Saxo Stronghold USD – Q1 2020 commentary

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Saxo Markets

Instruments traded
Asset classesGlobal equities and bonds
Investment styleQuantitative portfolio management
Quarterly return-6.5% (net of fees)
Annualised volatility (since inception)

Market overview

The first quarter of 2020 will go into the history books as one of the most dramatic quarters ever for financial markets. The year started with markets pulling ahead until the news broke that a new coronavirus (COVID-19) had been observed in China. Initially, as market participants thought that it would remain a Chinese issue, global equities went to new highs. Eventually, the virus spread globally and intensified, forcing governments to lock down societies and the financial markets went into an extreme volatile regime eclipsing the 2008 meltdown.

Global equities declined 34% from the peak in February to new lows in March. Interest rates became extremely volatile as relative arbitrage trades caused margin calls. Volatility and cross-correlation reached extreme levels during March, but the Stronghold portfolio managed to control risk in this challenging environment.

The Stronghold allocation model aggressively cut risk during the quarter, ending the quarter with 65% exposure to actual cash and the model’s synthetic cash positions (1-3Y Treasury bonds). 

Global equities are up 23% since the lows and credit bonds are almost unchanged as the Fed launched a historic policy program of buying secondary credit bonds, including fallen angels (bonds that have been downgraded into junk status). The large swings and especially the rebound have not benefitted Stronghold much, as the risk limit for taking further risk has been maximised for now. 

Current projections are suggesting the US economy could see its biggest quarterly decline in economic activity ever, eclipsing the 1930s depression, and the unemployment rate is expected to hit somewhere between 20% and 30%. With unprecedented economic shocks and unprecedented policy response from fiscal and monetary authorities, nobody really knows what the future will look like. In the event that the recent rally in equities is unwound as the currently expected V-shape recovery does not materialise, then the Stronghold strategy should be well positioned. 

Portfolio performance

First Quarter 2020 – total-6.5%
Since inception (01.01.2017)

(Performance is net of all fees)

  • The best performing position in the portfolio has been the exposure to 7-10Y US government bonds, which over the quarter has contributed with +2.6%-pts. 

  • The exposures to core S&P 500 and to US momentum stocks have been the worst performing positions, even though these positions were closed at the end of February. Their combined contribution to the portfolio return this quarter was -4.5%-pts.

Changes to allocations 

The main change in the Stronghold USD portfolio over the quarter has been a drastic de-risking of the portfolio. The equity exposure was reduced to zero at the end of February, followed by a reduction to credit bonds in the middle of March. These reductions were done to keep the expected level of risk within the risk limits of the strategy.

Portfolio weights (%)

Asset classAsset sub-classAs of 03-01-2020As of 06-04-2020
CreditUS Corporate IG
US Corporate HY
EM Bonds (USD)
EquityUS Large-cap Equities
US Small-cap Equities
International Equities
EM Equities
US Minimum Volatility
US Momentum
GovernmentUS Govt 1-3Y
US Govt 7-10Y
CashCash 0.5 0.6


Consensus macro economists are expecting the US economy to decline 2.5% q/q annualised in Q1 and then decline a staggering 25.1% q/q annualised, but then resume growth in Q3. Our guess is that the contraction will be even worse and that the recovery will be slower, as it will turn out to be more difficult to open up society and get back to the same activity levels. 

One instrument to monitor future market expectations is S&P 500 dividend futures, where market participants are betting on the amount of dividends S&P 500 companies will pay out in the future. Currently, the market is pricing in a 30% decline in dividends by 2021 and that corporate profitability will not recover until 2027. Financials continue to underperform other sectors and as the real economy (small and medium-sized businesses employing 80% of the labour force) sits on the banks’ balance sheet, the market is not optimistic on the real economy. Meanwhile, the volatility market (VIX spot and the futures curve) suggest elevated volatility throughout 2020.

The outlook is very uncertain at this point, and while Stronghold has not participated in the recent rally in equities, we have a good feeling about the current exposure as the capital is protected against adverse developments which could come with a second wave of the COVID-19 outbreak.


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