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May 5, 2020

Dear <<First Name>>,

Please find below our performance and market commentary for this month.


Orthogonal Global Fund ended April with a preliminary net return of +0.19% on the month for Series B investors invested since inception. This brings the Fund's 3-month and 12-month trailing net return to -0.48% and +9.15%, respectively, with correlations to broader market indices of just 0.05 to 0.31 and annualized volatility of only 6%—less than a third of the volatility exhibited by the U.S. equity market over the same period.

The chart below shows net performance attribution for April. Currency and equity strategies carried the month, covering losses in fixed income and commodities. The category of "Other" includes our additional short-term systematic risk adjustments that were implemented as a precautionary measure given the historic volatility in March.


Benchmark performance and other statistics are provided in the tables below. Fund performance figures are inclusive of fees; under standard terms, Series B interests are subject to a 0% management fee and 20% performance fee with a carry-forward loss adjustment.

Summary statistics are provided in the table below. 


The late March dysfunction in credit markets posed a major threat to the global economy, with large corporations dependent on continued credit access and the average small business having only enough cash reserves to cover, at most, two months of operating expenses. Policymakers successfully curtailed a sustained flight to cash by deploying forceful and coordinated monetary and fiscal measures. These measures were so successful that Boeing, suffering from a sharp decline in new orders and an FAA-mandated halt to the production of the 737 MAX airliner, was able to raise $25 billion in an April bond offering and turn down federal aid altogether.

Markets reacted positively, with the S&P 500, investment-grade credit, and high yield credit rallying 12.82%, 5.6%, and 3.55%, respectively. But investors should not confuse the propping up of nominal asset prices with an improvement in investment outlook. The current environment is one where the U.S. 10-year Treasury returns only 0.61% annualized over ten years. And despite the numerous headwinds in the global economy, the S&P 500 ended April at around where it was in August 2019, before COVID-19 struck. Blackrock's investment-grade bond ETF, LQD, finished April matching its 2019 high, despite significant downgrades to the credit quality of its holdings and significant deterioration in the economic outlook over the next two years. It seems that policymakers were so successful in supporting nominal asset prices that they have convinced investors to pay pre-COVID-19 prices for post-COVID-19 risk.

This isn't to say that policymakers made the wrong decision. They had a difficult choice to make under extraordinary circumstances. In the end, they took on the risk of a prolonged period of diminished returns in exchange for preventing short-term pain and preserving valuable enterprises (some built over many years and even decades) that otherwise may have been lost. Only time will tell whether this risk was worth taking.

Money, money everywhere
A consequence of the extraordinary speed, breadth, and magnitude of the monetary and fiscal responses to COVID-19 is that money supply has increased at an unprecedented rate. The most commonly-used measure of money supply, the Federal Reserve's M2 measure, has grown by over 12% ($1.9 trillion) since the beginning of this year and is expected to grow even more as the Federal Reserve implements the asset purchase commitments that it announced last month.

Investors concerned about the potential impact of this monetary impulse may be interested in assets whose prices are responsive to an increase in money supply. In this month's market commentary, we examine how one of humanity's oldest stores of value—gold—may behave in the current environment.

Two sides of the same coin

The recent increase in money supply would not have been possible without President Nixon. From 1944 through 1971, the U.S. dollar was pegged to gold at a rate of $35 per ounce. This had the effect of limiting money supply based on gold reserves. The dollar peg ended with the Nixon shock, eventually resulting in a free-floating dollar. Decoupling allowed the money supply to be increased, i.e., the so-called printing of money, during times of economic decline to shore up asset prices and stimulate the economy—opportunities the Federal Reserve has fully availed itself of. Since 1971, M2 has increased 2700%, from $635.5 billion to $17.23 trillion. During that same period, the total supply of above-ground gold stock increased by only 207%, from 95.1k to 196.6k metric tons.

The historical peg reflected gold's long history as a store of wealth and a medium of exchange. Similarly, money has intrinsic value as a store of wealth and as a medium of exchange. For our analysis, we treat gold and money as society's methods of account, i.e., they enable society to keep track on what has been given and received, and is still owed, between parties. We assume that in the long run, increasing the supply or either gold or money does not change the goods and services being accounted for; a party providing good or services will still demand an equivalent amount of goods or services in return. In economics, this is referred to as the neutrality of money.

Under the assumption of money neutrality, gold and money are simply two competing mediums of exchange and stores of wealth. The relative value of each is a function of relative supply. If money demand and gold demand are both constant, a doubling of money supply relative to gold supply should result in a doubling of the price of gold in money terms.

However, because money has an advantage over gold as a medium of exchange in day-to-day transactions, to the extent that the demand for money increases (for example, in a robust economy), the price of gold in money terms should decline as money demand increases .

