Equities finally took a respite in September with the S&P500 declining by 4.7%. September is historically, the worst performing month for stocks, so the decline was not completely unexpected. Investors were concerned over the systemic risk from the Evergrande crisis in China. Evergrande is a huge property developer and home builder that is close to defaulting on its billions of dollars of debt. The concern is that a default may have negative consequences throughout China’s financial system. If necessary, Chinese authorities will ask local governments to step in assuming Evergrande cannot meet its debt burden. Yields on 10-year U.S. Treasury notes moved higher over continued inflation concerns, as commodities moved higher led by the energy sector. Finally, volatility spiked around mid-month causing losses to short volatility positions.
Our counter-trend model posted a negative return as it spent the majority of the month long. This was primarily due to the lack of a choppy market environment. Our relative value model was the biggest detractor from returns for the diversified portfolio, as it lost ground during the spike in volatility. Our hybrid momentum strategies were roughly flat for the month. Nevertheless, the diversified portfolio has enjoyed solid positive returns year to date.