Dipsea Capital Fund, LP
May 2017 Commentary:
The Dipsea Capital Fund returned 0.95% to clients for the month of May, its 10th consecutive, positive month. Year to date, the fund is up 3.67% after fees and the trailing 12-month return is 7.03%. Twenty-one weeks into 2017, the fund has been profitable twenty of those weeks. In May, the fund’s largest daily loss was only 0.04%.
Other than a brief, two-day, downside price flush which correlated with Washington political concerns, the market was quiet in May. It has maintained its low volatility orientation and its upward price bias. The VIX volatility index, which is commonly used as an indicator of investor sentiment, continued to convey little concern among investors for downside price risk.
Is It Different This Time?
We’ve noticed a number of odd anomalies that historically would be signaling concern.
Narrow Participation: Stock market breadth has not confirmed the price strength we’ve been seeing in the indexes. Recently the broader market has made new highs with more issues declining than advancing on a given day.
Stock Indexes and Bond Yields are moving in tandem. The S&P 500 and the price of the 10 Year Treasury note both made new 2017 highs on Friday June 2nd. With equities being expensive, the conventional wisdom is that we need a strengthening economy to substantiate rising equity prices. The rally in bond prices seems to be communicating weakening economic growth.
Bitcoin: Although we’re not seeing speculative excess in investor surveys (often a contradictory signal), we are witnessing speculative activity in another financial instrument, Bitcoin. Exponential price appreciation in that market is a potential sign of speculative excess that may have the possibility to affect other markets.
Historically Low Volatility: As referenced in last month’s commentary, the VIX continues to hover near 1990 lows.
Our strategy has delivered consistent returns in the past as demonstrated by our historical track record. Yet what can we expect of our returns when volatility reawakens some day?
Clearly we can’t predict our future returns. That said, the chart below conveys how our strategy (pre and post the July 2015 launch of the Dipsea Capital Fund, LP) performed against the S&P 500 index during turbulent months in the past.
For the period from January 2007 to June 30, 2015, the performance results set forth above are not the results of the Fund, and represent the performance analysis of the largest investment account managed by Dipsea with a strategy similar to the strategy of the Fund. Such results do not reflect the actual results of the Fund or the composition of its portfolio. Performance results for the year 2007 through June 2015 were prepared by Dipsea and have been verified by The Spaulding Group. Net returns are net of all fees to the investor, however performance of individual investors may vary based upon differing management fee and incentive allocation arrangements, and the timing of contributions and withdrawals. No management fees were charged to the managed account referenced above from January 2007 through June 2015. Dipsea will provide details about current and prior expense, fee, and incentive allocation structures on request. Dipsea cannot and does not guarantee or predict a similar outcome with respect to any investment with Dipsea. Past performance of these strategies is not necessarily indicative of future results.
Our audited historical returns, both pre and post launch of the fund support the conclusion that we should weather the storm and prosper when the environment changes.
Please accept our continued gratitude for the trust you place in us as a steward of your capital.
Chris, Gregg, Eddy, Peter, Kurt and Austin.