Sage Investment Club

‘Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.’ [1] As J Powell addressed the Brookings Institute in November, it was clear that 2022 was a turbulent year for the Fed, emphasized by their inability to deal with rampant inflation; a result of the global energy crisis caused by the Ukrainian war, a global food supply crisis, and the rapid money supply increase since the COVID pandemic (in the last two years, the Fed allowed the M2 money supply to increase by approximately 40% [2]). On the global stage, economic growth slumped from 6% in 2021 to 3.2% in 2022 [3]; a result of monetary tightening across the board, the long tail of the COVID pandemic, and the cost of living crisis. The end of the year was topped off with the collapse of the crypto exchange FTX and a loss of investor confidence in the crypto markets. Private markets didn’t fare much better with deal activity and value on Carta dropping every quarter [4], exacerbated by the ballooning valuations in 2021.So what asset classes fared better than others in 2022?It’s not surprising that commodities (DBC) generated 19.3% in cumulative returns in 2022 given the macroeconomic factors at play. Managed futures also saw over 17.2% cumulative return in 2022. On the other hand, the FED’s continual interest rates hikes hit long term treasury bonds hard. 20 plus year treasury bonds (TLT) and 7-10 year treasury bonds (IEF) both saw a drop over 15% in cumulative return. It wasn’t a good year for REITS either with VNQ dropping over 25% in cumulative return.How did asset class performance correlate with each other?In 2022, stocks and bonds moved together (against historical wisdom), with a correlation of 0.32 between SPY and AGG, although the strength of the correlation weakened with longer term bonds 0.19 (IEF) and 0.08 (TLT). As interest rates rose and economic growth dampened in 2022, both stocks and bonds were pushed down.Let’s now shift toward Composer-specific data. As a community, Composer users built 31,000 symphonies, ran 1 million backtests, and automated 1.8 million trades.How did Composer symphony returns move in relation to each other?Safety in Sin Stocks (a symphony investing in the likes of defense and entertainment) showed weak correlation of 0.44 with Hedgefundie’s Excellent Adventure Refined (a risk on/off symphony investing in leveraged equity/bond positions or safe havens) and 0.42 with The Not Boring: Rising Rates with Vol Switch (a risk on/off symphony navigating the rising rates environment). While Safety in Sin Stocks can potentially hold a combination of alternative ETF’s such as US Aerospace & Defense (BATS), US Energy (ARCX), and Esports (XNAS), the Hedgefundie and Not Boring symphonies both switch across more traditional bond, gold, and US index fund ETFs.Meanwhile, the Dragon Portfolio (based on the Artemis Dragon Portfolio) showed a very strong correlation of 0.95 with The Dalio (all-weather strategy developed by Ray Dalio) and Golden Butterfly (inspired by the popular equal-weight portfolio combining stocks, short- and long-term Treasuries, and gold). All three of these portfolio’s hold long term treasury bonds, gold, and some form of commodity which can explain the correlation strength (although the Dragon Portfolio is more internationally focussed).What symphonies performed the best in 2022?Buy the Dips: Nasdaq 100 clearly outperformed all other symphonies in 2022 with a cumulative return of 32.2%. We believe the logic of this mean reversion symphony had good timing with dips in the market and was further emphasized by the number of opportunities that the symphony was able to enter TQQQ in 2022. Crude Reality: The Smarter Oil Playbook also showed strong performance with a cumulative return of 17.8% (driven by a rally in the DBO oil fund ETF from February to June following the Russian invasion in Ukraine).In 2022, SPY had a negative sharpe ratio of -0.74. On Composer’s platform, the Volatility Hedge symphony had the highest Sharpe ratio in 2022 at just over 1.2. Given the inflationary environment, Stoic Finance Presents: Inflation Spiral Hedge also had a strong sharpe ratio. Note: We are assuming a 0% risk-free rate.What were the most bought and sold ETF’s on Composer?SQQQ and SOXS represent the most bought ETFs on Composer’s platform while XLRE and DPST represent the most sold ETFs. Overall, investors moved into leveraged shorts on the Nasdaq and semiconductor industry, as well as short term bonds. On the other hand, investors moved out of real estate, regional US banking stocks, and technology companies.What were the most and least risky symphonies?Evaluating Value at Risk (VaR) at the 95% level, Hedgefundie’s Excellent Adventure Refined was the riskiest symphony. The risk on aspect of this symphony weighs 55% towards UPRO (3x leveraged daily exposure to large and mid sized US companies) and 45% towards TMF (3x leveraged daily exposure to an index of 20 year plus US treasury bonds). Volatility Hedge was the least risky symphony in 2022 focussing only on Gold and the US dollar.What were the symphonies with the lowest drawdown?Volatility Hedge had the lowest maximum drawdown of 2.75% in 2022 as a result of holding safe haven assets (gold and US dollar). Tactical Asset Allocator was not far behind with a 5.59% maximum drawdown in 2022.Looking ahead to 20232022 was marked by rising inflation, an energy crisis, and a slowdown in economic growth. In this macroeconomic environment, commodities, safe haven assets, and long term bond shorts all showed strong performance. On the Composer platform, users were able to build smart logic driven strategies to capitalize on these asset classes. Crude Reality: The Smarter Oil Playbook (utilizing commodity ETF logic) showed a cumulative return of 17.8%. Elsewhere, Composer users managed to minimize their risk systematically through the Volatility Hedge symphony, shifting assets to US dollar and gold. While SPY had a sharpe ratio of -0.74, Composer users inStoic Finance Presents: Inflation Spiral Hedge and Volatility Hedge both had strong Sharpe ratio performance in comparison. Looking ahead in 2023, the Fed will hope they can push inflation back to their 2% target, most likely at the expense of a further slowdown in economic growth.References[1][2][3][4] All metrics in this update are calculated based on adjusted close prices from December 31st 2021 to December 31st. Symphony performance is calculated based on hypothetical backtests and does not include Composer subscription fee.

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