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Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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Logica Capital – September 2021 Summary
Logica Absolute Return (LAR) - Upside/Downside Convexity - No Correlation
• Tactical/dynamic balanced Put/Call allocation –Straddle
Logica Tail Risk (LTR) - Max Downside Convexity – Strong Negative Correlation
• Tactical/dynamic downside tilted Put/Call allocation – Ratio Straddle
Summary: Equity markets broke trend in September with their first “significant” down month of
2021 (and only the 2nd down month overall for the year). VIX reached its highest level since May,
but quickly – and challengingly - retreated. Logica’s strategies suffered from poor
timing/sequencing in September – an outcome that is bound to happen once in a while, but
disappointing nonetheless.
1 Returns above are gross of fees. LAR Fund -2.47% (net), LTR Fund -0.03% (net) for September 2021.
2 Naïve Straddle Return: a 1.5 month out, S&P 500 at-the-money put and call bought on the final trading day of prior month and sold on the final
trading day of current month. This return on premium is divided by a factor of 6 to be comparable to Logica’s typical AUM-to-premium ratio.
3 Naïve Ratio Straddle Return: a 1.5 month out, S&P 500 at-the-money put and at-the-money call (divided by 2) bought on the final trading day of
prior month and sold on the final trading day of current month. This return on premium is divided by a factor of 6 to be comparable to Logica’s
typical AUM-to-premium ratio.
Sep. 2021 QTD YTD 2020
Logica Absolute Return1 -2.2% +0.9% +2.8% +14.9%
Naïve Straddle (1 put, 1 call)2 +5.7% +4.1% -12.1% +12.9%
CBOE Volatility Index (VIX) pts 6.7 +7.3 0.4 +9.0
CBOE Volatility Index (VIX) % chg +40.4% +46.2% +1.7% +65.1%
S&P 500 -4.8% +0.2% +14.7% +17.4%
Sep. 2021 QTD YTD 2020
Logica Tail Risk1 +0.1% +0.8% -1.5% +15.1%
Naïve Ratio Straddle (1 put, 0.5 call)3 +12.8% +2.8% -23.2% +0.5%
CBOE Volatility Index (VIX) pts 6.7 +7.3 0.4 +9.0
CBOE Volatility Index (VIX) % chg +40.4% +46.2% +1.7% +65.1%
S&P 500 -4.8% +0.2% +14.7% +17.4%
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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Commentary & Portfolio Return Attribution
“Good timing is invisible. Bad timing sticks out by a mile”
-Tony Corinda
There were 3 main drivers of performance in September. As a starter, Single Stock Calls
disproportionately disappointed, with most of the loss attributed to our Growth/Tech and Health Care
positions. As a proxy/benchmark to illustrate the environment for these sectors in September, both the
NASDAQ 100 (QQQ) and SPDR Healthcare ETF (XLV) were down more than -5.5% on the month. Our
smaller decline was thanks to our more defensive single stock calls, which fared very well. Though not
so noticeable given the overall down month in LAR, they significantly buoyed the long side of the
portfolio (for reference, this is the module that we introduced in late 2020 - following our lengthy R&D
into the “rotation effect” to aid in the factor rotation and associated volatility we foresaw. This module
has performed materially better than our more “aggressive” Single Stock portfolio since its introduction
in October 2020).
Second, after hopes of a turn in trend, our Macro Overlay demonstrated significant weakness, led by
heavy declines in Long-Term Treasuries and Gold (iShares 20-year Bond ETF lost more than -2% on the
month; similarly, SPDR Gold Trust GLD ETF lost just over -3%). Our exposure to the US Dollar helped to
offset some of the losses in this bucket, but the lack of protection provided by Long-Term Treasuries
given an equity market decline was a focus of disappointment. Notably, we have maintained a reduced
exposure to this module for many months now, expecting some weakness in these assets across the
board, but are still somewhat surprised by the outsized weakness in the face of “risk off” moments. As
a consequence, we are further investigating the continued value of parts of this overlay (we introduced
our thinking on this in our June 2021 monthly letter in the section titled “So what’s the deal with
60/40?”).