With these principles in place, we can examine how well this theory holds in practice.

A simple model

The principle of money neutrality, adjusted for money demand, implies the following for the "fair value" price of gold :

For moneySupply, we use M2 (discussed earlier), which includes currency in circulation, liquid deposits, CDs, savings accounts, and money market funds. The chart below shows the growth of M2 since the 1950s.

Source. Federal Reserve, Orthogonal.

For goldSupply, we use the total stock of above-ground gold stock in metric tons as reported by the World Gold CouncilClio Infra, and the U.S. Geological Survey. The chart below sets out the growth of above-ground stock since the 1680s.

Source. World Gold Council, Clio Infra, U.S. Geological Survey, Orthogonal.
For moneyDemand, we use M2 money velocity, known as M2V. Money velocity is calculated as the total goods and services provided and exchanged in a given year using the U.S. dollar as a legal tender divided by M2—other words, U.S. GDP divided by M2. This is commonly used as a measure for the demand of money as a medium of exchange. The chart below sets out M2V since the 1950s.
Source. Federal Reserve Bank of St. Louis, Orthogonal.

The extended decline of M2V since 2000 reflects the fact that the growth in money supply has far outpaced the total level of goods and services produced in the U.S. economy in that time period. The use of currency and cash substitutes over a one-year period for the purchase of goods and services declined from 2 turns in 2000 to just under 1.4 turns in 2019.

From model to markets

We now compare the "fair value" (based on money demand and supply) price of gold in U.S. dollars as implied by theory with the actual historical price of gold from 1971 (when the dollar peg was ended) to the present. The chart below plots actual gold prices (in red) against the model's "fair value" price (in black). The results are striking.


Source. Reuters, Orthogonal.
The theory of money neutrality holds up well in real life. To quantify the quality of fit, the table below sets out the results of a simple regression of our model's fair value price of gold on the actual price of gold in U.S. dollars. Our model has a coefficient of exactly 1 versus realized historical prices and an R-squared of 81%, suggesting that the principle of money neutrality is a strong predictor of gold prices in the long run and that the price of gold responds to changes in money supply as theory predicts.

Source. Orthogonal.

What the model predicts for the current environment

As mentioned above, money supply has increased dramatically in the months since the close of 2019. Assuming that money velocity has remained unchanged at 1.374 in that time period, our model has the fair value price of gold at $1,799 per ounce. As of the close of April 30, gold was trading at $1,716.75 per ounce, a difference of less than 5%.

But we also know that money velocity is U.S. GDP divided by money supply. For money velocity to remain constant in the face of increasing money supply, GDP would need to increase by a proportional amount. However, U.S. GDP is projected to decline in 2020. Assuming a 5% contraction, as some have projected, indicates that money velocity, i.e., money demand, will decline to 1.16 in 2020.

In turn, our model sets the "fair value" price of gold at $2,127.62, a 23.9% increase from current levels.


The impact of COVID-19 and the monetary and fiscal measures enacted by policymakers has resulted in a dramatically increased money supply in a short period of time. Investors concerned about the impact of this may look to assets whose prices are responsive to this monetary impulse. Our analysis above suggests that the price of gold in U.S. dollars has historically been highly responsive to money supply and may be worth examining in the current environment.

This concludes our commentary for this month. As always, we look forward to your questions and thoughts.

Dion Chu

+1 (847) 508-8270

Michael F. Peng
+1 (415) 265-4183

This communication is strictly confidential and is intended exclusively for the use of the person to whom it was delivered by Orthogonal Asset Management, LLC ("Orthogonal"). It may not be reproduced or re-transmitted in whole or in part without authorization. The contents of this communication and any attachments are solely for information purposes and are provided for your internal use only. Nothing contained herein constitutes 
an offer, solicitation, or recommendation to sell, or an offer to buy any securities, investment products, or investment advisory services.

This document may contain forward-looking statements and projections that are based on Orthogonal's current beliefs and assumptions and on information currently available that Orthogonal believes to be reasonable. However, such statements necessarily involve risks, uncertainties, and assumptions, and recipients may not put undue reliance on any of these statements.

Although the information provided herein has been obtained from sources which Orthogonal believes to be reliable, Orthogonal does not guarantee its accuracy, and such information may be incomplete or condensed. The information is subject to change without notice. Since Orthogonal furnishes all information as part of a general information service and without regard to a recipient's particular circumstances, Orthogonal shall not be liable for any damages arising out of any inaccuracy in the information.

The information in this presentation is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice, or investment recommendations. Each recipient should consult their own tax, legal, accounting, financial, or other advisors.
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