Tycho Arete Macro Fund

Overview

Tycho Arete Macro Fund aims to deliver competitive risk-adjusted returns while maintaining a low correlation with all major asset classes. It strives to construct and update macro-analytical frameworks that incorporate the rapidly changing macroeconomic conditions around the world, as well as the significant idiosyncrasies of large global actors such as China and Japan.

Strategy & Manager

Performance

Commentary

Investment Manager’s Commentary – September 2025

Chinese equity markets extended their leadership in September, decisively outperforming a complex global backdrop marked by heightened volatility as central banks across the US and Eurozone grapple with the “last mile” of inflation. Our portfolio maintained its strategic long bias towards China and secured gains for a fifth consecutive month. Our sustained performance reflects an emphasis on both strategic and dynamic portfolio management as we allocated exposures to capitalize on evolving sector opportunities while remaining consistent to a broader market thesis.

Our PnL drivers reflect the dynamic evolution of our portfolio over this period: initial gains in May and June were powered by global equity indices (e.g., S&P 500) and defensive Chinese sectors such as banks. July saw our PnL rotate to growth sectors such as healthcare and “new consumption”, leading in turn to a broad Chinese A-share market (e.g., CSI A500, CSI 1000) rally through August. In September our primary PnL contributors stem from sector-specific China AI/Tech exposures. The sectors were buoyed by a fresh wave of AI capex, technological breakthroughs, and monetization successes. Key contributors for the month included direct equity exposure to Chinese internet giants, AI infrastructure and software leaders, and tech-heavy indices like the HSTECH. In a largely buoyant market, our strategic hedges in the HSI and HSCEI served as the main detractors but played a crucial role in insulating the portfolio from broader market swings.

Current Outlook

Investors who have been following China from afar have likely been grappling with a seeming contradiction. On the one hand, top-down economic data continues to lose momentum, pointing to a slowdown in the third quarter. Real GDP growth reached 5.3% YoY in H1, more or less ensuring that full-year growth will be close to the target of “about 5%” growth. But monthly data in July and August point to a slowdown in Q3, probably to around 4.6-4.8%. On the other hand, the equity market has not only looked through this weakness, but has become one of the best-performing assets globally this year, with the CSI1000 index up 27% YTD and Hang Seng Tech advancing 48%.

As reflected in our recent newsletters, we believe this seemingly enigmatic price action is consistent with our evolving view since late 2024: the old paradigm of simply equating top-line GDP growth with Chinese equity performance is giving way to an environment where the quality, not quantity, of growth will serve as the fulcrum of market performance. This summer’s market action dovetails with our core thesis: the dominant macroeconomic force in today’s China is the pivot towards innovation-led productivity. We are witnessing a deliberate transition away from public-led investment – which, while large in scale and employment, often generated low returns – toward private-led investment in high-return sectors. This new wave of capital allocation may not fully offset the cyclical slowdown in property and infrastructure in the short term, but it is fundamentally more productive, promising stronger corporate profits and sustainable future growth. Put another way, the equity market is reflecting the gains associated with a regime shift from an era of high economic activity with low returns to one of slower economic activity with high returns.

More recently, this dynamic is being cemented by two powerful, concurrent developments. The first is the long-awaited maturation of China’s artificial intelligence sector. After years of isolation from the global AI boom, there is now compelling evidence that the industry is entering a self-sustaining cycle. We see this in the sizable step-up in capital expenditure, with private giants like Alibaba, Tencent, and ByteDance collectively planning a 60% increase in spending, overwhelmingly directed toward AI and cloud computing. Crucially, this investment is already translating into revenue, as seen in the accelerated cloud growth of Alibaba and Baidu, indicating robust demand as downstream companies embed more AI functions into their products. Furthermore, supply-side bottlenecks are easing, with domestic chipmakers ramping up production and gaining market share from Nvidia—whose dominance in China has fallen to 50%— particularly in the critical area of AI inference. Crucially, the recent enthusiasm around China’s AI sector is grounded in reality: This is no longer just a policy directive; it is a commercially viable industry with global linkages. The narrative that China can replicate at least part of the US AI boom no longer seems so far-fetched.

The second development reinforcing this shift is the tangible progress of China’s “anti-involution” policies, which can be understood as a government-led push for “less is more.” By consciously moderating the relentless (and, as a consequence, historically less margin sensitive) drive for capacity expansion in strategic industries (e.g., steel, cement, solar, lithium and EVs), the policy is curbing destructive competition and overinvestment. The results are increasingly visible in the hard data: manufacturing fixed-asset investment growth is slowing (down 1.3% YoY in August), and as this capital expenditure rationalizes, corporate profitability is improving. In August, industrial profits rose 20.4% YoY, reversing three months of declines, with a significant majority of sectors showing capex slowdown and profit gains. The most telling signal came from PPI, which held steady month-on-month for the first time since July (after a 0.2% decline), with the YoY drop narrowing to 2.9%. Although the path to reflation remains fraught, there are initial signs that suggest deflationary pressure from overcapacity is beginning to abate, allowing healthier margins to emerge across the industrial landscape.

In short, from our current vantage point we view this most recent market rally as possessing some staying power, built as it is on the solid foundation of a dual reassessment. First, we are seeing a re-rating of equity market multiples across Chinese equities as the market starts to recognize the future value created by an economy reorienting itself towards higher-return sectors. Notably, even with recent multiple expansion, Chinese equities remain cheap compared to global peers relative to long-term earnings growth and return on capital. Second, we are in the early stages of upward revisions to corporate EPS. This optimism is not speculative but rooted in demonstrable evidence: the rapid (re)creation of high-tech value chains in areas like AI and automation is now poised to drive long-term value. We are already seeing this transition bear fruit in corporate results, as evidenced by accelerating cloud revenues and improving industrial profits— concrete signs that these shifts are beginning to flow through to the bottom line.

The divergence between lagging macroeconomic indicators and a forward-looking equity market is a defining feature of this great transition. The old China is slowing, but the new China—powered by innovation, rationalized competition, and higher productivity—is taking root; the resulting investment opportunity may be one that is properly measured over quarters and years rather than weeks and months.

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