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Bodhi Tree February Commentary
Posted at 13 Mar by Shalin

Given recent market action, I would advise you to read my views throughout 2019 on the dangers of unprecedented disconnected macro fundamentals and equity valuations. The danger was so great, that if you refer to our October Flash Update, you will see I decided to shutter our Quantitative programs at year-end for fear that these programs would be counter-productive in a true Black Swan event. I also gave all investors the option to redeem penalty-free in the immediate month. If you know of any other Investment Manager who did this, kindly let me know.

Moreover, if you would indulge me, I would appreciate your attention on the additional commentary below, which is a direct excerpt from our October update in your mailbox:

“I believe it would be foolish to ignore what is going on in our models; they have direct applicability to everyone reading this. Since our framework was built under the rules of Modern Portfolio Theory, is algorithmic, and uses ETFs, I have come to the conclusion that the current foreshocks we are seeing are a prelude to a large earthquake in the algorithmic investment world and beyond – similar in nature, but multiples larger than Feb-2018. The reason is that Central Banking policy has changed the definition of what is risky and what is not for far too long, leading to complacency over sound investment practices, which are clearly evident in the ETF market but can be found in every style of investment from PE, private lending, to real estate. We have all become complacent to believe that the current system of mispriced collateral, based on mispriced risk-free rates, and driven by Central Banking omnipotence, can last in perpetuity, but it cannot.

Vladimir Lenin once said, ‘There are decades where nothing happens and weeks where decades happen.’ With every regime shift, there are tremendous opportunities for those who care to do the research to understand it…

The coming period of turbulence will have both risks and opportunities. I don’t promise to know all the answers, but I am confident I can help guide you in this environment.”

I would also point you to an interview last October between myself and Business Insider, pointing to the incredibly dangerous risks and the probability of a “Black Swan.”

Finally, I would point you to our video with Opalesque on the dangers of popular “Endowment Model” investing and Illiquid investing, both of which were a potentially catastrophic bubble in my eyes. To this day, I still cannot understand why Allocators willingly locked themselves up for years at generationally low returns with no recourse.

I believe this was an act of fiduciary malpractice.

Despite investor apathy of the likes I have never witnessed in my career, I have continued for the singular reason to prove that I was right. This mission has been at the expense of my own health, my relationships with friends and business partners, and my family. However, I did not give up (despite wanting to many times) because I was determined to take advantage of a once in a generation opportunity to differentiate myself, as well as profit handsomely.

I believe that my analysis has been vindicated.

Our investment strategy is an outgrowth of my conclusions from long periods of analysis about how to allocate in a world where Modern Portfolio Theory will no longer apply. I am confident that I am years ahead of everyone else clinging on to antiquated models.

Our current marriage of quantitative equity selection and macro hedging is an optimal combination of strategies to allow for downside protection and ‘unlimited’ upside once these hedges are lifted. Our new strategy was purpose-built to protect against a predicted epic meltdown (and any major drawdown) as well as provide MAXIMUM upside during periods of asymmetric value. The longer we can protect our top holdings, the cheaper they become, the more upside there will be on the “other side.”

I do not consider this to be a joyful moment. I am not spiking the football. This is far from over. There are no winners among us. Please stay safe over the coming weeks. This will eventually end and hopefully, it will bring us all closer together.

 
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