Antiloop Hedge - March 2023

Antiloop Hedge was off to a bad start in March but recovered mid-month. The fund was positioned on the short side of tech and growth through our long/short equity strategies as well as being long commodities, euro, and gold through our Tactical Asset Allocation and Global Macro strategies. This led to an initial drawdown that started to recover by mid-March. As investors began to price in a pause in rate hikes moving forward in reaction to the emerging banking crisis, the Nasdaq was relatively strong. Simultaneously, short-duration bonds had their biggest rally since 1987 as rates fell, accompanied by massive volatility. This initially hurt the fund's short position, but these losses were also recovered later in the month.

As gold and commodities bottomed mid-March, the fund has been in a positive trend going into mid-April.

Market Outlook

Transitory disinflation

Last month, we wrote about what we called inflation 2.0, stating that we believe the actions taken by the Federal Reserve now will eventually lead to new inflation peaks. Today, one month later, the signs are definitely even more evident. However, to understand how and why we are willing to claim during disinflationary times that it’s not, in fact, inflation that is transitory but the downward trend of CPI YoY, we need to go back and look at what have been driving factors of inflation before.

In 2015 and 2016, there were several pieces published about the “dead commodities market”. And I get it. Commodities had been in a bear market for years while other assets were thriving. Why would anyone even consider adding them to a portfolio as a hedge against inflation or as a diversifier when everything we heard from Central Banks globally was that the only issue we had with inflation was that it was too low? 

Fast forward a couple of years, and the market tells another story. From trading sideways between 2015-2019 and then bottoming in 2020, commodities suddenly woke up from their grave and dug themselves out and have since outperformed equities.

Commodities lead inflation

Since last summer, commodities have been in a downward trend. However, the trend turned as it became clear to the markets how fragile the banking system is and that the only tool to save the system from a complete meltdown is for the Federal Reserve to leave the dream of normalized rates and QT. Since mid-March, when markets had this epiphany, gold, as well as other commodities, have taken off again.

We are Golden

History never repeats itself, but it does often rhyme. If we go back and look at previous inflationary events, we find that when the inflation rate historically has gone over 5 percent, it has always been followed by one or more inflation peaks later. There is no reason why that would be any different now. 

We believe this is just the beginning of a secular bull market, and thus remain confident that gold and commodities will outperform the stock market this decade.