Dear Investors, Partners, and Friends,
In an already eventful year, September didn’t disappoint. Volatility was present in a wide array of
markets including a 9.3% decline in the S&P 500 Index (“S&P”) and the 2-year U.S. Treasury
yield and U.S. Dollar Index jumping 24% and 5.6%, respectively. These are some of the largest,
and historically most stable markets in the world, rising and falling in extreme magnitudes.
Dramatic moves like these are arguably the direct result of the Federal Reserve’s explicit
campaign to tame inflation by any means necessary. From rate hikes to aggressive jawboning of
markets, lower asset prices seem to be their solution to solving the persistent demand-driven
inflation.
Even with markets moving rapidly, the Directional Spread Strategy’s position implementation
techniques provided multiple opportunities to participate in this volatility, capture profits, and
equally as important, avoid losses. Our experience has taught us that markets have a tendency
to move much farther and faster than investors anticipate. This led us to use more distant, out of-the-money, long ratio put spreads that provided a buffer should the market have dropped
sharply, while also offering significant profitable opportunities.
As the S&P continued its decline, the Tactical Strategy selectively used put options to collect
profits, but with actual market volatility continuing to exceed implied volatility, many put option
trading opportunities did not provide an attractive risk/reward scenario. The strategy is more
cautious in this type of extreme volatility, and while we saw success in selling call options as the
S&P declined, small hedging costs offset those gains delivering a flat return for the month.
We have underperformed in 2022, especially these past two months as interest rates rise at the
fastest pace seen since 1982. This can and will work in our favor as a fund but in the short term
It has worked against us.
Aside from the trading which has generally been positive, the T-bills that we hold excess cash in
have priced negatively the past two month with September being the most significant. Meaning
our return has taken a negative mark the last two months, last month being approximately –
.40%. Our longest duration is a 12-month T-bill that was purchased on June 15th at a yield of
2.97%. We are yet to see any that return in the monthly numbers but that will change as we get
closer to maturity. The shorter duration 13-week bills have shown a flat return as well and those
will mature December 1st. The rest of the funds cash will be in 30 days T-bills starting in
October and for October will yield .23% on that portion of the fund. While rates are still expected
to rise, we will continue to stay in the 30-day term to average our duration and yield. What this
means for Hyperion is that we will have considerable income from the bill yield over the next 8
months in addition to our trading which has been positive every month in 2022. Although a
difficult trading environment for a low vol portfolio like Hyperion Fund, we were able to grind out
returns that once coupled with the treasury yield should get the fund back to historical averages.
As for the trading itself we are certainly better suited for this new normal level of volatility than
we were at the beginning of the year. Year to date these are the three take aways from the first
three quarters along with the variables we have adjusted for.
1) The VIX remains at an elevated range but still well below where actual volatility is at. When
the daily ranges on the S&P 500 are 2-5% it makes options 5-7% out of the money very
expensive and much beyond that the probability of success on the trade diminishes. Staying in
that range and keeping a high probability of success (75% of our trading days have been
positive) while not changing our risk management means positions are smaller. We’ve had a
high ratio of winning trades while having a smaller return on them.
2) This challenge is most present in the Tactical Strategy. While the strategy has been active it
has mostly been on the call side the entire year. The violent moves in this bear market have
made put spreads very challenging. That leaves call spreads which typically yield less because
the perceived risk of a sharp rise is lower than that of a sharp decline The strategy will continue
to look for opportunities on both sides of the market.
3) The VIX has not seen a significant spike all year, rendering the Volatility Capture Strategy
without much opportunity. Any spike we have seen has stayed within the contango curve of the
calendar and we need to see movement toward backwardation (think capitulation) for that
strategy to really perform.
The rest of 2022 and looking into 2023 many of the themes discussed at the beginning of this
letter will continue to persist. In what will surely have long-term ramifications, the sabotage of
the Nord Stream 1 and 2 undersea natural gas pipelines has critically damaged a significant
artery for the flow of energy from Russia to Europe. This further drives a wedge between Russia
and the West and complicates a potential “return to normal” should Russia cease its incursions
in Ukraine. This crisis, in addition to the litany of issues being thrown at the world economy,
shows why such dramatic market movements are occurring with more regularity. We believe
volatility is here to stay for the foreseeable future as many of these issues cannot be dealt with
in the short term and will lead to continued instability across the globe. This environment will
continue to provide additional trading opportunities for our funds.
As always, thank you for supporting Le Mans Trading and entrusting us with your investment
capital. If you would like to learn more or have any questions, please feel free to reach out via
the contact information below.
