A Quick Performance Update

The YTD Attribution and Holdings here is up-to-date as of 4/19/24. I’ve added a new tab to the holdings sheet which shows any recent hedge activity (i.e. buys or sells based on updates in the subscriber chat, with links to the relevant thread in the notes column).

There were a couple changes made, only in the Water Basket. I added Xylem and exited Kurita and the EM names as I’ve done some more work (and also remain bearish on Mexican equities, or at least the peso).

The reason I’ve put this basket on before expanding in a thematic primer is because I wanted the portfolio to have more defensive exposure - and most of these have utility beta - but still within a theme I believe has a very bullish setup.

The water thematic primer will be out by the end of April. It’ll be very in-depth, as you’re used to, and a lot more exciting than anything you’ve read about water so far. If you waited to put it on until the primer was out, congratulations - it looks like you’ll get a much better entry on most of the names.

Some of the more interesting earnings this season, beyond the obvious ones for the AI and GLP-1 basket, are coming up this week. GE Vernova and the rest of the “AI Power Shortage” names specifically. We will see if that thesis is materializing or not, as you’d expect them to already see demand related to it.

As far as the GLP-1 basket, I think Novo does better than Lily for Q1 as a function solely of supply. Novo has managed the shortages of autoinjectors better, in my opinion.

Something I have found quite interesting is that there seems to be some inverse correlation forming between how most of our US beta does and how our Chinese Equity basket does. It could be a coincidence, or it could be people selling at elevated US Valuations and then basically looking to see where the margin of safety is wider. China might view this as an opportunity to finally get some inflows and try to target investor friendly headlines, if they notice this dynamic as well.

I’m much more comfortable with being reactive rather than proactive around earnings, and I think that if you have the urge to get out of a lot of stuff right before they report you probably weren’t all that convinced to begin with. I will update any earnings developments that materially impact our thematic exposures as they arise, in the chat.

Hedging when you can…

Not when you have to.

When I updated subscribers to increase hedges to 175bps of NAV due to Iran news (link here), I got a lot of pushback. Many people figured it was nothing (it probably will be in the end, like most geopolitical reasons for sell-offs) and I even received a message on Twitter accusing me of being a doomer!

Honestly, guilty as charged in this specific instance. I have always preferred to hedge against anything that I would be at a severe disadvantage predicting (like war, I’m not good at predicting how it will play out) and isolate the stuff I’m confident on. Hedging is the only area where it actually pays to be pessimistic in my opinion, and even then - overall it’s really not a strategy that results in higher returns (just a smoother equity curve and maybe some cash raised when opportune buying presents).

Here’s the deal when you decide to “hedge when you can, not when you have to”. On balance, it’s actually probably going to be a drag on performance. But when it pays off, you’ll be very happy.

So let’s look at our hedges baskets. We’ve had more than a few since inception, some on bonds, some on equity indices, one on a large single name equity short etc.. More than half of them have all the options expire worthless. But the ones that don’t provide the ability to monetize them at the most opportune of times.

Hedges are meant to go to zero or be monetized in a drawdown. The beauty of getting progressively more net short as the index drops and gamma is in your favor is something that can’t be overstated. But, of course, most times the index does not drop.

If you go and look at the attribution analysis since inception, you’ll see that we have actually taken a -381bps drag from hedging since inception:

Even as recently as the last update, we took a relatively large drag because of our hedges. Yet this quarter, so far, it’s preserved a massive amount of gains and resulted in significant outperformance.

This is the Citrindex, now, Quarter-To-Date vs. SPX:

As of 4/19/22, Quarter to Date, we’re down 1.36%. I don’t like it when the line goes down, but when it goes down this much less than the index I can pretty much deal (especially when NVDA is down 10% in a day and our book is like 14% AI exposure).