February 2024 – Teks Alpha Preliminary NAV Systema Fund

Market Overview

The stock market had another positive month in February. Throughout the month, the SPY posted a return of +5.24% (+7.50% YTD).

The S&P continued its gains from January (2.27%), December (4.42%), and November (8.92%) for a fourth consecutive month, resulting in a strong +20% four month rally as the economy continues to show strength. On the other hand, the Nasdaq Composite performed +6.2% (+7.2% YTD). The first two months of 2024, however, have failed to confirm the consensus narrative, as economic growth has been much stronger than expected and major price indexes have suggested reaccelerating inflation.

The 10-year US Treasury yield has risen more than 40 basis points since late December, with the real rate hovering close to 2.0%, near its pre-Great Financial Crisis level. As measured by the one-year swaps market, inflation expectations have risen from 1.9% last December to 2.5%. The consensus soft-landing narrative shifted to a “no-landing,” mid cycle reflation narrative, whereby profit growth is expected to justify equity prices. Earnings revisions and revisions breadth for 2024-2025 profits, however, have remained negative, while the theory that a rising tide will lift all boats has been countered as market data continues to suggest a struggle with breadth.

So, if stocks are not being driven by the new Fed narrative on rates, and the earnings outlook isn’t being driven by better fundamentals, what’s going on?
The first reason is liquidity. Over much of the past year, financial conditions have become looser and more accommodative, reaching levels from February 2022, when the Fed’s hiking campaign began. We also note that net systemic liquidity has been a major tailwind for markets, as quantitative tightening (QT) has been more than fully offset by an injection of cash from banks, money markets and Washington largesse. While these sources may be drying up as excess savings near exhaustion, hopes for an early end to QT, rather than faster rate hikes, may be inspiring investors to sustain the chase. Institutional positioning suggests fully long postures.

A second bullish narrative is the presumably unstoppable power of artificial intelligence (AI) and potential upside for corporate margins not yet reflected in earnings forecasts. Morgan Stanley published a report last week suggesting that broad AI-driven productivity could add 30 basis points to 2025 S&P 500 net margins. Regarding industry drivers of productivity gains, services-oriented pockets of the market possess more opportunity for AI-driven efficiency gains; these groups alone represent over 30% of expected 2025 S&P 500 net income, which speaks to the potential margin opportunity. While this is impressive, we think market discounting mechanisms may already be played out.

With the S&P 500 north of 5,000, based on consensus estimated 2025 earnings of $277—a 26% jump from the current level—the index’s forward multiple is over 19 times. If we are in a higher-for-longer rate environment, it is hard to see valuation expansion driving incremental gains. While productivity is one source of margin gains, it could be offset by headwinds from a stronger US dollar, higher costs from interest rates and input inflation. A final consideration for the profit expansion narrative is that the role of economical share buybacks may be ending. The average cost of corporate debt now exceeds equity costs by the widest margin since 2001, and returns on cash are competing with forecast forward equity returns.
The recession that economists broadly feared in 2023 never showed up, but there are some concerns going forward.

The focus on politics will also continue to grow, as the possible Biden-Trump rematch buzz has already started to filter into the general public, even though the primaries have just started. Typically, the Street will start to take market positions on the expected November outcome in September, as a clearer picture on not just the presidency emerges, but that of the House and Senate

\Performance

During February the Fund’s preliminary net return was + 0.15% (-0.60% YTD).

We are comfortable with the performance of our market neutral model and the enhancements which were put in place during the last months.

Reflecting on our performance to date we maintain our goal of a +3% net monthly return over time.

Teks Alpha Performance (%)

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD
2021 1.36 0.79 0.77 0.80 1.51 1.61 1.15 2.56 1.70 0.05 12.9
2022 -0.65 1.22 1.22 -0.10 -1.85 -5.7 2.35 -1.61 -0.5 0.33 -3.1 -0.7 -9.0
2023 3.5 0.45 1.45 2.20 5.20 -1.50 0.2 1.10 -1.50 -0.3 0.6 0.35 12.0
2024 -0.75 0.15 -0.60
Performance is net of fees. Trading started on March 12, 2021. NAV is calculated quarterly by the Administrator. The next official NAV will be based in December 2023

Teks Alpha Performance vs Benchmarks since inception (March 2021)

TEKS ALPHA SPY HFRI
Effective 14.39% 35.42% 12.49%
Annualized 4.97% 12.24% 4.32%
STD Dev 6.54% 17.57% 6.35%
Shape Ratio 0.30 0.53 0.21
Benchmarks: The HFRI Institutional Equity Hedge Index is a global, equal-weighted index of hedge funds with minimum assets under management of USD $500MM which report to the HFR Database and are open to new investments. The Equity Hedge funds that comprise the index are a subset of the HFRI Institutional Fund Weighted Composite Index. The index is rebalanced on an annual basis

Releated Articles

Legal Disclaimer

The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. This material is not an offer, solicitation or recommendation to purchase any cryptocurrency, security or to invest in Teks Capital or in Systema Fund PCC. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of any market, or of any specific investment. Please remember that all investments carry some level of risk, including the potential loss of principal invested all principal. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Please remember that past performance may not be indicative of future results.