below the range, any system or finely tuned trader is looking for opportunities to get short, preferably after some type of retracement. What will often happen in this unique frenzied type of market is that the retracement will extend beyond the top of the original move, entice participants to join in, and then turn around and break the low to the downside. In other words, an environment like this requires patience and risk management. Both are pillars of the trading we do in the Hyperion Fund.
Our directional spread strategy was quite light for most of the month. Knowing that we only needed to capture a few of the daily swings to make a nice gain, the strategy was restrained and then deployed more aggressively as timing lined up. The strategy posted a mild gain which was the bulk of the performance.
Both, the Tactical and the Volatility Capture strategy were negative for the month. Tactical was stopped out on the downside of the market as those moves accelerated and were almost exclusively on the call side but also has to be light as volatility was very high. The Volatility Capture strategy was never really given a chance to succeed despite the environment. Surprisingly the VIX was below where it peaked in December at 35 and stayed that way for all of January. The volatility was very up and down without a capitulation type event to cause a significant spike in the VIX. So the system was triggered into the trades that quickly fell away and were either stopped out of for a loss or closed due to the probability of success declining.
As I said, I do think January has set the tone for the year. As the systems and portfolio managers adjust to the heightened volatility I expect that we will continue to be profitable in this environment. If you have any questions about what is happening in the market or how we are positioning ourselves please feel to reach out any time. As always, thank you all for your trust in The Hyperion Fund LLC.
