To our Partners at HIT Capital,
HIT Capital’s gain in the first half of 2017 was 8% in comparison to the S&P 500’s 9% and Hedge Fund Index’s 4%. This gives HIT Capital a 19% compounded annual growth rate and an overall outperformance of the S&P 500 and Hedge Fund Index by 35% and 91% respectively.
The USA’s market performance has continued to be strong over the first half of 2017. In our 2016 end of year update, we mentioned the S&P 500’s Shiller PE was at 26 when its historical average was 16. Fast forward 6 months and the S&P 500 Shiller PE has climbed to 30, as the price of domestic equities continued to rise faster than earnings.
Using market history as our guide, valuation increases such as these likely mean:
- Future 5-10 year performance will be dampened (we are paying more for less)
- Drawdowns of grander scale become more likely (less margin of safety)
The issue with knowing that drawdowns are becoming more likely is that we still do not know when the drawdown will happen. The market could also continue to go up. In the late 80’s Japan saw a valuation 300% higher than where the United States sits today. So even though we are expensive from historical standards, there is still not a strong, evidence based case for us to try and time the market.
Since we are unable to time the market, we diversify our strategies across both the domestic and foreign markets. Our strategies still include Value, Contango, and Beta Slippage (and potentially Momentum, discussed below). To a certain extent, our Contango and Beta Slippage strategies are limited primarily to the domestic US market. Our quantitative value strategy has 64% invested in foreign markets compared to 36% domestically, whereas our Contango and Beta Slippage strategies are 92% invested in domestic markets compared to 8% in foreign markets.
The world continues to become more intertwined but the United States is still about 53% of the tradeable universe. When the USA drawdown inevitably happens, it will likely be felt across the globe.
Another strategy we implement is a reduction in market exposure. We generally do not believe in using leverage to artificially exaggerate returns (or losses) but because our strategies Beta Slippage and Contango are inherently levered we sometimes do. Historically the fund’s leverage has ranged from 80-140% (100% being fully vested); HIT Capital is currently sitting at the lower end, 80%.
As we finish out 2017 and look ahead, HIT Capital will continue to be long the market and susceptible to drawdowns. We will use the tools available to us but we are not market timers and ask that you be prepared when the inevitable downturn occurs.
Going forward we continue to learn, refine and search for new strategies. Over the past year we have been furthering our knowledge on momentum. Momentum investing is a strategy that aims to capitalize on existing trends in the market.
Our belief is momentum’s historical outperformance can be derived from human behavioral bias. Humans naturally want to extrapolate trends, follow the herd, and outweigh recent events over the aged past. Since these are inherent parts of who we are, we believe the inefficiencies based on them will be a sustainable source of outperformance going forward.
In addition to outperformance, momentum has:
- an ability to be implemented across various markets.
- a lower correlation to the S&P 500 and our value strategy.
In conclusion, we believe momentum’s predicted outperformance, global flexibility, and diversifying qualities enhance our already robust strategic portfolio. We don’t know for certain, but if the market performance and capital contributions continue to strengthen as they did in the first half of 2017, you may see momentum added to the portfolio in the latter half.
HIT Investments, the general partner of HIT Capital, is in the process of moving from New Mexico to Texas. My day job as an engineer has transitioned to Houston and the plan is for HIT Investments to follow. The firm’s new address will be 1250 Heathwood Drive, Houston TX 77077.
We hope you all had a wonderful first half of 2017 and are ready to finish out with an even better second half. Until next time, all of us at HIT Investments wish you a safe and prosperous future.
This report is intended to assist limited partners in understanding how HIT Capital LLLP (Fund) performed during the period ended June 30, 2017 and reflects the views of the general partner at the time of this writing. These views may change and do not guarantee the future performance of the Fund or the markets. Portfolio composition is subject to change. The current and future holdings of the Fund are subject to investment risk.
Hedge fund investing involves risks, including possible loss of principal. An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The Offering Documents contain this and are available by contacting Stephen Read @ 309.253.7887 or Stephen.Read@HITInvestments.com. The Offering Documents should be read and understood before investing.
The comparison of the Fund’s performance to a single market index is imperfect because the Fund’s portfolio may contain options and other derivative securities, may include margin trading and other leverage, and is not as diversified as the Standard and Poor’s 500 Index or other indices. Due to the differences between the Fund’s investment strategy and the methodology used to compute most indices, HIT Investments cautions potential investors that no indices are directly comparable to the results of HIT Capital.
S&P 500 data is the S&P 500 Index (no expenses and re-invests dividends)
S&P 500 data provided by Yahoo Finance
Hedge Fund Index data provided by BarclayHedge