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June 2022 Investor Letter: A Bear Wakes from Hibernation

June was another tumultuous month in the markets, with the S&P 500 officially entering bear market territory. The S&P 500 was down 8.4% during the month, bringing its YTD decline to -20.6%. The index reached a low of -23.6% on June 16th before seesawing upward as some investors attempted to “buy the dip” on low trading volumes.

The S&P 500 closed Q2 at -16.5%, the worst Q2 seen since the 1970s, as inflation continued to weigh on investors’ minds. Higher than expected inflation readings forced the Federal Reserve to tighten interest rates more than expected. The Fed is now expected to increase interest rates by 0.75% in both July and September of this year. Investors continue to grapple with whether the Fed can successfully facilitate a “soft landing” or if a recession is imminent.

alphaAI’s long-only Eta strategy continues to significantly outperform the S&P 500 on monthly, YTD, and lifetime bases. In June, Eta closed -4.3% vs S&P 500 at -8.4% YTD, Eta closed -11.9% vs S&P 500 at -20.6%. Since inception, Eta closed -5.0% vs S&P 500 at -15.3%. During the month, Eta’s average net exposure was 30%, which shows that our algorithms prioritized capital preservation over capital appreciation. Looking ahead, the market seems to have found some temporary footing, but we believe the worst is far from over. We expect significant volatility in the medium-term as the Fed continues its monetary tightening policies.

Although a bear market seems scary, now is not the time to fear. Investors should stick to their guns and understand that this too will pass. Now is not the time to get emotional, but rather a time to be smart about capital allocation and invest according to time-tested methods. In the case of our long-only Eta strategy, we have been able to outperform the market through sector and net exposure management. Sector management means buying more of the sectors that have outperformed (such as Energy and Healthcare) and selling those that have underperformed (such as Technology and Consumer Discretionary). Net exposure management means keeping money on the side in order to limit losses. Our algorithms continue to ingest more than one billion data points daily in order to make the best investment decisions for your portfolio.


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