Aspect Absolute Return Fund Class A (FSF3532AU) Report & Performance

Markets monitored US debt ceiling negotiations for signs of progress, as fears of a potential default in the US weighed on risk sentiment which supported the US dollar. The Federal Reserve and other major central banks continued their efforts to fight inflation by each issuing widely anticipated rate hikes of 25bps. The outlook for the end of the rate-hiking cycle remained murky. US inflation showed signs of moderating, but the US job market demonstrated it remains very strong. Meanwhile disappointing Chinese economic indicators suggested a flagging economic recovery and Germany fell into technical recession.

The euro was central to the Fund’s currency returns this month. The strategy managed to capture euro strength against the Swedish krona and euro weakness against the British pound. Widening rate differentials between Europe and Sweden, resulted in persistent Swedish krona weakness. Conversely the British pound strengthened against the euro as a relatively higher UK inflation implied a more hawkish Bank of England. The Fund incurred losses from stock indices, predominantly from long European stock indices exposures, as prices fell on signs that the economic outlook may be worsening. Losses also came from the Fund’s long position in the Canadian TSE 60 index as commodity prices fell and data showed Canadian consumer inflation unexpectedly rose for the first time in a nearly a year.

Performance from the Fund’s net short energies exposure came from short positions across natural gas markets, as both supply glut and low demand worries pushed prices lower. Concerns about the health of the global economy contributed to oil demand pessimism, which also led to gains from the Fund’s short WTI crude oil position. In agriculturals, profits were largely driven by the Fund’s short position in lean hogs as prices continued to slide in response to poor demand for US pork. Elsewhere in commodity markets, the Fund’s net short exposure to base metals generated modest gains. Relatively subdued metals demand from China as well as weak Chinese economic data for April, weighed down on prices.

Continued signs of stress amongst US regional banks cemented investors’ expectations of recession, as lenders tightened credit conditions in the face of rising rates, exiting deposits and higher risks of defaults. Market-implied policy rates suggested a final 25bps hike at the upcoming Federal Reserve’s meeting in May, followed by rate cuts in the second half of this year.

Within the Fund’s most profitable sector, currencies, the Fund’s net long exposure to the euro against the Norwegian krone led gains. The Nordic currency weakened as the Norges Bank continued to sell its domestic currency to fund the Government Pension Fund of Norway. Widening rate differentials and oil price weakness also weighed on the currency. The Fund’s long exposure to the euro against the Japanese yen was also profitable. Stubbornly high inflation, strong wage growth and the lack of a recession this winter in Europe have given the ECB room to hike. This has been supportive for the euro against the Japanese yen, particularly given the BOJ’s pursuance of yield curve controls. The Fund sustained a small loss across its net short exposure to bonds, as yields fell slightly on expectations of a more dovish Federal Reserve policy stance ahead.

Across commodities, the majority of the Fund’s gains came from agriculturals. Sugar prices rallied extensively as poor weather in sugar producing country India constrained supply, and increased production of ethanol—a biofuel made using sugarcane juice—supported demand. The Fund also made gains from its short positioning in wheat which came under pressure due to prospects of bumper crops in the Americas.

Market consensus abruptly changed direction in response to the failure of Silicon Valley Bank, the largest bank failure since Washington Mutual in 2008. The news fuelled fears of contagion risk in the global banking sector and highlighted the potential difficulties rising interest rates could pose to economies. As a result, the fixed income sector experienced extreme volatility as government bond yields posted their largest daily fall in decades.

Prior to the shift in sentiment, the Fund made gains from appropriately sized and intuitive positions based on the enduring interest rate hiking cycle narrative. However, the extraordinary reversal in fixed income yields over a handful of days began to dominate losses. The Fund’s systematic measures of risk and faster trend filters responded swiftly to the sudden increase in volatility and change in trend direction. As the interest rate risk shock subsided, performance started to recover slightly towards the end of the month.

Losses came primarily from financial markets, particularly in the fixed income sector as short positions were impacted by the drop in government bond yields. The stock market sell-off caused by banking sector fears and a flight to safety, resulted in losses for the Fund’s long positions. In commodity markets, prices in general fell as economic uncertainty weighed on demand. The Fund’s net short exposure in the energy sector generated gains, particularly from a short position in Natural Gas.

Despite continued hawkish rhetoric from the Federal Reserve and European Central Bank, risk assets rallied and bond yields fell as cooling inflation raised hopes of a reduction in the size of future rate rises. The positive sentiment in financial markets was further boosted by the reopening of China’s economy following a relaxation of Covid restrictions and by unusually mild weather in Europe, which helped the region to avoid an energy crisis over the winter.

The Fund’s net short fixed income exposure incurred the majority of losses during the month. Government bond prices rose in unison due to an expected shift in the pace of rate hikes. In currencies, the Fund’s net long exposure to the euro resulted in gains, as there were hopes that moderating energy prices could help Europe avoid a severe recession. The Fund made a small gain in stock indices, as it increased its net exposure in response to an upward trend in the sector.

In commodities, the Fund’s gains in energies came from short positions in natural gas markets, where prices fell sharply due to high European inventory levels and a reduction in demand. The agriculturals sector made a small loss, notably from a short position in coffee, as prices increased due to supply concerns. In metals, the Fund’s net short exposure at the start of the month led to losses as prices rose in response to a weakening US dollar.

Despite continued hawkish rhetoric from the Federal Reserve and European Central Bank, risk assets rallied and bond yields fell as cooling inflation raised hopes of a reduction in the size of future rate rises. The positive sentiment in financial markets was further boosted by the reopening of China’s economy following a relaxation of Covid restrictions and by unusually mild weather in Europe, which helped the region to avoid an energy crisis over the winter.

The Fund’s net short fixed income exposure incurred the majority of losses during the month. Government bond prices rose in unison due to an expected shift in the pace of rate hikes. In currencies, the Fund’s net long exposure to the euro resulted in gains, as there were hopes that moderating energy prices could help Europe avoid a severe recession. The Fund made a small gain in stock indices, as it increased its net exposure in response to an upward trend in the sector.

In commodities, the Fund’s gains in energies came from short positions in natural gas markets, where prices fell sharply due to high European inventory levels and a reduction in demand. The agriculturals sector made a small loss, notably from a short position in coffee, as prices increased due to supply concerns. In metals, the Fund’s net short exposure at the start of the month led to losses as prices rose in response to a weakening US dollar.