MTD QTD YTD
S&P Puts 2.49% 0.33% -6.62%
Fast Scalping 1.38% 0.49% -3.55%
Slow Scalping 1.10% -0.15% -3.07%
S&P Calls -2.24% 0.23% 6.32%
Fast Scalping -0.37% -0.23% 1.53%
Slow Scalping -1.87% 0.45% 4.78%
Single Stock Calls -2.14% 0.11% 3.35%
Macro Overlay -0.34% 0.23% -0.19%
Gold -0.30% -0.12% -0.45%
Long-Term Treasuries -0.39% -0.04% -0.41%
US Dollar 0.35% 0.39% 0.67%
Logica Absolute Return -2.2% +0.9% +2.9%
Attribution
MTD QTD YTD
S&P Puts 2.58% 0.47% -5.62%
Fast Scalping 1.46% 0.58% -2.91%
Slow Scalping 1.12% -0.11% -2.71%
S&P Calls -1.15% 0.06% 2.65%
Fast Scalping -0.19% -0.12% 0.71%
Slow Scalping -0.95% 0.18% 1.94%
Single Stock Calls -0.95% 0.10% 1.64%
Macro Overlay -0.34% 0.22% -0.20%
Gold -0.29% -0.09% -0.52%
Long-Term Treasuries -0.38% -0.06% -0.47%
US Dollar 0.33% 0.37% 0.80%
Logica Tail Risk 0.1% +0.9% -1.5%
Attribution
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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Lastly, we were affected by poor timing on our scalping modules given the back-and-forth undulations
of volatility (spike-retreat-spike-retreat, etc..), or broadly, the indecisiveness of the market along its
general path. In a month like September, where implied volatility had a nice spike (but didn’t give it all
back intra-month), our expectation is for our strategies to be up nicely. But we are, at times, subject to
sequencing/timing issues associated with meaningful relief rallies during the fall, that while expected
to occur every so often, are frustrating when they do occur, and we are caught offside.
A timely baseball analogy might help here. Baseball statistics are notoriously noisy, and subject to small
sample size biases in the short-term. Every fan has experienced a game when team A seems to convert all
its opportunities, while team B leaves runners on base, inning after inning. Team A and B may have the
exact same long-term hitting expectancy, but in the short-term, things go poorly, and they just can’t get
the big hit with runners on base. The hits they do get are with no runners on base. Most SABRmetrics
aficionados chalk this up simply to bad sequencing which evens out over the long run. An example this
season is that of the LA Dodgers and San Francisco Giants. The Dodgers had a massive advantage in run
differential (runs scored minus runs given up – at 269-210) over the course of the regular season but have
a worse record than the Giants overall. Given run differential, the expected win/loss record for the Dodgers
is 109-53, and 103-59 for the Giants. But San Francisco has defied the odds and wound up with a better
actual, realized record through the end of the regular season. According to FiveThirtyEight, however, the
Dodgers ELO is still significantly better than the Giants, and the Dodgers are heavy favorites to win the 5-
game series.
This sequencing phenomenon is worth more focus. For perspective, since 2005 – the start of our back-
testing framework and through our live performance – there were 11 calendar months where the S&P
500 Index was down between 3% and 6% (ignoring the “current” month, Sep. 2021). LAR’s average
return over these was +3.3%, and LTR’s was +5.1%. However, LAR experienced 4 negative monthly
returns out of those 11. On average, of these negative months, LAR was -2.02%, which is tightly in line
with this past month’s performance. (Of note: the average positive month for LAR and LTR during these
periods has been +6.3% and +8.12%, respectively.)
“Through my research, I found that vulnerability is the glue that holds relationships
together. It's the magic sauce.”
-Brene Brown
Moving on to the bigger question: why does our process ever allow for a downside outcome during a
downside market? In recent letters, we’ve discussed that instead of shorting volatility as most other vol
managers do, we are unwilling to take any “short vol” risk, and so the risk we’re willing to take is that of
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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delta risk. Recall our “shifted” distributions illustrating our “in the middle” of the distribution risk
profile:
Within the “risk” portion of our expected distribution, there are a couple things happening. The “delta
risk” we take is that of a mean-reversion bet, the point of which is to monetize volatility spikes, and
anticipate a bounce-back in the underlying. We do this so long as our model isn’t giving us a RED FLAG
that a bigger disaster is pending. When our model gives us this RED FLAG, we call it a “Phase Shift.” It’s
at this point that we halt our mean reversionary style and significantly increase our downside exposure
- eliminating our positive delta risk and trading differently for several days, ensuring a higher Put load
than usual. (As a reminder, even outside of Phase Shift, we always carry meaningful Put exposure on the
books. In the event of catastrophe, even with a positive delta risk in play, the Puts quickly overtake the
Calls. Please refer to our July 2021 monthly letter for a nice exposition on this idea).
