Thursday, Jan 20th 2022

Titan Trade Update: Activating our maximum hedges

Investor Update

Positioning for the potential of a continued market decline

We’ve activated the maximum hedge for clients in each of Titan’s equity strategies. In addition, we have also sold out of The New York Times Company (NYT) for clients in our Opportunities strategy. 

We believe these moves offer our clients:

  • Downside protection to the extent we see a further decline in equity markets;
  • Reduced exposure to a low-conviction holding in NYT.

Maximizing our hedges

We have activated your personalized hedges to their maximum level. In other words, clients across each of Titan’s equity strategies, regardless of their risk preferences, now have some portion of their portfolios positioned for a continued decline in the stock market. 

These hedges are only activated when our analysis leads us to conclude the high probability path for markets in the near-term is to the downside. 

As you may recall from our 2021 year-end review letter, major U.S. equity indexes held up well during 2021 despite challenges for many individual stocks underneath the surface. In this environment, we deemed it prudent to accumulate strategic cash in our portfolios amid increased volatility.

Our work today, however, suggests the most likely path for the indexes from current levels is lower.

On January 18, the Nasdaq closed below its 200-day Simple Moving Average (“SMA”) for the first time since March 2020. As we discussed in a Quick Thought piece earlier this year, we use the 200-day SMA to measure the prevailing, longer-term trend for a stock or an index. And we believe the Nasdaq’s close below its 200-day SMA (amongst other factors) is evidence the tech index has entered a correction.

We have also kept a close eye on “The Generals” — or the mega-cap tech leaders like Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG), all holdings in our Flagship strategy — as a sign of broader market weakness. Throughout 2021, these stocks were often a safe haven for investors, and their steady performance helped to prop up the indexes amid volatility underneath the surface. We have long believed “The Generals” would be the last to fall in a correction and bring the indexes down with them, and recent weakness from this group suggests we are entering that period. The reason we prefer to hedge this risk using, well, hedges, as opposed to selling our Generals, is to avoid clients having to potentially face tax consequences on the significant gains these stalwarts have had since we purchased them. By hedging, we think we can mitigate the Generals' risk in the near-term while remaining long-term shareholders.

As a result, clients with an aggressive risk profile now have 5% of their capital in our hedge vehicles (inverse ETFs), moderate clients have 10% of their capital in our hedge vehicles, and our conservative clients have 20% of their capital in our hedge vehicles.

While we’re not in the business of calling market tops and bottoms, we are students of history, and we’ve seen how markets generally respond when these various indicators occur simultaneously. Protecting against the likelihood of further stock price declines by implementing hedges is the most prudent action we believe we can take at this time to achieve our primary goal: compounding our client’s capital.

These conditions won’t last forever, of course, and we plan to start removing hedges and adding risk exposure once we determine overall market health has improved and the path of least resistance may be to the upside. This could be a series of days, weeks or months, but the decision will be objective and data-driven, and we’ll be ready.

Sell the news

We’ve held shares of The New York Times Company (NYT) since the inception of our Opportunities strategy in August 2020 and have now exited this position at a 6% loss, net of fees.

Although we appreciate the quality of the business, weakening subscriber trends and our doubts pertaining to the recent The Athletic acquisition led us to believe that the business currently does not offer the risk/return skew we believe Opportunities holdings should offer to clients.

With any investment, we believe there is a price that adequately compensates investors for the risks inherent in any holding. Going forward, we’ll continue to monitor NYT, and if the stock were to get to the low $30s per share — or about 25% below current levels — we could again find ourselves buyers of the stock.

Our team is here to answer any questions you may have, and thanks as always for the opportunity to manage your capital.

Best,

Titan Investment Team

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