The Appian Fund returned –0.77% in January as markets sold off worldwide. The Fund’s loss was caused entirely by the negative performance of the Fund’s Tactical Currency manager, which was caught off guard by the Swiss National Bank’s surprise removal of its currency peg against the Euro. Two of the Fund’s defensive strategies performed well during January, sparing the Appian Fund from further losses.
Stocks fell sharply early in the month as the price of crude oil reached multiyear lows – a barrel of West Texas Intermediate was down nearly 60% from its mid-2014 peak. The S&P 500 returned -3.0% in January. Although low oil prices are a welcome sight for U.S. consumers, energy stocks are a significant component of the overall stock market and were down 4.8% for the month. Additionally, energy companies have been a significant source of new job growth through the U.S. economic recovery. As energy companies scale back growth plans, their contribution to the labor market recovery is expected to slow. Reduced capital expenditures in exploration and drilling will likely spill over to many industrial employers who supply the energy industry, further weighing on GDP growth. That said, the benefit to the U.S. consumer, still accountable for over 70% of U.S. GDP, may make this a net positive event for the U.S. economy. As with any major move in the markets, the dramatic fall in oil prices will create winners and losers.
Hedge funds generally performed positively in January, with the HFRI Fund of Funds Index returning 0.25%. Macro managers were among the top performers this month, with the HFRI Macro Index returning 2.62%. The HFRI Macro Systematic Diversified/CTA Index was a leading contributor, delivering a 4.5% return, the best monthly return for the Index since December 2010. The HFRI Equity Hedge Index fell -0.62% for January. The HFRI Event Driven Index fell -1.39% for the month, and relative value arbitrage strategies generally performed strongly, with the HFRI Relative Value Arbitrage Index up 0.19% for the month.
On January 15th the Swiss National Bank (SNB) shocked worldwide markets by removing a three-year-old cap on the franc, sending the currency soaring against the euro and stocks plunging on fears for the export-reliant Swiss economy. Only days prior, SNB officials had described the 1.20 Francs per Euro cap, introduced in 2011 at the height of the Euro zone crisis to fend off deflation and a recession, as a policy cornerstone. The abrupt change sent the Franc nearly 30 percent higher against the Euro in chaotic early trading. The move was explained by the desire of the SNB to be ahead of the anticipated quantitative easing announcement by the European Central Bank in late January. Many market pundits consider this to be another volley in an ongoing currency war between central bankers charged with the dual goals of defending both their currencies and their national economies. With interest rate and stimulus policy maneuvers somewhat exhausted, it may be logical to expect an increase in the frequency of such actions. The main criticism in this change was not the removal of the peg itself, but rather the poor communication surrounding it.
The Appian Fund was off to a nice start to the month until the aforementioned move by the SNB. The Fund’s Tactical Currency Manager’s models expressed a bearish view on both the Euro and the Swiss Franc since the currency was impacted by a floor that allowed it to weaken (it was not a pure peg). Their models proved incorrect, and the manager suffered a loss of approximately 12% in one day, turning their 4% gain into an 8% loss as of mid-month. The manager pared losses somewhat as the month concluded. There is a somewhat of a silver lining to this otherwise disappointing result, being that volatility in currencies shot upwards and remained high after the Swiss announcement. Our manager has performed well historically in previous periods of high interest rate and currency volatility. Despite the loss in January our conviction behind this manager remains high although it is fair to say that we are monitoring them closely.
Managers exposed to broad market moves were negative for the month. The Fund’s U.S. Long Short Equity manager suffered a loss for the month, albeit a smaller one than the overall stock market. The Fund’s Event Driven manager also produced a small loss for the month. The manager has rotated their book of business away from special situations and towards merger arbitrage, reflecting their beliefs that the U.S. Stock market is not adequately rewarding the risks in many current special situations and exceptional opportunities exist in the merger space. Although volume of U.S. transactions fell in January to $54.1 billion from $57.6 billion in the previous month, volume and spreads remain attractive.
Two of the Fund’s non-correlated managers performed as expected in January and prevented a larger loss for the Fund. The Fund’s Relative Value Arbitrage manager profited from the higher volatility that persisted in January. After averaging approximately 14.0 in 2014, VIX averaged 19.2 during January, the highest monthly average experienced in over a year. Our manager capitalized on this volatility to produce a strong return in January.
The Fund’s Global Macro manager had an exceptional January, as profits were delivered in interest rates, currencies, commodities and equity indices. Note that the manager profited from the trend in equity prices and not their directionality. The potential to produce profits during tumultuous markets is entirely consistent with our inclusion of this manager in the Appian Fund portfolio, and the Fund’s Global Macro manager delivered in January.
We are maintaining our positioning of the overall Fund portfolio as 2015 unfolds: long-volatility with a high degree of exposure devoted to quantitative and non-correlated strategies. The loss by our Tactical Currency manager in January was disappointing for sure, but it does not change our belief that 2015 is likely to be characterized by greater turbulence and volatility than experienced in the past two years. The asset allocation of the Appian Fund portfolio reflects these beliefs.
Attribution for January is as follows:
|Attribution by Strategy|
|Relative Value Arbitrage||0.22%|
|U.S. Long/Short Equity||-0.46%|
We appreciate your interest in The Appian Fund and invite you to contact us at any time.