2024 was a remarkable year for stock market investors, with one record after another being broken. The year saw interest rates cut as inflation came under control, while economic growth was consistent and corporate profits were solid.
The artificial intelligence boom underlay much of the growth in leading stocks. The question now is whether history will regard 2024 as a year when investors wisely backed the AI revolution, or as a year when AI stocks were driven into bubble territory in a speculative frenzy.
Our fund, the Headstart Fund of Funds Ltd is an absolute return multi-strategy fund that seeks to achieve long term capital appreciation with controlled volatility. The Fund was launched in 1999 and invests in managers across a wide spectrum of strategies with an identifiable “investment edge”. The Fund targets annual net returns of 10-15% with single digit volatility.
Yet while the overall trend for 2024 is now clear, it was a rollercoaster year, with new dynamics arising month on month.
January 2024 kicked off with real volatility during the first half of the month, but global markets recovered to end in positive territory in January. The strongest returns came from exposure to the healthcare sector, in particular biotech, which had been in a bear market for some 3 years after booming into bubble territory during the pandemic.
The market entered 2024 with a total of 7 planned interest rate cuts but fears around inflation saw these scrapped.
By February fears grew that the S&P 500 was entering bubble territory, and no longer presented an appealing forward-looking risk return. Data suggested euphoria and speculation were driving several markets and sectors.
Despite market volatility, our portfolio generated a strong return in March, with returns coming from a broad range of funds across the portfolio. Losses were predominantly contained in our hedges, such as long volatility where volatility was again crushed across asset classes.
We were delighted to see how the portfolio has shown itself capable of producing strong risk-adjusted returns in this environment.
After a strong start to the year for the major global indices, April saw the first bout of volatility as the liquidity drain hold in the latter half of the month, catalysed by the tax selling and resultant build in the Treasury General Account. Despite an adverse liquidity environment, the portfolio performed well, producing another positive performance.
By May, the economic weather was improving, with cautious optimism tempered by significant challenges. The U.S. and global economies faced a mix of persistent inflation, slowing growth, and complex geopolitical dynamics, with policymakers closely monitoring data to guide their decisions on interest rates and fiscal policies. The U.S. economy showed signs of slowing growth with GDP growing at an annual rate of 1.6% in Q1 2024, down from 3.4% in Q4 2023. Inflation remained persistent, with the Personal Consumption Expenditures (PCE) price index showing an annualised increase of 3.4%, up from 1.8% in the previous quarter. The Federal Reserve indicated it might consider starting rate cuts by September if inflation trends remained stable.
June was a challenging month for our portfolio as Long / Short Equities and Global Macro suffered. The losses can be pinpointed to one main reason: the narrowing breadth and new extremes reached on spreads between an ever-narrowing cohort of what is working, be it MAG 7, short Yen carry trade etc. Yet the portfolio has performed well, and true to its goal of producing absolute returns across all market conditions as an all-weather portfolio. Yet June 2024 also saw S&P 500 vs. equal weight hit new record extremes, with technical indicators and positioning data exhibiting signs of late-stage euphoria.
July was a pivotal month for the financial markets and our portfolio posted a solid return as managers captured the increase in volatility and dispersion across asset classes. By August remarkable statistics emerged, showing that US equity markets accounted for 64.5% of the MSCI World Index – yet the US share of global GDP is just 25.7%.
By September, concerns about how much of the US market was being driven by the AI speculation had risen further still. Investing in the S&P 500 meant owning an ever-greater stake of assets whose prices were driven by AI speculation, comparisons could be drawn to the dot-com bubble.
As October yielded to November, much of the talk was about the US Presidential election. A key question for our fund to remain focused on the question of how the election winner would deal with a truly unprecedented economic and geopolitical backdrop.
The Trump win soon saw markets become turbo-charged as buying fever and animal spirits have unleashed a blow-off. However, there was still little clarity on Trump’s plans to deal with an unprecedented economic landscape, and a significant and unsustainable deficit victory. A combination of loose financial conditions and the Trump / Elon Musk effect had clearly ignited animal spirits together with the positive seasonality often seen at year end.
A remarkable year came to a positive close, with the ghosts of inflation and high interest rates increasingly banished. Yet as markets reach new heights, and with Trump’s tariff regime impacting trade, even while the prospect of peace in Ukraine comes into view, 2025 may prove to be an even more interesting year.
