For such a formidable combination of risks, hedging markets have remained quite tentative in 2022, with the VIX index having yet to exceed its high for the year set intraday on Jan 24. Taking its cues from these same hedging markets, each of two hedging attempts on the year has resulted in mild costs for TCM portfolios, the most common outcome for the strategy's risk management module which seeks to add value not through consistency, but through the "positive skew" inherent in long volatility exposures.

After years of Fed-enabled denial, inflation is finally forcing investors to confront the realities of a hyper-leveraged financial system. VIX and equity markets are so far treating this as a chronic issue that will be addressed slowly and smoothly over time, but markets rarely move in smooth lines. As we saw with the last “rate scare” in late 2018 and early 2019, the situation can change quickly

Overall, January has many parallels with October 2018, the last Treasury-led correction for equities that produced similar results in stocks and the VIX. In retrospect, that experience was just the warning shot before clearer alarm bells in VIX and substantial hedging gains during the plunge in December that year. With the Fed widely expected to begin hiking rates in March, the stage may be set for more turbulence in 2022.

2021’s results highlight a unique aspect of TCM’s tactical risk management approach: the stronger the S&P becomes, the lower TCM’s hedging expense tends to be. In contrast, static risk management approaches (eg, continuous exposure to put options) tend to create relatively constant expense from year to year, growing ever larger the longer a bull market persists.

As we approach the end of another tumultuous year, it is time to assess your income tax situation before 12/31/2021 so that you might minimize your total tax bill.