We have long suggested that should volatility return to equity markets, our style of long/short investing would begin to prove its mettle. This is exactly what we saw during the month of February, as the spike in US Treasury yields catalyzed volatility (as measured by the VIX index) to spike to levels last seen in 2015, resulting in a monthly loss of 3.0% for the TSX and 3.7% for the S&P 500 indices. Both Forge First Long Short LP (“FFLSLP”) and Forge First Multi Strategy LP (“FFMSLP”) generated positive net returns for the month.
Even the bulls who foresaw additional upside in equities admitted stocks were far from cheap entering 2018. Then, January 2018 delivered stunning upside in US stocks, epitomized by the 15.5% advance in the FANG index, catapulting the S&P 500 deep into overbought territory at 7% and 14% respectively above its 50‑ and 200‑day moving average. Coincidentally, as shown in Figure 2, the frequency that the term “market bubble” appeared in the financial press climbed back to levels last seen during 2006 and many fund managers remained overweight equities...
January started off as one of the strongest months for equities in the history of capital markets with stocks marching relentlessly higher amid investor optimism and non-existent volatility. Continued strong performance in the US economy combined with positive earnings revisions from US tax reform helped buoy the S&P 500 5.7% for the month, the best start to the year in 31 years. Meanwhile, here in Canada, uncertainty surrounding NAFTA weighed on the TSX, resulting in a loss of 1.4% for January. Both of the Forge First funds generated positive net returns for January.
2017 ended up being another strong year for equity markets. The S&P 500 and Dow Jones indices achieved record levels, up a respective 21.8% and 28.1% for the year including dividends. It was a year characterized by ultra-low volatility, three Fed rate hikes, low inflation and unemployment levels, US tax cuts, and cryptocurrency and cannabis mania. Most alternative asset managers materially underperformed the major US and Canadian indices (as at November 2017, the Scotiabank Canadian Hedge Fund Index was up 4.01% YTD). While our two long/short funds also fell under this category of underperformance, we can’t help but question whether this equity bull market, now almost 9 years long, can continue indefinitely. In our view, the case for diversifying your 100% long only equity portfolio has never been stronger.