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Performance Update May

Dear Clients and Partners,

I started the last update citing how April brought a lot of pain to the markets. Well, guess what? May proved not to be any better. In fact, things just got worse, and now the month of June isn’t showing much sign of being any help either. My colleague, Nebo, from our asset management team summarized it best with the following:

“The world economy remains distorted. We face an extraordinary cocktail of circumstances that skews risks to the downside. The grinding conflict in Ukraine, Covid-related lockdowns in China and ongoing supply chain bottlenecks are battering economies and exacerbating the already existing trends of slower growth and rising inflation. Consumer prices remain elevated in all major economies (ex-China), prompting many central banks to tighten their monetary policy. The FED is tightening into a slowdown, as is true for other nations. The quarter-over-quarter GDP growth in the United States turned negative in Q1 2022, falling by 0.4%. There is still no end in sight for the war in Ukraine, no real hope that the talks aren’t getting anywhere close to a peaceful resolution soon. Due to the sanctions against Russia, the need to find alternative sources of energy has become particularly acute for Europe since Russia is the leading supplier of natural gas, oil and coal to the European Union. Furthermore, the war and accompanying sanctions have made supplies uncertain and sent prices soaring. Global equities are mostly down double digits year-to-date.”

When looking at the digital asset space for May, BTC was down -17%, losing as much as 30% inter-monthly and being at around -31% for the time period January to May. The BGCI was down -28% in May and -47% for January to May. The carnage also continued in tech stocks with the 800-pound gorillas, such as Google and Microsoft, losing around -25% YTD, and the smaller, yet still mighty players such as Shopify or Snapchat being down around -75% YTD. Professional managers are also feeling the heat: famed VC/hedge fund Tiger Global lost roughly -14% in May, tallying YTD losses at over -50%. Crypto hedge fund managers have been struggling and generally underperforming the market as shown by the Crypto Strategy Index, which was down around -58% YTD. This has led to managers closing shop, thanks to the combination of a decrease in managed asset base and the respective fees being generated. Simply put, the business model is no longer working out as our Marc P. Bernegger states in this interview. As much as 36% have gone out of business this year, as estimated by NilssonHedge.

We at BFI have been around for 30 years, having seen our fair share of market downturns, and are equipped to once again weather this storm.

For May 2022, we were down by -12.41%, while managing to strongly outperform the market (-28%) and other hedge fund averages (-32% according to NilssonHedge’s database). May was a brutal month encapsulated by the collapse of the stablecoin UST and associated LUNA token project. This collapse ranged around the realm of $40-60B which is in the same ballpark as the Lehman Brothers or Enron collapse. The main difference is that no government has tried to bail out any participant. This, in turn, created a nasty spillover effect with alt coins down between -40% and -60%. This general downturn took its toll on our aggressive positions, especially those invested in altcoins, where growth potential is the largest but where downward swings can sting the most. Our midfield position was able to strongly outperform the market, and our defensive investments continued to hold the line. For the period January to May, we are down –22.53%. While we certainly don’t like to see the color red, we have been able to outperform BTC (-31%), BGCI (-47%), or actively managed benchmarks (-58%) while investing in the market and not standing on the side lines, vindicating our decision to run a diversified strategy.

We are in a bear market and the pain is not yet over. But these are also interesting times and reminded me of the saying, “Fortunes are sowed in bear markets, and harvested in bull markets”. You just have to make sure you’re still around for the harvesting.

Have a great day and feel free to let us know if you have any questions.

Marc S. on behalf of Frank, Dirk, and Marc B.

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