So, we sold. I spent the rest of December (and Christmas) 2024 dissecting and running all the scenarios where NINA could be wrong. As systematic investors, we do not override the system when we are uncertain. Instead, we follow the process and ensure no stone is left unturned. In essence, a large part of my job is to stress-test and challenge the system so it will perform well when live. I interpret the economic and market conditions, challenge NINA, and make sure we can maintain performance for the long run.

From my conversations with top fund managers (those who truly excel in our field), I learned one thing: It is not about having great insights. Many investors can spot good opportunities. The real differentiator is the discipline to follow through and having a robust process. When markets turn red, bulls turn into bears. That's the wrong order. The goal is to turn bearish first, based on a process and a thesis, either systematic or discretionary. Then the market may or may not follow. If you are good at what you do, markets turn red more than 50% of the time, when you turn bearish and vice versa.

We are fine with not squeezing the last drops out of the lemon. For example: exiting earlier, we got out and finished December with ~3%. It also means we are not being forced to chase the first signs of market recovery, that's for those who took all the losses. We know that when our macro intelligence engine flags an opportune environment, we can step back in with a set of concentrated winners that will outperform, even if it is slightly later than the market’s initial rebound.

Key notes:

• Performance: As mentioned, lowering our equity <10%, turned out to be useful last month. We give more color on February and our broader outlook below.

• Office update: in the January update, we mentioned our new office. Please join us for a cup of coffee (made by me): Kleine-Gartmanplantsoen 21-1, Amsterdam

February update:

While many now claim that tariffs are the root cause of the sell off, I would argue they are merely a catalyst. The macro chamber has been filling with gas for a while now, waiting for a spark. Below the graph where you can see the moment we stepped out of the market.

In the graph above, we also see the spread on U.S. high yield, which is at historical lows and is now starting to correct. This yield incorporates many factors, including defaults. Keep a close eye on this because, in our opinion, the probabilities of default priced in by the corporate credit spreads (<350 bps) still reflect a swift recovery in the market. Therefore, if this sector of the market starts misbehaving, we might be in for more trouble.

As said, in the U.S., credit spreads are still at historic lows, and prices remain stickier than expected. Historically loose financial conditions, volatile growth forecasts, and term premia reflect heightened market uncertainty. On top of that, the administration aims to manage the budget balance by taxing the lower echelons of society-the very group with the highest propensity to spend-through tariffs. This same consumer is doing the heavy lifting in the U.S. economy. The challenge is clear: a strong dollar typically follows high yields, driving up refinancing costs for the government, while lower yields are often paired with a weaker dollar and increased tariff burdens on consumers.

This cocktail of forces leaves little room for anything other than a correction or rotation. Now, imagine an alternative policy scenario—a coordinated pro-growth agenda. In that case, real yields would rise, SOFR-treasury spreads would widen, and the 1-year forward 1-year inflation swap would increase. Markets would grow scared and sell, in fear of overheating. With treasury yields reaching 4.8%, driven by real yields and term premia, this scenario mirrors the market fears we observed just two months ago.

Real yields are once again at the center of market action, albeit in reverse, with no signs of inflation expectations easing further. We’re witnessing a stagflationary rotation in markets, where the broader macro backdrop leaves policymakers with very little room to maneuver—sticky prices continue to play a crucial role. While it’s not yet a real flight out of risk, this scenario remains a possibility. The labor market has held up well so far, but much of what we’ve seen over the past weeks are yet to be reflected in the data.

Progress in bringing down prices has been slow—perhaps too slow. By definition, a soft landing means preserving growth, yet over the past year, maintaining growth has gone hand in hand with persistently sticky prices. The question remains: can policymakers navigate our complex economy precisely enough to overcome inflation without triggering an economic slowdown?

I remain vigilant on inflation trends, as they appear to be the biggest constraint on policymakers’ ability to deliver the “put” that markets so deeply value. This week we are seeing encouraging numbers! 

On to March then!

Obviously, we cannot predict what will happen-and we don't need to. As a systematic fund with a macro focus, we avoid speculating on specific events.

Currently, we are primarily holding cash. Our FX strategy is straightforward: we keep our USD exposure roughly equal to the percentage of USD- denominated assets we expect to buy when re-entering the market. As a result, we do have USDEUR exposure. For us, this is just mark-to-market volatility, manageable during these times and, given the mean-reventing properties of FX, an effect that can reverse over time. That said, we expect this to be a factor that will hurt us in March, a nuisance, but part of the process. As shown below, it has depreciated from a US Dollar nearly equivalent to 1 Euro to now approximately 0.9 Euro—a decline approaching 10% from its peak!

Looking ahead, signs of economic downturn can provide central banks space to react. For example, if the quantitative tightening cycle is paused, we could see additional liquidity entering the market. Still, the broader macro-economic environment remains challenging. Sticky prices, government policy being uncertain and volatile growth continue to complicate the landscape. Adding to this uncertainty are the varied opinions within the Fed, which further cloud the outlook. 

You know what, let's leave it at this.

Argan.ai

• Team: As mentioned in January, we are continuously building the team. Since last Monday, our new CTO joined! He is an established AI engineer with a background at TU Delft and Goldman Sachs. For the time being though he will work in stealth mode, until we grow further. In due time we hope to make the introductions. 

• Marketing: In February, I joined the HFM European Boutique and Emerging Managers Summit in London. I hosted a roundtable discussion on multi-strategy funds.

• Office: Our new office is now fully up and running and we welcome all our participants and followers to stop by for a coffee! Our space is situated within the office of Anyone.com, located at Kleine Gartmanplantsoen 21-1 in Amsterdam.