Dear Partners:
This month we let you down. We came perilously close to enduring permanent capital loss, which is unacceptable to us. While we ultimately found a solution that both protected the fund and safeguarded investors, our intention in managing the fund was always to avoid finding ourselves in such a situation.
Volatility is the price of long-term investment returns. Over the past two years, despite occasional significant pullbacks, we have delivered outstanding performance. However, our fund must always maintain a structure where even in the face of losses, we can continue moving forward.
I will do everything in my power to ensure we learn the necessary lessons from this experience.
The current situation is as follows:
· The portfolio experienced a significant drawdown in July, and the intense volatility in the core holdings over the past week further exacerbated the situation. Many artificial intelligence stocks saw declines of up to half or more, and our originally positive long-short spreads sharply reversed. Despite the extraordinary market turbulence in July, we have consistently adhered to higher investment standards, regardless of market conditions.
· Subsequently, we began to witness increasingly unfavorable trading in stocks associated with us publicly. This dynamic is essentially akin to a bank run: fragility begets greater fragility. We endeavored to keep the portfolio within risk parameters, but as positions swiftly turned against us and market liquidity dried up, this became increasingly challenging.
· Late Wednesday/early Thursday, we took decisive action to protect limited partners' (LP) funds. We liquidated part of the public investment portfolio through block trades to eliminate all fund leverage and prevent further losses. All short positions have been closed, and reliance on portfolio financing has been discontinued. Currently, we manage a fully paid-for public investment portfolio (holding long stock positions and fully paid-for long option positions, with no margin/clearing risk). This action restored the fund's stability and allowed us to preserve our private positions.
I take full responsibility for these events.
It is important to note that in terms of our fund's performance, this month should have been very bleak: as AI stocks plummeted while the AI technology/business fundamentals were improving, it was natural for our fund to incur losses. We are willing to accept volatility, but it should never jeopardize the fund's equity.
The fund is not closing, being liquidated, or transitioning to a purely private fund. We will continue to operate in the form of a hybrid public and private fund, as usual. However, while learning from this event, we will continue to manage our public offering in a fully paid manner. Most importantly, we have taken necessary steps to prepare for future challenges.
In the coming weeks, I will focus on driving necessary changes—covering portfolio management, the risk team, and supervision at all levels— to ensure higher resilience in the future. AI may continue to exacerbate market volatility in the coming years. These events have left us with painful lessons, but I am committed to ensuring that they become valuable experiences for our organization and my personal development in the future. I promise you that we will not waste the opportunity to learn from these events.
Regarding the portfolio itself: we are very optimistic about the current investment opportunities. Despite the significant price drop, the fundamentals are accelerating.
Thank you all for your patience and cooperation. I have put in my full effort— almost all of my funds are invested in this fund— and I will do my best to prove that this month's experiences have made me a wiser, more prudent investor. Next week, I will be available for one-on-one calls to discuss all of the above in detail.
As a mid-month update, our current unaudited month-to-date net performance estimate is -67%, and the year-to-date net performance estimate is +80%. The final data will be released following our normal reporting process.
We will hold a group conference call next week to share more details.
All the best,
Leopold
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