Let’s illustrate a simple sequence, which consists of Mean Reversion trade 1 (MR1), followed by another
Mean Reversion trade 2 (MR2), and finally resulting in a Phase Shift, as the underlying keeps going down
(moving right to left in our distribution):
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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During these points, we are trading similarly to how one might play blackjack: one always doubles down
on 11 (MR1 and MR2), as the odds get more highly in favor of winning on the next play. Similarly, we did
exactly this, and lost each time. But then when our model goes into Phase Shift, as happened, we
suddenly reverse posture, preparing for a major asymmetric payoff in the other direction (as Volatility
continues expanding rather than reverting). It’s a bit like having the bases loaded with 2 outs in
baseball. Over time, the strategy that will generate the most runs will be to take a full swing and try to
drive the ball, either getting a home run or a double. However, this is a low hit rate proposition: doubles
and homers with the bases loaded don’t materialize that often. And when they don’t, fans are left
wondering why a hitter didn’t just “put the ball in play,” and why a manager didn’t simply play for at
least one run. Taking a big swing when the bases are loaded (when our model shouts at us that a
pending Phase Shift may be upon us) is a calculated risk that our strategy takes; this will achieve the
best long-term return and, as importantly, the most convexity.
(It wasn’t always this way, but just like in investing, baseball has come to understand that artificially
limiting run output via bunting, or only trying to hit singles, is a lower expected value than letting hitters
swing away in these “juicy” situations. The only exceptions are very specific in-game situations, where 1
run may win you the game. Since investing is a continuous “game” that doesn’t usually have a specific
endpoint, this is where the 2 “games” diverge, and the analogy becomes a bit less apt.)
But it was a false positive. Phase Shift can be a frustrating thing for us to implement when it doesn’t
follow through. In fact, it’s precisely counter to our general monetization policy: this part of the strategy
gears up for more volatility following a volatility spike/market downturn (and significantly delays
monetization). We know that Phase Shift has a low hit rate: most of the time, the market recovers, and
things go back to normal. But, when Phase Shift is correct, significantly outsized gains are well within
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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reach. And this is what helps buoy an overall portfolio in the worst of times. Doing things in this
manner controls our risk and long term expected return but can hurt us more when we are wrong;
when the market does not follow through, but instead mean-reverts, as happened in September.
The crucial point, however, is that along this jagged path, we take calculated risks in the middle
of the distribution, and ones that are bounded by our Phase Shift parameter.
As you might be able to surmise by now, during September, both the mean-reversion trading and the
Phase Shift implementation got it wrong, so ended up whipsawing us at each turn. We are as frustrated
as anyone by saying that these sequences just happen sometimes; and even with our process taking the
right bets in being downside controlled for highly asymmetric payoff opportunities. The key is for us to
reflect on these and evaluate; to ensure these outcomes are within expectation, and to alter course if
we feel they are not. September, while somewhat disappointing, was in fact well within expectation.
So, we roll on.
All that said, we can see the normalcy of daily returns in our scatter plots:
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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Of particular interest, September was an ideal month for a naïve implementation of both a straddle,
and a ratio straddle. This will typically be the case when implied volatility is positive for the month and
the final day is the absolute low point for the month:
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In closing, we continue to remain confident in our process, and just like a professional Blackjack player
doubling down each time they are dealt a sum of ‘11’ (given the high number of 10 value cards in the
average deck enabling the next card dealt to achieve ‘21’), if the market presented the same setup to us
once more, we would take the same bet, for those are the best odds for asymmetric upside at bounded
risk.
