Dear client of Vailshire Partners LP hedge fund,
The second quarter of 2021 was a tumultuous time across several market sectors, but none more so than in Bitcoin, which was recently “kicked out” of communist China! — Read on to see how this development affected our returns.
Communist China Kicks-Out Bitcoin
One of the biggest criticisms among Bitcoin’s detractors has been the fact that the majority of bitcoin miners are located within communist China. Even though the place of production of this stored monetary energy has no bearing on its fungibility or utility as a secure store of value, vocal critics in the media regularly expressed concern about the outsized role of a communist country within the network.
In May and June, the CCP alerted its citizens that bitcoin mining and exchanges will no longer be allowed to operate in China. This announcement resulted in an immediate huge decline in the Bitcoin network’s hash rate (computing power) and a precipitous drop in price, from April highs of approximately $64,000 to transient June lows below $30,000.
A greater than 50% decline, while not unprecedented for this young and famously volatile asset class, did not go unnoticed within Vailshire Partners LP. After a 2.50% gain in April, the fund declined -26.16% in May. Given the relatively strong performance by the other assets within our fund, we managed a 1.94% return in June, for a 2Q total performance of -22.84%.
Despite the powerful drawdown in the second quarter of 2021, over the trailing 12 months, Vailshire Partners LP–our innovative, long/short, healthcare and technology-centered hedge fund–delivered net returns for its clients of 135%. When compared to a 41% total return (including dividends) of the S&P 500 over the past year, we handily outperformed this famous benchmark by a whopping 94%!
While sometimes unpleasant to endure, volatility is the price we pay for outsized returns over the long-term. I expect no different over the the coming quarters, years, and decades for Vailshire Partners LP as we continue to invest in innovative, world-improving technologies.
And speaking of volatility, the 2020s will be rife with it as the economy sputters along, inflation returns with a vengeance, and quality of living generally declines for people across the highly-indebted Western world. We are reaching the end times for our credit-based, Keynesian economic experiment, which has been the norm since the end of World War 2 and, especially, since President Nixon removed the US dollar from a gold standard in 1971.
US stocks, bonds, and real estate have reached precipitous record valuations in response to low interest rates and a massively expanded M2 money supply. This monetary inflation reduces purchasing power and counteracts the gains we have all seen in our investment and real estate portfolios over the past decade.
The Federal Reserve has painted itself into a corner with its expansive monetary policies. Unfortunately, the only solution it sees is to continue more of the same policy. This is akin to giving a new credit card to a teenager who has already maxed out the last one you gave him… and the one before that… and the one before that. Adding more debt doesn’t undo the problem of suffocating debt; it only makes it worse! Without a doubt, future economic growth will be stifled.
The importance of Bitcoin in such dire times cannot be overstated. In contrast to the US dollar, Bitcoin is perfectly scarce, secure, and decentralized money that cannot be manipulated. Accordingly, government officials can never print more of it to kick their debt burdens down the road for future generations to deal with.
Fiat currency erodes purchasing power over time. Bitcoin increases purchasing power over time. It’s just math.
As always, Vailshire Partners’ innovative, full-cycle investment approach continuously evaluates myriad assets across the world, including stocks, bonds, currencies, commodities, real estate investment trusts, bitcoin, and other cryptocurrencies. From experience, long-term performance generally favors forward-thinking investors with a comprehensive portfolio management strategy.
As alluded to above, the ability to take long or short positions in almost any asset class, coupled with real-time economic and inflation indicators, has led to significant alpha generation for Vailshire Partners LP over the past one, three, and five years (see table).
Current Market Conditions
The so-called “reflation trade” has been highly profitable over the past 9-12 months. However, since June, inflation acceleration is slowing and inflation-sensitive assets have experienced sharp pull-backs from their recent highs.
The most prominent examples include Treasury bond yields, financials, and commodities, including the oil and gas sector. Declining lumber prices, for their part, have brought some relief to home builders and buyers, who have actually been priced out of their trade during much of 2021!
If GDP also slows in 3Q 2021, then conditions are ripe for a spike in volatility (which has been sanguine for months) and a meaningful pullback in most equities and other “risk on” assets.
As it stands now, we remain in a transition period. Most asset classes will trade in a choppy, sideways pattern until the underlying metrics become more clear. As they do, we will reposition our portfolio accordingly.
3Q 2021 Investment Strategy
With the “reflation trade” now solidly in our rearview mirror, it is time to carefully study the incoming data and reposition our fund accordingly.
The CCP-induced pullback in bitcoin prices offers us an unbeatable risk/reward set-up akin to mid-2013, after which the price of bitcoin skyrocketed 10x in the final months of that bull market. Needless to say, we are well-positioned in this burgeoning asset class to prosper in the coming quarters if a similar scenario plays out.
It bears repeating that volatility is the price wealthy investors pay for outsized gains over the long-term.
Speaking of volatility, we are betting on it returning to the equity markets in the coming months. If it does, our stock positions may pull back but will be hedged by our new long and growing $VXX position, which increases in tandem with market volatility. (The last major $VXX price spike occurred during the March 2020 Covid panic.)
We can’t predict the future, but we can continue to wisely prepare for it by adhering to our innovative full-cycle portfolio management strategies. In doing so, I remain extremely confident that we will continue our market-beating performance over the coming years and decades.
As Vailshire’s founder and portfolio manager, I remain extremely honored and humbled by those of you who have joined me within the fund to date. I do not take lightly the trust which you have placed in me and Vailshire’s investment strategies.
For current non-clients: If you would like to discuss what Vailshire’s innovative investment strategies can do for you and your family, please do not hesitate to reach out to me personally. This is not a solicitation to invest but, rather, an invitation to inquire more.
Living well and investing wisely with you,
Jeff Ross, MD/MBA