Comprehensive Quarterly Letter - Q3 2025

Equity Markets

U.S. equity markets experienced heightened volatility in Q3 2025, with the S&P 500 declining 2.1% while the Nasdaq 100 fell 3.4%. Technology stocks bore the brunt of the selloff as rising Treasury yields pressured high-multiple growth names. The Russell 2000 outperformed, declining only 0.8%, as investors rotated into value stocks with more attractive valuations.

Internationally, European markets held up relatively well with the Euro Stoxx 50 down just 1.2%. Emerging markets underperformed developed markets, with the MSCI EM Index falling 4.3% on concerns about China's economic slowdown and a stronger U.S. dollar.

Fixed Income

Bond markets continued their adjustment to the "higher for longer" interest rate environment. The 10-year Treasury yield rose 35 basis points to 4.88%, its highest level in 16 years. Credit spreads widened modestly, with investment-grade and high-yield spreads increasing by 8 and 22 basis points respectively. The Bloomberg Aggregate Bond Index declined 1.8% for the month.

Digital Assets

Cryptocurrency markets showed resilience despite broader market weakness. Bitcoin rallied 12.4% to $45,000, supported by institutional accumulation and optimism around potential ETF approvals. Ethereum gained 8.7% to $2,800, benefiting from successful network upgrades and improving on-chain metrics. DeFi protocols continued to see growing adoption, though total value locked remained below 2021 peaks.

Commodities & Currencies

Oil prices remained volatile, with WTI crude fluctuating between $82 and $94 before settling at $87. Gold rallied 5.2% to $2,045 as investors sought safe havens amid geopolitical tensions. The U.S. dollar strengthened against most major currencies, with the DXY index gaining 2.8%, pressuring emerging market currencies and commodities priced in dollars.

Overall Positioning

We maintained a balanced approach throughout Q3 2025 with net equity exposure around 59%, slightly below our long-term average of 65%. Gross exposure of 111% reflects our continued use of hedges and short positions to manage downside risk. We increased cash to 8.6% from 6.2% last month to preserve dry powder for potential opportunities.

Key Additions

• Technology: Added to AI-related semiconductor positions on weakness, viewing the pullback as a buying opportunity in names with strong earnings visibility
• Healthcare: Initiated positions in biotech companies with promising late-stage pipelines trading at attractive valuations
• Digital Assets: Increased Bitcoin exposure from 1.5% to 2.0% of NAV ahead of anticipated spot ETF approvals

Key Reductions

• Consumer Discretionary: Trimmed exposure to high-multiple consumer names showing weakening demand trends
• Energy: Reduced direct commodity exposure, replacing with stock picks in well-managed E&P companies
• Industrials: Took profits on transportation stocks that rallied into weakening freight data

Hedging Strategy

We maintained our multi-layered hedging approach including:

• Index put options (3-6 month duration) providing downside protection
• Tactical short positions in overvalued single names
• Sector-specific hedges in areas showing deteriorating fundamentals
• Currency hedges against dollar strength exposure

Near-Term Outlook

We expect elevated volatility to persist in the near term as markets digest the implications of higher-for-longer interest rates. Key catalysts to watch include upcoming Fed meetings, Q3 earnings season, and geopolitical developments. While valuations have become more reasonable following recent weakness, we remain cautiously positioned given persistent macro headwinds.

Key Themes for November

• Earnings quality and forward guidance will be critical with rising input costs
• Fed commentary on terminal rate expectations and potential pause timing
• China stimulus measures and economic stabilization efforts
• Cryptocurrency regulatory developments, particularly ETF approvals
• Oil supply dynamics given OPEC+ production decisions

Primary Risks

Opportunities

Market volatility has created selective opportunities in quality names that sold off indiscriminately. We're focusing on companies with strong balance sheets, pricing power, and secular growth tailwinds trading at attractive valuations. The crypto space offers particularly compelling risk/reward given institutional adoption trends and potential regulatory clarity.