Eta Carinae was up 3.31%(net) in March. The program experienced a healthy rebound after a tough February and achieved its mandate of providing diversification to beta-exposed portfolios this month. After experiencing one of the largest single-day increases in its history in early February, the Chicago Board of Exchange’s (CBOE) Volatility Index (VIX) steadied, albeit at higher levels than those of 2017 and January 2018.
March had a mid-month flip of trend in equity and bond markets. The first half saw equity markets rallying thanks to a better than expected February jobs report accompanied by a mixed wage/growth picture which dampened inflation expectations. The Federal Reserve also expressed an upbeat economic outlook and raised the target rate by 25 bps as expected. Bond yields continued their downward trajectory as a weakened dollar resulted in diminished demand from overseas buyers. The mid-month reversal was the result of concerns of a potential global trade war. Bond yields dropped and, in turn, prices rose as investors made the flight to quality trade. Equity markets were not immune to the trade war concerns either. They were kept on edge by the rhetoric and reversed direction, losing the positive momentum garnered earlier in the month.
Closer to home, the Eta Carinae program had some recent updates to report, adding a new market to its portfolio and a new type of system to its model basket. The MSCI Emerging Market Index futures contract is the latest entrant on the tradeable market list. We also were excited to introduce a machine learning-based hedging model that was developed by a team brought in over a year ago and specifically tasked to focus on building applications in what is a relatively new and intensively researched area in the quantitative finance space. The system triggers intraday to protect the portfolio against downside shocks when the porfolio is holding net long exposures within a respective market.
A portfolio rich in global equity holdings may not provide the anticipated geographic diversfication, as the charts of S&P 500, FTSE 100 and Nikkie 225 index futures highlight below. Eta Carinae’s mission as achieved this past “Ides of March” is to strive to be an alpha-generator (more often than not) to beta-exposed portfolios.
To sum up March trading: while heading into the month the program was net long North American but short both European and Asian-Pacific equity index futures. The TNR ratio was above the lows seen in February and a rising TNR tends to portend favorable trading conditions. The program’s top-performing (geographically-based) subsectors were Europe, which returned 2.22% (gross) and Asia/Pacific which tallied 0.88% (gross). The mean reversion and long-term trend models produced the majority of the returns in the portfolio, primarily from trading in the European equity index subsector.