MARKET OVERVIEW: BREAKING POINTS AND BROKEN CORRELATIONS
April proved to be a month of unprecedented developments, marked by distinctive market movements and a breakdown in traditional correlations. The announcement of “Liberation Day” tariffs sent shockwaves across asset classes. The magnitude and ambiguous calculation methodology of these tariffs fuelled widespread uncertainty regarding their objectives and potential efficacy. Confusion turned to volatility as OPEC+ simultaneously opted to boost oil production, driving crude prices down -8%.
Markets struggled to adapt to the aggressive and possibly ineffective negotiation style of the Trump administration, which highlighted the market’s miscalculations about recession probabilities. The S&P 500 plunged -10.5% across just two trading days (April 3–4), marking one of the steepest two-day drops since the Global Financial Crisis and COVID-19. This sell-off was particularly striking because it occurred in the absence of prior stress signals; preceding volatility was modest and declining, leaving this sudden decline systematically undetectable. Systematic strategies therefore had little warning and no time to adjust as most market moves happened overnight.
Elevated pro-cyclical positioning in equity allocations and an overweight in US equities exacerbated the de-risking impact. As a result, the S&P 500 fell to -18% YTD. Meanwhile, bond markets signaled stress, with the 30-year US asset swap spread widening 30bps in a matter of days.
Within days, the Trump administration suspended the tariffs for 90 days, adding yet another layer of policy whiplash and resilience emerged. Equity indices recovered to end the month nearly flat, sovereign yields declined (from -0.15% to -0.30%, across tenors and regions), and volatility metrics eased. Notably, the US Dollar's loss against G10 currencies amid market stress raised critical questions about future asset performance. This rare and sustained US Dollar depreciation during significant drawdowns suggests a continued reduction in foreign exposure to US assets, with capital repatriation reflecting the erosion of US exceptionalism.
FUND DEVELOPMENT: AGILITY AMID UNCERTAINTY
The abrupt policy changes and rapid market shifts provided minimal opportunity for systematic strategies to dynamically hedge and adapt exposures.
DOM’s systematic strategies therefore suffered.
• Volatility mispricing: Ahead of “Liberation Day,” implied volatility underestimated risk. When realized volatility spiked across equities, rates, and commodities, short vol positions suffered.
• Trend misalignment: Heading into April, medium-term trend was long equities, oil and short bonds and thus wrong footed. Just as positioning shifted for a risk-off move, the tariff suspension stabilized markets, limiting gains from newly established exposures.
• Deliberate tail protection: Defensive systematic strategies began adding value just as markets started to reverse. By design these are calibrate to avoid overpaying in quiet times, at the opportunity cost of missing out on smaller drawdowns.
This is the trade-off in building resilient strategies: they won’t hedge smaller drawdowns, but they’re built to compound over the long run.
DOM’s discretionary overlays provided partial relief.
• Discretionary defense: Long equity downside hedges, short dollar positions, and long volatility exposures helped to offset some of the systematic drawdowns.
• Tactical opportunities: The tariff-driven dislocation opened the door to increase long US bond positions, selectively re-engage in equity upside, and expand short dollar exposure.
• Resilient performance architecture: Despite losses from rules-based strategies in the face of abrupt policy shifts, DOM’s multi-layered approach enabled positive discretionary returns and preserved capital.
This outcome reflects our foundational belief: traditional diversification alone is insufficient. It’s adaptability—integrating systematic discipline with discretionary hedging—that protects portfolios in the moments that matter most.
FUND POSITIONING: ADAPTIVE DEFENSIVENESS
April’s volatile and dislocated market validated our active risk management stance. In response to increasing instability and the emergence of social-media-driven market shocks, we took decisive action:
• Reduced systematic exposure to recalibrate risk budgets amid heightened uncertainty.
• Monetized equity downside protection at attractive levels as volatility spiked.
• Refined discretionary hedges, aligning them with evolving macro conditions and prevailing risk premia.
• Dialed back FX hedges, focusing capital where asymmetric payoff profiles remain compelling.
Our posture remains defensive, not passive, engineered for flexibility. The goal isn’t just to endure volatility, but to remain positioned for opportunistic engagement as clarity returns.
OUTLOOK: NAVIGATING A FRAGMENTED FUTURE
The path forward remains foggy. Efforts to reverse globalization introduce friction and fragility, while tariff-driven supply shocks risk tipping developed economies into a recession. Against this backdrop, policy divergence intensifies: the Federal Reserve’s cautious stance stands in stark contrast to the administration’s more combative approach, complicating investor interpretation and response.
However, fragmentation doesn’t preclude opportunity. As markets adapt to new communication norms and structural shifts, dislocations may normalize. DOM’s focus remains on resilience over prediction favoring thoughtful design over reactive positioning.
This is not an environment for rigid allocation. It demands a multi-strategy, adaptive playbook one that can navigate uncertainty without succumbing to it.
Sincerely,
the DOM Global Macro team
