As we mentioned in our past emails, a weak dollar is deflationary for Japan and Europe placing downward pressure on their asset prices and bond yields. Recently, we have witnessed both the Japanese and German equity markets trading lower and today US equities were dragged down with them. Japanese 10yr notes have stayed stable at -0.08% but German 10yrs traded down to an historic low below 0.10%. The slowing global economy is a real concern but for the central banks, deflation is the real enemy. Both the Bank of Japan and the European Central Bank have moved their short term interest rates to 0% and penalized bank reserves with negative interest rates. To reiterate, given our research, we believe negative interest rates are deflationary. We recognize quantitative easing is necessary when there are no natural buyers of bonds at certain interest rates but QE temporarily mis-prices the bond market the central bank is trying to support. In short, low bond yield due to QE are both deflationary and unsustainable and run the risk of creating real deflation. Consequently, we do not expect the BOJ or ECB to drive bond yields any lower.
The global deflationary pressures and negative bond yields provide the Federal Reserve the unique opportunity to begin to sell-off its bond position to reduce its balance sheet. But more importantly, as the Fed sells their bonds at historic highs, prices move in opposite direction to yields, the Fed selling will keep global bonds yields from going further negative and strengthen the dollar. If Japanese and German bond yields stabilize near zero or begin to rise, capital going into the bond market will now be diverted to asset markets providing necessary inflationary pressures for both Asia and Europe. The Fed bond selling at historic spreads to Japanese and German bond yields incentives international buyers to purchase US dollars to purchase US bonds. A weaker Japanese Yen and Euro will support global equity markets while the Fed stays accommodative and reduces its balance sheet.
On Tuesday, April 5th, early morning we sold the German Dax at an equivalent yield of 0.085%, yields move in opposite direction to price. Currently, we are long the S&P, in a synthetic option on the Japanese Nikkei, short US 10yr notes and in a synthetic option on the German 10yr bund and 62% invested.
In 2012 modeled performance (7 ˝ mo.) net of all fees was +12.46% with a 10% Hurdle rate
In 2013, modeled performance net of all fees was +19.73% with a 10% Hurdle rate
In 2014, modeled performance net of all fees was +56.42% with a 10% Hurdle rate
In 2015, modeled performance net of all fees is +72.68% with an 8% Hurdle rate
In 2016, modeled performance net of all fees is +17.56% with a Graduated 10% Hurdle Rate
The Unicorn Macro Fund, LP (“Fund”) operates under the SEC rules of 506(c) of Regulation D. This rule allows general solicitation as long as all purchasers of the Fund are accredited investors and the Fund takes reasonable steps to verify that purchasers are accredited investors. The 506(c) rule benefits funds that perform better than their peers, because for the first time, Regulation D funds can post their results publicly.
The Fund trades both long and short positions in a variety of global markets and its performance is not correlated to any one market. Performance of the model of the Fund is measured by Net Asset Value (NAV) which is net of all fees, is unaudited, and may include the use of estimates. Individual results will vary based on the timing of an investment and past performance is no guarantee of future results and there is a possibility of loss.
The modeled results are based only on capital appreciation from macro style trades. The results do not include dividend reinvestment or any other form of cash flow and are taxed as ordinary income. All trades have a risk/reward objective of at least 3 to 1 and each full position risks no more than 2% of assets. There will be times when market conditions may alter these objectives. Since the inception of the model our trading of the methodology has become more precise.