Beginning in July 2023, we are publishing our returns from our $ neutral Long/Short Systematic Portfolio.¹

We believe that the reporting of earnings is our best catalyst for performance. As banks report, it either validates our modeling of the industry’s risks and opportunities or it doesn’t. Accordingly, in the interim between earning seasons, we bring the fund’s gross exposure down to protect our performance from idiosyncratic catalysts; such as an acquisition of a short or an unfavorable regulatory event for a long. For October, we brought took our Gross Leverage up from an average of 154% of NAV in September to 154% to 215% in October.

Reflecting our overall view that near-term prospects for banks will disappoint analysts’ expectations for Net Interest Income (See Net Interest: Rising Beta, August 25, 2023), we increased our Net Short Exposure to 12% in October.

October Performance

We lost 4.8% in October compared to a loss for the KBW Bank Index of 5.61% and a loss of 4.87% for the KBW Regional Bank Index (which better overlaps our investable universe). Our volatility remains less than half that of the bank indexes as well as lower than the broader indexes. Annualized volatility increased from just 5.26% in September to 8.67% in October, which compares 24% for the KBW Bank Index in October.

While our losses for the month were less than the bank indexes, the fact that we sustained losses at all when we were 12% net short during the month while banks were down substantially tells us that our models were not well calibrated to capture market dynamics in the banks sector in October.

In fact, we have been unable to devise fundamental markers (even in hindsite of 3Q23 earnings reports) for banks that explain bank performance during October. We’ve experienced this before in an earlier manifestation of our model, which performed admirably until Russia invaded Ukraine. Our conclusion is that exogenous geopolitical shocks to the market for bank stocks has displaced fundamentals as the primary driver for price movements at least temporarily. Over the longer term, we expect that bank stock price performance will revert to trading based on fundamentals.

To Date Performance

This month’s loss has eroded our to-date (4-month) return to just over half a percent. We aren’t pleased with this performance to-date. While our strategy of avoiding downside risk did well in bounding our volatility and losses, we failed to capitalize on “earnings season” as we expected in October.

While our slightly positive performance to date continues to compare favorably to the extensive losses in the banks sector and markets in general, we are not performing within our expectations.

As a reminder, the governing risk parameters of the fund are as follows:

From time to time we also take more concentrated positions in high conviction ideas; but that is NOT part of this portfolio or strategy. Instead, we are operating by what we define as “Quantimental” wherein we engage in quantitative strategies derived relative to proprietary fundamental variables that create markers for the risks and opportunities that our macro analysis tells us are in play in any given banking regime.

Cybiont’s Quantimental Approach

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