Q2 2023 Investor Letter
Good Afternoon:
I am pleased to share that our strategies have shown sustained outperformance both year-to-date and since their inception.
Managing risk remains a top priority despite our strong start to the year, given the new and higher interest rate environment. While the “transitory” portion of inflation seems to have run its course, a more sustained inflationary environment driven by geopolitical tensions and global trade fragmentation, among other catalysts, is emerging.
Given the fragile economic environment and slowing growth, it’s challenging to be overwhelmingly bullish on the stock indices (although, a soft landing certainly still seems to be a possibility). Nevertheless, there are certainly winners to be had in this era. It is our belief that the current climate presents a prime opportunity for “pickers” to thrive, or in other words: it is time for skilled active managers to show their stripes. As we delve deeper, the anticipated subdued to moderate returns of the broader stock market make it increasingly viable for a seasoned macro strategist to surpass these indices. This is especially true if one ventures beyond the traditional confines of a long-only stock and bond portfolio. With our broad and unconstrained mandate, we continue to execute on an abundant opportunity set.
Further elaborating on the performance chart above:
Otium Absolute Return Fund, LP is our flagship unconstrained cross asset partnership which focuses on Macro, Long / Short Equity, and Crypto focused exposures. This data is partially audited.
Floridus Capitus LLC is our pure play crypto sleeve. This data is unaudited.
More detailed performance data can be viewed here: https://docsend.com/view/h6m56hyhvagcyp6j
Market Imbalances
Since 2010, an unprecedented influx of assets has poured into the US stock indices, leading to a historically exceptional level of concentration within these indices. The S&P 500 and other market-cap weighted indices have perpetuated this self-fulfilling prophecy, with more dollars flowing into the index and increasingly funneling into the same mega-cap US tech giants. This trend has spawned trillion-dollar companies over the past decade.
While this is partially a testament to the [perceived] operational and financial excellence of many of these mega cap firms, it is important to note that this extreme level of capital allocation to a small group of similar firms has caused significant inefficiencies for companies on the other end of the spectrum.
The deluge of flows pouring into the most highly concentrated names has left stocks that are more reasonably priced — often categorized as “value” stocks — at their cheapest relative level since 1998. In simpler terms, value has rarely been the value that it is currently!
At NWTM Management, we have adeptly navigated through the economic turbulence of the last few years, as evidenced by our impressive performance table highlighted earlier. Our approach is distinctive, as we actively invest against the trend outlined in the previous paragraph. Our primary objective is to generate uncorrelated and excess returns for our clients, which means that we eschew investing in indices or mega-cap US tech giants. We believe that clients should not have to pay fees for this type of beta exposure, and we advise them to seek this type of exposure from other products or brokers, preferably at no cost. Our commitment to providing unique alpha solutions is what sets us apart from our peers, and we are honored to be a trusted partner for clients in their investment journey.
Time is one of the most important yet underrated functions within Finance…
Time is a critical factor in investing, as it has a significant impact on investment returns. Those who have a long-term investment horizon and the patience to hold their investments for many years, or even decades, tend to be the most successful investors. At our firm, we historically considered ourselves “Medium Term” investors, but as we have matured, we have grown more similar to long-term investors.
One of the benefits of a longer investment horizon is that time helps to smooth out the volatility of markets and investments. Short-term market fluctuations and downturns may cause panic and anxiety among investors, but over the long term, markets tend to trend upward. By staying invested for a longer period, investors can ride out short-term fluctuations and reap the rewards of long-term growth.
It’s important to mention that many investors who have bought various assets over the last year or two may currently be underwater on those purchases. A prudent approach is to review your due diligence and assess whether your thesis on these assets is still valid given this current higher rate regime. If it is, then it’s best to let time do its job. If not, then it may be a good idea to review these positions at the end of the year and utilize them as a tax shield if the opportunity presents itself.
NWTM Background and 2022 Stress Managing Strategies
NWTM Management has been a pioneer in evolving the multi-strategy investment concept. Our efforts in this area began in 2018 and were formalized in 2019 and 2020. We have kept a pretty low profile as we continue to develop as a firm. As the founder, I have been taken aback by the misconceptions surrounding industry benchmarks and what is considered success for investors and investment managers. It is often assumed that big capital raises and large AUM are the ultimate measures of success, and while there is some truth to this — it is primarily a fallacy. Raising capital is a sales and marketing game, not an investing game. The ability to raise capital is not a guarantee of successful and productive investment. Our primary focus at NWTM Management is on producing large, risk-minded, and uncorrelated returns. Our track record speaks for itself, and we have achieved great success in this regard. While a strong sales and marketing presence is important for long-term business sustainability, our focus will always be on delivering superior investment performance for our clients.
2022 proved to be a challenging year for many from an investment point of view — and beyond spending my time tightly managing risk — I personally used 2022 as an opportunity to focus on health, mental balance, and creativity. The re-ignited focus on health and balance meant bringing back two of my favorite and most vital energy balancing activities which had somehow gotten left behind amid the chaos of the last few years: Yoga and Acupuncture. Some of the benefits I have experienced from these activities include:
Improved overall physical and mental well-being
Increased self-awareness and sleep quality
Improved mood and decreases symptoms of anxiety
Both yoga and acupuncture can be effective for stress relief, and utilizing both allows for even greater benefits.
Current Situation with the USD / in the USA
As a proud American, it is somewhat tough to remove my ingrained bias to discuss the rough shape of our nation. Recent developments indicate that even staunch allies like France are distancing themselves from the West, highlighting the troubling state of affairs in the United States. From budgetary concerns to the alarming frequency of mass shootings, the country appears to be grappling with numerous issues.
Furthermore, there is a growing movement among countries to shift away from the USD standard in trade, which has been the global currency for nearly a century. While the USD remains a dominant global currency, the effects of this potential shift on the economy and markets are not being adequately discussed. It is crucial to consider the prospective outcomes of a re-rated USD and its impact on inflation.
America and American investors / entrepreneurs have been extremely successful in bringing capital into this country and allocating it productively since the beginning of this great nation — starting with English investors and the Dutch West India Company in the 1600s, through to declaration of independence in 1776 and then accelerating into late 1800s with the help of John Pierpont Morgan as well as many others. We have earned a large premium on our assets over the centuries of successful investment and from our trusted business infrastructure. I will leave you with some final thoughts on this which are worth pondering:
Is the US at risk of losing its asset price premium? What would happen to the USD in foreign exchange and USD assets if this were to happen?
Where would this asset premium go? Who or what could potentially benefit from this shift in asset premium?
Given that it took centuries to earn this premium, I do not consider it at risk of being removed quickly. However, these are some of the topics that we are thinking about and analyzing currently.
On a personal note, I will be traveling to NYC in June and would be happy to meet with anyone interested in discussing these topics further. Thank you for reading, and please do not hesitate to reach out if I can be of any assistance.
Sincerely,
David Bernstein
Founder, NWTM Management
