Market Insights

The first quarter of 2025 can be aptly described as a rollercoaster. In our last note in this series, published back in January, inflation was still top of mind while tariff fears were only nascent. In the months that followed, tariffs took center stage as U.S. trade pressures first worried Canada and Mexico, and now, most of the globe.

On April 2nd, the Trump administration announced its “Liberation Day” tariffs, causing global equity markets to spiral in response as investors grappled with recalibrating expectations. Credit had a much more muted reaction to the tariffs as the bond market was more bearish in anticipation of the announcement. The worsening growth and inflation outcomes leave the Fed in a challenging dilemma, but without labour market deterioration, there is a strong case that policy rates will remain on hold.

Going into the announcement, our view was that the tariffs would be substantial and would negatively impact both inflation and growth. We had already positioned our portfolios conservatively, accounting for both the uncertainty surrounding global policy decisions and our assessment of market valuations. In other words, in our long-only strategies, we focused on higher-quality securities and ensuring more liquidity; and in our alternative strategies, we employed more hedging and lowered leverage. This discipline offers more flexibility and stability when markets become unsettled.

It’s not all doom and gloom though. Uncertainty has historically also presented opportunities. Market dislocation often leads to mispricing that we can take advantage of as an active manager. As opportunities emerge, we can rebalance, capture attractive credit spreads, or selectively add exposure where the market is overreacting. However, our focus remains on positioning our portfolios to benefit from market inefficiencies while maintaining a strong risk foundation that seeks to navigate volatility, not amplify it.

In a recent letter, Richard Pilosof described volatility as our intermittent companion for the past 15 years since the firm’s founding. Now, just as always, our aim continues to be generating strong risk-adjusted returns for our investors in all market environments.

Despite all the noise related to trade policy, our status as an institutional-scale bond market participant allows us to benefit from new issue opportunities as well. One such example is our recent participation in the financing of Mars’ (like the bar) $36 billion acquisition of Kellanova (Kellogg’s old snacking business). Before the deal was announced, we provided early indications of interest to the banks likely to lead the deal. Our early involvement and scale enabled us to receive an outsized fill into several of our strategies despite extremely strong market demand. Mars is a high-quality A-rated issuer; however, the size of this deal ($26 billion) and the highly private nature of the company meant the bonds were significantly cheaper than those of other food companies of similar credit quality. The deal was well received by the market, causing spreads to tighten and prices to rally after issuance, enabling us to earn a good return.