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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Business Update
We are happy to share that the Logica team continues to grow. Over recent months, we have added two
new team members, including Alexandra Imbro, who will be assisting our client relations team, and
Jam Zovein, who will be heading up our Product Development & Strategy. Alex comes to us from a long
stint at Aegis Capital, and Jam comes to us with long term experience in similar institutional roles at
Nuveen, Wilshire Associates, and quant hedge fund Algert Global. Welcome aboard to our new team
members!
Logica Strategy Details
Note: We have comprehensive statistics and metrics available for our strategies, but only include a
select few to highlight what we believe is our most valuable contribution to any larger portfolio.
If you would like to learn more about our strategies, please reach out to:
424-652-9500
Follow Wayne on Twitter @WayneHimelsein
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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*HFRX Indices have been scaled up to 15% annualized volatility to be comparable to LAR and S&P 500.
Logica Absolute Return 1.76 (0.14) 0.12
S&P 500 Index 1.21 1.00 (0.37)
HFRX Macro Index 0.08 0.34 (0.17)
HFRX Equity Mkt. Neutral Index (0.34) 0.32 (1.33)
Correlation
(S&P 500)Sortino Skew
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2021 0.5% -1.7% -0.1% 1.2% 0.5% 1.5% 2.1% 1.1% -2.2% 2.82%
2020 4.7% 6.3% 8.6% 0.6% -1.4% 1.1% 0.0% -1.3% -1.1% -1.2% -2.1% 0.4% 14.93%
2019 1.9% 0.3% 7.2% -1.2% -3.8% 9.2% 5.4% 3.0% -8.5% -6.0% 0.3% 0.1% 6.53%
2018 7.3% 10.8% 3.6% 0.7% 7.2% -2.3% -2.8% 6.5% -0.2% -5.4% 1.8% 6.6% 37.98%
2017 1.2% 5.3% -1.2% -1.4% 3.2% -5.6% -2.0% 3.2% 0.7% 8.9% 2.4% -1.1% 13.63%
2016 6.0% 1.9% -0.9% -4.3% 3.9% 6.0% 1.7% -2.1% 2.0% -5.1% 1.8% 0.9% 11.58%
2015 8.8% -3.6% 5.2% -8.4% 4.4% -3.4% 2.3% 8.4% 1.6% 1.2% -3.4% -5.0% 6.62%
Logica Absolute Return - Monthly Returns
Logica Absolute Return
2015-2019 stats & grid, reconstitution of live sub-strategies
2005 to present growth of $1000 chart, simulation
Jan 2020-Present Live
Logica Capital September 2021 LOGICAFUNDS.COM 424.652.9520
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*EHTR Index has been scaled up to 17% annualized volatility to be comparable to LTR.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2021 0.5% -1.9% -1.4% -0.2% 0.2% 0.4% 1.0% -0.3% 0.1% -1.55%
2020 3.1% 10.2% 13.2% -0.7% -2.6% 0.4% -1.4% -2.7% 0.7% -0.9% -3.1% -0.6% 15.12%
2019 -1.1% -1.8% 5.4% -2.5% 0.8% 4.2% 4.2% 2.7% -7.1% -6.6% -1.3% -1.9% -5.78%
2018 2.2% 11.9% 5.8% 0.6% 3.1% -2.7% -3.3% 3.1% -0.7% 0.8% 1.7% 13.1% 39.93%
2017 0.4% 2.9% -0.6% -1.6% 0.7% -4.6% -2.6% 1.8% -1.2% 4.5% 0.0% -1.2% -1.78%
2016 10.4% 3.5% -4.6% -2.5% 1.7% 4.3% -0.2% -1.8% 1.0% -3.0% -3.1% -0.6% 4.33%
2015 11.2% -6.9% 3.4% -6.6% 1.2% -3.6% 0.2% 12.9% 3.3% -1.3% -3.4% -5.0% 3.29%
Logica Tail Risk - Monthly Returns
Logica Tail Risk
2015-2019 stats & grid, reconstitution of live sub-strategies
2005 to present growth of $1000 chart, simulation
Jan 2020-Present Live
Logica Tail Risk 1.08 (0.56) 1.15
S&P 500 1.21 1.00 (0.37)
EH Tail Risk Index (1.10) (0.54) 6.29
SortinoCorrelation
(S&P 500)Skew