The Picton Mahoney Fortified Inflation Opportunities Alternative Fund Class F (“the Inflation Fund”) decreased by 0.10% in the second quarter of 2024. The performance of the Inflation Fund has largely mirrored inflation dynamics year to date in 2024.
Market participants were largely caught off guard by the hotter than expected inflation data in Q1 in the same way that inflation data generally cooled in Q2. As a result, the Inflation Fund moved sideways in Q2 after strong performance in Q1. We view the ability of the Inflation Fund to preserve capital in the presence of cooling inflation data as a positive.
Two key themes contained in our approach is that 1) we gain exposure to a diversity of inflation sensitive asset classes, and 2) we seek diversification within each of these inflation sensitive asset classes. Both themes ensure the portfolio is designed to properly capitalize on the emergence of an inflationary regime.
The sideways and diverse nature of the movement in many inflation asset classes in Q2 is somewhat in contrast with the dynamics of Q1 where most of the asset classes moved higher. And almost all asset classes contributed to positive portfolio performance in Q1.
This behavior is typical, an inflationary regime tend to move all the asset classes higher whereas during periods where other factors are impacting these asset classes their price movements tend to be less correlated and less sensitive to inflationary dynamics.
There was a wide variation across the different inflation sensitive exposures in the portfolio. Some of these variations were idiosyncratic to the supply and demand of those specific commodities as opposed to driven by inflationary dynamics.
For example, the weakness in the grains markets in the last month of Q2 was weather related as better than expected growing conditions emerged and therefore the return drivers were not inflation related.
And both Industrial and Precious Metals experienced volatility through the quarter by 1) concentrated positioning of market participants which led to unwinds and 2) rumors of changes in central bank buying activity in gold. Cocoa, which experienced large gains in Q1, continued to make headlines with prices coming off their earlier peak. The portfolio did benefit from the moves in other soft commodities which were generally positive.
In Q2 the largest contributor to positive performance was Precious Metals followed by Industrial Metals with strong positive performance in April followed by weakness and sideways movements in May and June. The largest negative contribution was from Grains and as mentioned above, the emergence of better-than-expected weather and crop conditions weighed on prices.
In addition to the two key themes of breadth across inflation related asset exposures and breadth within each of the inflation related asset class; we rely on a tactical risk management process to mitigate against more secular price declines in the various positions contained in the portfolio. Through Q2 the tactical positioning remained relatively constant in most of the inflation related assets.
The portfolio maintains close to maximum long position in Precious Metals; close to maximum short position in Global Government Bonds; close to maximum positive position in duration hedge Inflation Linked Bonds. The positioning in other key inflation related assets such as Energy and Industrial Metals was mixed and variable through the quarter as no clear trend has yet to emerge for many of these commodities.
Towards the end of the quarter, we applied tactical hedges to our short Global Government Bond positions to mitigate against unanticipated declines in government bond yields. This decline in yields would be associated with a decline in inflation expectations and therefore negatively impact the portfolio.
| Performance as of June 30, 2024 (%) | 1M (%) | 3M (%) | 6M (%) | 1YR (%) | Since Inception* (%) |
| Picton Mahoney Fortified Inflation Opportunities Alternative Fund (Cl. F) | -2.66 | -0.10 | 5.54 | 7.51 |
5.36 (May 4, 2023) |
(*) Annualized performance
