Vailshire Partners Hedge Fund Client Memo – Q1 2022
To Clients and Friends of Vailshire Partners LP Hedge Fund:
- The fourth quarter of 2021 started with a bang before ending with a whimper
- The Federal Reserve just made a critical policy error, bringing back unpleasant memories from the 4th quarter of 2018
- Adverse economic indicators mean a significant shift in Vailshire Partners LP’s investment strategy through 2022
Bullish to Bearish in Q4 2021
Hedge fund Vailshire Partners LP has spent the majority of 2021 on an unusually uncomfortable roller-coaster ride. This continued into the fourth quarter as well, with a huge gain in October followed by losses in November and December.
In October, our fund recorded an impressive increase of +36.18%. However, November returns were -2.79% and December returns fell -23.36%. This combination resulted in a total performance (unaudited) of 4Q 2021 of +1.46%.
In early November, bitcoin (an increasingly leading economic indicator) began to “sniff out” decelerating economic growth and inflation in the first quarter of 2022. While our fund remained positioned for a surge in bitcoin and of the associated assets at year-end, the price action simply turned bearish. , and it continued into the new year.
As shown in the chart (below), Vailshire Partners LP investors gained +8.14% in total in 2021. While this performance is adequate, I consider any year’s close to be lower than the S&P’s total return 500 is suboptimal. Our annualized returns over the past three and five years – measuring +41.59% and +24.76%, respectively – continue to significantly outperform the S&P 500.
As revealed in Q4 2021, the market does not always conform to our short-term, data-driven full-cycle investment strategies, but the odds remain strongly in our favor for meaningful long-term outperformance.
Current market conditions
While I was admittedly hoping for a longer run for volatile risk assets through early Q1 2022, the market spoke otherwise. And when the facts change, so do my investment strategies.
A few important metrics have changed since my last quarterly update, which has changed my outlook from cautiously bullish to resolutely bearish and defensive.
First, my research indicates that US inflation and economic growth likely peaked in the 4th quarter of 2021. This means that GDP and inflation will likely slow over the next two quarters. In such conditions, certain risky assets tend to be favored, including the US dollar, US Treasuries, gold, real estate stocks, healthcare and other “safe havens”.
Second, I believe the Federal Reserve has just made a significant policy error. Until the end of 2021, the Fed has been excessively dovish in its stance towards the economy and markets, with ongoing massive purchases of US Treasuries and mortgage-backed securities (MBS), increasing significantly money supply and now short-term interest. rates close to 0%.
I think they should have used the strong underlying economic indicators and market fundamentals throughout 2021 to drastically reduce their dovish policies. Instead, now that we’ve entered 2022 and the business cycle has peaked, the Fed recently moved to scale back its purchases of Treasuries and MBS with aggressive speed and then quickly raise interest rates. short-term interest.
Why do I consider this a material political mistake on their part?
Ironically, this is quite similar to the overly hawkish “autopilot” policy stance the Fed adopted in late September 2018, which led to a dramatic market downturn in Q4 2018. You may recall that the chairman of the Fed, Jerome Powell, then adopted a dramatic and very public policy. decision reversal – a dovish pivot – around Christmas 2018, which led to an instant and sustained rise in stock markets.
Since the cycle has turned and Fed actions have become (I believe) too hawkish, it is clearly time to be more cautious in our investment strategies. Based on the cyclical nature of economic cycles and inflation, I suspect that better days for risky assets will reappear in the second half of 2022. But, until then, it is wise to take a cautious and measured approach. .
As you know, Vailshire has a dual mandate of growing and protecting its customers’ assets. It is clear to me that we are officially entering a period of “protection”.
Investment strategy for the 1st quarter of 2022
From growth to protection mentality
Given the above outlook and outlook, our fund (and other separately managed accounts) has undergone a significant change in composition for the coming quarters.
First, our high-growth stocks, made up primarily of our MOVIES (Fdeputy, Iinnovative, Llong-term value creator, Mcapital allocator aster, Staker-friendly businesses) have been sold. These stocks have performed well over the past “risky” years, but tend to be hit harder when the stock market crashes.
In their place, we’ve added ten of the most capital-efficient companies out there. These companies know how to generate profits and reward their shareholders in almost any economic condition. If the US is heading into another recession and/or the stock market crashes, these stocks tend to experience less volatility and rebound quickly. For this group of resilient stocks, I am aiming for a compound annual growth rate (CAGR) of 20-30% over the next few years.
Second, I have reduced our exposure to bitcoin and related assets for the time being. While we still hold a base allocation of bitcoin, we are also increasingly protected against further declines through various methods, including active short selling by bitcoin miners and crypto exchanges.
Going forward, our approach to buying and selling bitcoin will be entirely quantitative. That is, more bitcoins will not be added to our wallet unless certain price action criteria are met. Similar rules will also be used to determine the best time to sell. In short, these metrics and rules will allow us to maximize future bitcoin gains while minimizing losses. I think this will have a dramatic effect on the performance of our funds throughout the 2020s.
Finally, we will continue to use a significant portion of the fund’s proceeds to follow our innovative and systematic full-cycle investment approach. For example, when the underlying metrics signal a cautious approach (as is currently the case), we will increase our hedges and our safe havens within the fund. This should serve to minimize losses and even profits during market declines.
Another year has passed and the Vailshire family is growing faster than ever! Thank you for your continued confidence in Vailshire’s systematic and innovative approach to investing. Our current defensive strategies should serve us well for the coming quarters. And, after this period of defensiveness, I expect a robust performance in the second half of 2022.
For current non-clients: If you would like to discuss what Vailshire’s innovative investment strategies can do for you and your family, please contact me personally. This is not a solicitation to invest but rather an invitation to learn more.
Live well and invest wisely with you,
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.