Ivy program

Letter to investors

January 2018

Market commentary

A few year-to-date price changes

The confidence of equity investors has remained unchanged for the most part of January, before the occurrence of a market pullback at the very end of the month and at the beginning of February. The unabated rise of global equity markets had made investors especially complacent, with most indices exhibiting strong monthly performances in January (+5% on average). A few markets though showed a negative performance in January, like the English Footsie 100 or the Japanese Nikkei 225, if we do not take into consideration the turn-of-the-year gains.

The current short-term pullback on equity markets has triggered a swift perception change, although the medium term expectations might not have to be revised altogether for the time being. If the coordinated global expansion of economies is there, the main uncertainty lies in interest rates and in how monetary policies will play out in 2018. Financial markets have to deal with the uncertainty that a broader normalization of monetary policies entails. On that front, 2018 could well be a transition and test year for central bankers around the world. Will they have to normalize quicker than anticipated to avoid overheating, or slower because things turn sour? It is not unusual of financial markets participants to test the willingness of central bankers to act one way or another.

Interest rates have actually already risen quick and strong. The 10-year US Treasury rate is up 0.3% over the month of January and 0.7% over the past five months. It was at 2.7% at the end of January. The market participants now seem to anticipate higher levels of inflation than previously foreseen in the United States, a possibility we had warned about before. Such an higher inflation would not be surprising altogether, with such a strong economy and with the US dollar having declined for the past few months. The imported inflation in the United States could well become obvious to the Federal Reserve in the next 6 to 9 months. In Europe, inflation expectations could well be revised upwards as well. The Bund contract is consistent with German medium-term rates at 0.7%, a level not seen since 2015.

Finally, regarding volatility, we had mentioned in our Dec letter that the unusual and very large flows into passive short volatility products could create distortions between expiries and unexpected effects. We did not think that they would necessarily occur that quickly. The extreme moves that we have just witnessed in the XIV ETF (short volatility) and its announced termination are here to demonstrate how latent risks can quickly materialize.

The Ivy program invests across the four major asset classes. It has been able to benefit in January from the performance of the strongest markets with a gain of +5.0% over the month. Obviously, prospects for February point so far to a much less favorable performance.

Our convictions

Market convictions and active views
The graphs show our current market convictions from -100% (maximum bearish) to +100% (maximum bullish).
For each asset class, our highest and lowest three convictions are shown.


Ivy program YTD

Highest positive contributions YTD
E-mini S&P 500 +0.92%
E-mini Nasdaq 100 +0.77%
US 10Y T-Note +0.77%
Vanguard Health Care +0.32%
Highest negative contributions YTD
Platinum -0.30%
Corn -0.28%
Henry Hub Natural Gas -0.25%
FTSE 100 -0.23%

Performance and positions

The Ivy strategy performance stands at +5.0% in 2018 after one month.

The gains on the ETFs represent approximately 60% of the performance, and the longs and shorts on futures 40%.

Gains during January 2018 come from equity markets, fixed income (notably short positions on US rates) and real estate.

Losses during the month come from specific futures positions, notably on some commodities (corn, platinum and natural gas) and the Footsie 100 equity index.

A more detailed performance analysis is shown thereafter.

As per our positions and convictions, we remain bullish on equities at a mid term horizon. Our lowest convictions are in the telecommunications and utilities sectors, as well as in some European markets.
Regarding bonds, we still favor convertibles and corporate bonds. We remain short on long term US rates and Canadian rates.
For real estate, we favor the ex US instruments.
In the commodities space, we are bearish on corn, natural gas and sugar, while we are bullish on copper, Brent crude oil and palladium.


Performance contribution of ETFs

The graphs (one by asset class) show the contribution to performance of ETFs since January 1st 2018 (in USD).


Performance contribution of futures

The graphs (one by asset class) show the contribution to performance of the futures since January 1st 2018 (in USD).

Risk contributions

Risk contributions (component VaR 95% 1-day)

The graphs show how a position contributes to the combined portfolio VaR (Value at Risk). A positive number indicates that the position generally moves in the same direction as the overall portfolio. A negative number means the opposite, indicating that the position diminishes the overall portfolio risk level.

For each asset class, we are showing the largest and lowest three contributions to risk.


Focus on a trade: US rates

US rates are on the rise, but that move is not uniform across maturities: it comes together with a flattening of the whole term structure.

On one hand, the 10y-2y spread has declined dramatically since early 2014 (a situation called bear flattening), the short term part of the curve being driven up by what the Fed tells us they will do with their target rate, that is an increase of 1.75% over the next 3 years. We view this target rate increase and the fact that the market follows up (and perhaps exaggerates) on the 2-year tenor as a confirmed consensus on expectations of higher inflation. The lasting increase in commodity prices (energy and metals) over the past 6 months has had time to diffuse into an economy which is already at or close to full production capacity, meaning that we should soon be able to observe these effects on the core inflation rate. Add to this a declining dollar and an adverse US trade balance, it is then natural to expect a higher inflation.

On the other hand, the 30y-10y spread is now at a level it had not reached in 10 years, a situation which might be explained by a buying pressure from pension funds on the very long term rates. As is usually the case, different players with different needs act on different tenors of the interest rate curve.

Wedged between the 2-year and the 30-year, the 10-year has a lot to say. It grabbed people’s attention in the last few weeks with a strong increase from about 2% to more than 2.7% over the past 5 months. And there is room for more movements there.

2018 will have its share of events to which markets and policy makers will react, and it is fair to say a higher inflation is already one of them, prone to influence initial expectations by the Fed.

«Ivy» has held short positions on the US 10-year futures (i.e. long the rate) since early October. The graph below shows the gains that the position has delivered since the beginning of the year.


Key points and benchmarking

Strengths of the Ivy program
Deep learning Swiss made
Tail risk protection & crisis alpha Daily liquidity
Metrics Ivy 12 SG CTA Trend Index S&P500 20Y Treasury Bond
Annualized return 12.97% 5.81% 5.68% 7.08%
Volatility 10.16% 13.31% 19.32% 12.78%
Sharpe ratio 1.2 0.41 0.29 0.53
Max. drawdown 13.91% 21.66% 55.20% 26.59%
Correlation with Ivy - 0.55 0.26 0.14


The Ivy strategy is currently available as a managed account, and will soon be available as a UCITS fund.
Minimum investment is 500’000 CHF/EUR/USD/GBP.
Please contact us for more information.

Management fees
Performance fees

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Interactive Ivy portfolio


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