Birkoa Newsletter 49 (end of year 2024)
Executive Summary
As 2024 concludes, Birkoa continues to showcase strong performance, delivering a net return of over 25%, outpacing the S&P 500’s 23% growth. Our Sharpe and Sortino ratiosaffirm our commitment to risk-adjusted excellence, even amidst December’s market volatility.
Key highlights include:
Launch of Birkoa Pro Fund: This de-levered version of the main fund achieved a 19% return in its inaugural year, offering a low-volatility option for investors while underscoring our adaptability and innovation.
Volatility as a Strategic Choice: The main fund’s superior Sortino Ratio reflects our deliberate strategy to leverage upward volatility for enhanced returns, an essential component of our investment philosophy.
AI as a Growth Driver: AI remains central to our strategy, with new investments in pharmaceuticals (Novo Nordisk and anticipated entry into Eli Lilly) underscoring its transformative potential.
Semiconductors and Big Tech AI: Continued outperformance in Nvidia, Tesla, and Google, coupled with Micron’s strategic addition, positions us well for 2025.
Cryptocurrencies and Geopolitical Assets: Bitcoin’s surge to > $100k and defense assets capitalizing on rising geopolitical tensions reinforce our diversified edge.
Chinese and Japanese Recoveries: Stimulus-driven opportunities in China and rebound-driven gains in Japan highlight our strategic global exposure.
Market Hedge Strategy: Our VIX hedge remains a vital component, proven during August’s market crisis, and ready to capitalize on inefficiencies.
Looking to 2025, Birkoa remains focused on AI-driven innovation, sector recoveries, and robust risk management, aiming to sustain long-term value creation for our investors.
Full Newsletter
Birkoa End-of-Year Performance Highlights
We are pleased to report that Birkoa achieved a net return of over 25% for 2024. While this year’s performance is below last year’s impressive 47% net return, we continue to deliver strong and consistent results.
Importantly, we outperformed the S&P 500, which grew by 23% this year. Our Sharpe ratio stood at 1.35 for the past 12 months and 0.77 over the past 24 months. The Sortino ratioreached 2.73 for the past year and 1.52 over the last two years. These figures, as of the end of November 2024, will be updated once December numbers are finalized, though they are expected to remain consistent.
Our performance since inception and over the past two years aligns with our goal of achieving 20-25% average annualized returns over 3-5 years. We are at the upper end of this expectation and continue to outperform, even in a year that ended on a down note.
P.S.: Our new Birkoa Pro Fund, launched on May 1, 2024, which is a de-levered version of the main fund, also logged impressive gains for the year, finishing the calendar year up ~19%. We will talk more about this fund in later newsletters as we build more of a track record, but it’s something to keep an eye on. This fund was built to tamp down on some of the volatility of the main fund by eliminating leverage.
The reason we mention the new fund here is to highlight that volatility, especially upward volatility, as reflected by superior Sortino Ratio numbers for the main fund, is a voluntary choice we make to boost absolute returns. Properly utilizing volatility is an important part of our investment strategy.
Macroeconomic Outlook
In 2024, the U.S. economy saw significant changes, with the Federal Reserve cutting interest rates by 100 basis points since September. Despite this easing, recent inflation readings have shown signs of stalling, leading the Fed to adopt a more cautious stance going into the new year. This shift in tone caused market nervousness and contributed to a market drop in December.
Looking ahead, we believe that while the path to lower inflation may be bumpy, the recent downturn presents attractive buying opportunities, particularly in sectors that have shown strong performance. Additionally, we remain cautiously optimistic about China, where steady improvements in non-manufacturing services PMI signal potential outperformance in the coming year. We also view the market’s concerns over Trump tariffs and U.S.-China tensions as potentially overblown, providing further opportunities for strategic investments.
AI Outlook
AI has been a significant contributor to Birkoa’s performance over the past two years, and 2025 is expected to be another strong year. We anticipate advancements in higher reasoning models, multimodal capabilities, and the agentic AI revolution, which will drive further monetization of AI technologies.
Our recent investments in computational biology and pharmaceuticals, including new positions in Novo Nordisk and an anticipated position in Eli Lilly, underscore the transformative potential of AI in drug discovery and its broader human impact.
Cryptocurrencies
In 2024, our cryptocurrency-related equities, including Coinbase and blockchain payment platforms, performed exceptionally well, buoyed by the surge in Bitcoin and other major cryptocurrencies following Trump’s election. We do not hold cryptocurrencies directly but focus on equities within this sector.
