2025 Q2 net performance was positive at 2.12% in USD Z. A volatile quarter for most investors had April start with the “Liberation Day” tariff bonanza which quickly unsettled markets, causing a VaR shock that led to deleveraging. Since then, there has been a litany of tariff threats raised and postponed, in some cases within hours. The initial panic over potential inflation spiking and slowing trade, dragging the globe into a recession, has since softened on these postponements. News flow at the back end of the quarter has been dominated by geopolitics with Israel and the US bombing nuclear facilities in Iran, but this had very little market impact.
This quarter demonstrates why our fund captures positive performance in uncertain environments: Long volatility trades in FX and Volatility Risk Types, purchased at cheap levels, performed very well in April, allowing the fund to weather the storm. As markets settled and volatility dropped, the mean reversion trades in Spreads and Cross Currency Risk Types performed, delivering positive returns throughout the remainder of the quarter. Over the quarter the portfolio added nine new strategies while nineteen trades were exited (four trades target, four stop).
Cross Currency Interest Rate trades were the most profitable risk type within the portfolio for this quarter. Performance was predominantly due to a USD steepening v CAD flattening trade, but also the yield spread trade between USD and CAD contributed as rates narrowed in the 4y maturity of the curve. A long position in NOK rates vs short SEK in 5-to-7-year maturities contributed late to the quarter.
Volatility trades made the second biggest contribution and protected the portfolio during April’s VaR shock. These contributions came from long positions in AUD and JPY combined with a spread between EUR and GBP. A draw came from a calendar vol spread in GBP that was adversely affected by a high CPI data print, removing any chance of a June cut by the BoE.
FX trades, notably EURGBP longs, provided strong performance on the market’s improved view of the Euro as a safe haven.
Inflation trades were negative mainly due to expectations of medium term inflation in the UK lowering over the period.
Spread trades were solid contributors with long end Italian bonds outperforming shorter maturities on asset swap. UK inflation linked bonds also flattened in the long end adding to positive performance. Some draw was due to Austrian bonds underperforming vs peers.
Duration trades were a small positive driven by positioning for the odds of the BoJ hiking being significantly reduced, generating a profit.
Curve trades were a small net positive benefitting from the re-steepening of real rates in EUR and nominal interest rate curves. However, this was largely offset by a draw long end GBP curve as well as UK bonds.
