Bayou City Capital returned +1.56% during July after fees and expenses, raising 2017 performance to +9.32%. The VIX set a new historic low during the month, falling to 8.84 after an uneventful Fed announcement. Combined with the satisfactory 2nd quarter corporate earnings that have been released, there has been little cause for concern in the U.S. stock market. Such a utopian environment may be welcome to equity investors. From a volatility perspective, however, there is a stark risk/reward asymmetry when comparing the scenario where utopia continues vs. one when market uncertainty is reintroduced. In previous newsletters, we have harped on the Fund’s risk allocation during these periods of ultra-low volatility. The Fund’s conservative approach allows its strategy to exploit opportunities in the S&P 500 options market when a return to historical volatility does finally occur.
Since February 2016, when the Fund adopted its current risk philosophy, the Fund’s performance metrics have been impressive in terms of risk-adjusted returns. These figures from the last 18 months are included below, with a glossary of the terms following on the next page. The decrease in volatility of the Fund’s returns is especially noteworthy. In the years to come, the Fund’s strategy will continue to evolve alongside the market. We are pleased with the results the recent evolution's have produced. We thank you for your support and please let us know if you have any questions.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Standard Deviation - A measure of the dispersion of returns around their mean. Higher standard deviations translate into more volatile monthly return patterns.
Sharpe Ratio - The Sharpe ratio divides the out-performance of the manager or index over the risk-free rate by the standard deviation. A higher Sharpe ratio indicates a higher return delivered for the risk taken.
Beta vs. Market - Beta reflects the portfolio's sensitivity to the overall market volatility. A beta of 1 reflects a portfolio that has fluctuated at in perfect or conjunction with the market. A beta higher than one indicates an above market level or risk and vice versa. A portfolio with beta of .75 would be expected to rise 7.5% if the broad market increased by 10%.
Alpha vs. Market - Alpha represents the risk-adjusted outperformance of the manager. This statistic reduces or increases the total out- or underperformance of the manager based upon the beta of the portfolio. For example, if a manager outperformed the benchmark by 200 Basis Points (2%) with a beta of .75 the alpha would be 3.75%, assuming risk free rate is at 3% and the market increased by 10%.
Downside Risk - An estimation of a security's potential to suffer a decline in price if the market conditions turn bad. You can think of this as an estimate of the amount that you could lose on a stock or other investment.