With Bitcoin expected to exceed $100,000 again, the outlook remains positive. The recent market downturn presents a buying opportunity, especially for Coinbase, which is down nearly 30% from its December peak. We anticipate continued growth as Trump’s administration’s policies become clearer, and we are gearing up to capitalize on these developments. The strong dollar, which has been a headwind, is expected to weaken, further bolstering the sector’s prospects.
U.S. Semiconductors
In 2024, the semiconductor sector had a mixed performance. While Nvidia and Broadcom were standout performers, many other names like AMD, ARM, and Qualcommunderperformed or remained flat. This somewhat limited our gains in this sector.
We took advantage of the pullback by swapping out our position in Intel for Micron, purchasing it at its year-to-date lows. We believe that as the sector sees more participation from companies beyond Nvidia and Broadcom, 2025 could see greater performance across the board. The increasing competition in AI models, coupled with sovereign AI investments, is expected to drive significant growth.
Overall, we remain very bullish on the semiconductor sector, anticipating more widespread participation and stronger performance in 2025.
U.S. Big Tech AI
In 2024, the U.S. Big Tech AI sector had a strong performance, primarily driven by Google and Apple, which have made significant strides in AI innovations. As we look to 2025, we anticipate continued growth, especially with Google’s advancements in AI models and hardware, such as wearables and other form factors. Tesla, initially a hedge against Chinese EVs, has become a key AI player for us, with promising developments in autonomous driving and robotics. We believe these advancements position Tesla as a multi-trillion-dollar company in the making, underscoring our bullish outlook on Big Tech AI. This sector remains central to our strategy, and we are excited about its future potential.
Chinese Asset Holdings
1. Government Stimulus:
The Chinese government’s recent willingness to implement significant stimulus measures aimed at boosting consumption and combating deflation.
This aligns with our initial investment thesis based on the long-term debt cycle, anticipating a deflationary environment.
2. Performance and Outlook:
Despite underperformance in the past two years, recent developments suggest that 2025 could be a turning point.
The property sector, a primary beneficiary of government stimulus, is expected to drive performance.
New capital can benefit significantly as these assets are still relatively depressed.
3. EV Sector:
• Continued government incentives and a focus on maintaining global leadership in EVs.
• Positive outlook for our EV investments as consumption picks up.
4. Software and Consumer-Led AI Companies:
With the AI premium starting to be recognized in Chinese tech stocks, 2025 could see significant growth.
Recent improvements in non-manufacturing PMI numbers indicate a recovering consumption-led economy.
5. Fund Strategy and Diversification:
Emphasis on the fund’s ability to perform well despite past underperformance in Chinese assets, showcasing strong risk management and diversification.
Japanese Assets
Japanese holdings bounced back strongly after their August 2024 lows:
SoftBank: Our largest Japanese holding, benefiting from its $1.5 billion stake in OpenAI shares.
Consumer Electronics: Rebound driven by inflation and rising consumption.
Currency Advantage: The yen’s depreciation offers conversion benefits, and a short dollar-yen trade could add significant value in 2025.
Commodities
Our commodities sector has remained relatively stable, neither significantly adding to nor detracting from our returns. We’ve been gradually building positions in oil, lithium miners, and steel exporters, focusing on strategic opportunities. With China’s economy recovering and U.S. recession fears receding, metals like lithium, iron, and copper are poised to benefit.
Defense Sector
Rising geopolitical tensions and the incoming Trump administration’s hawkish stance are expected to benefit defense-related assets. We increased allocations to both hardware and software defense companies during December market dips and plan to further increase exposure as new capital becomes available.
Market Hedge: Volatility Index Strategy
Over the past year, our investment in the VIX (30-day VIX futures) through the ETF VIXY has resulted in a 6% net loss to the portfolio. Despite this, we continue to hold the hedge due to its fundamental asymmetric potential to protect our portfolio. The inefficiencies in VIX pricing provide us with a unique opportunity to safeguard against market volatility.
This hedge has proven its value during times of market stress, such as the August 5th market crisis, where our fund experienced a positive performance while global markets dropped 6-12%. This strategic hedge aligns with our commitment to protecting investors’ capital and maintaining a diversified risk profile.
Looking ahead, we plan to continue monitoring this hedge closely, ready to allocate new capital at low levels to capitalize on pricing inefficiencies. This hedge remains an essential component of our strategy, providing a buffer against market uncertainties and ensuring the long-term stability of our portfolio.
Looking Ahead
Birkoa’s focus on AI-driven growth, sector-specific recoveries, and risk-adjusted diversification ensures resilience and strong performance heading into 2025. Thank you for your continued trust and partnership.
Sincerely,
Pranjit K. Kalita
Chief Investment Officer
Birkoa Capital Management