Welcome to the Arnott Opportunities (Cayman) Fund (the Fund) monthly update.
The Fund returned -2.82% for the month of March 2025.* Net exposure averaged 44% long, while gross averaged 107%. This brings the calendar year return to -1.79% and since inception return to 18.23% p.a. net of fees.*
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Gains through the month of March, were generated from the long themes in Index & Derivatives (+73 bps) and Structural Shorts (+46 bps). With losses stemming from the Data is the New Oil theme (-117 bps) and the Longevity theme (-108 bps).
The markets have gone from having some concerns on Artificial Intelligence (‘AI’) capital expenditure to a complete about turn on U.S. exceptionalism. U.S. exceptionalism had its roots going back to roughly 2010 and peaked during January 2025. As recently as late 2024, it was predicted that U.S. valuations should and would trade structurally higher because of the U.S. economy being less volatile and less recession prone, and that companies would generate structurally higher margins, leading to higher returns and companies would continue to return more capital to shareholders.
These predictions are now being called into question. While there are many uncertainties, what is clear is that the U.S. economy is likely caught in a policy-induced slowdown. Forecasting the effects of this will be challenging, as there are only a few guideposts. The intention is not to make a forecast, however, the current market regime needs to be analysed for the types of risks it presents and the probabilities of the regime changing. In this new uncertain environment, it will be challenging for valuations to move significantly higher from where they are currently. For this reason, Arnott is taking a cautious approach until any real clarity emerges. In the meantime, positioning remains quite light, and - whether intended or otherwise - we're watching how U.S. President Donald Trump and his administration respond to movements in the U.S. Treasury and equity markets. So far, their response indicates that the fiscal policy will not run wild, and ultimately it is likely the Federal Reserve will intervene if there is significant slowdown. That leaves us in a large range bound market basis in the S&P 500.
Because the portfolio is neither heavily concentrated in the U.S. nor in U.S. Big Tech where there has been significant derating, the themes have not significantly changed. However, in a range bound market, Arnott plans to manage the net risk with a trading orientation and tighter overall net market risk. The low probability but high impact event would be that it’s the wrong policy and geopolitical tensions escalate. Under this scenario, Arnott is prepared to swiftly change the portfolio structure, if needed.
Kind Regards,
Kenny Arnott
Co-CIO
Yianni Gertos
Co-CIO
Arnott Opportunities (Cayman) Fund
