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 – December 2025

Review of 2025

2025 unfolded as a year of unrelenting volatility in global markets—no shortage of hairpin turns, from tariff brinkmanship to AI breakthroughs. Amidst historical volatility we experienced our largest drawdown followed by a steadfast recovery that landed us firmly in positive territory at year-end. The last twelve months underscore the robust and repeatable process we have deployed since inception: a blend of rigorous research, sharp risk controls, and consistent focus on long-term asymmetries over short-term noise.

We entered 2025 with a bullish view on Chinese equities, a conviction built upon three interlocking pillars. First, we saw the early signs of a crucial domestic rebalancing: a decoupling of the broader economy from the beleaguered property sector. Policymakers, we argued, were prioritizing financial stability through targeted debt resolution and refusing the siren call of blanket stimulus. This painful but necessary pruning of the “old economy” was creating a leaner, more sustainable foundation for growth, even if it meant near-term GDP headwinds. Second, and more dynamically, we identified a powerful capital migration underway. Savings and investment were flowing away from low-return infrastructure and property and into high-return, private-sector innovation in artificial intelligence, electric vehicles, pharmaceutical, and advanced manufacturing. This was epitomized by breakthroughs DeepSeek’s cost-effective AI model—not just a policy wish but tangible evidence of China climbing the value chain. This shift, we believed, would drive a fundamental improvement in aggregate corporate profitability, the true engine of equity returns. Third, we posited that external pressure from the West, particularly the United States, was nearing a peak. The economic costs of severe decoupling, we reasoned, would prove untenable for both sides, leading to a managed, if volatile, rivalry rather than an irreversible break.

While these hypotheses did play out over the course of the year, the path was anything but smooth—a series of risk events triggered outsized volatility that threatened to derail economic logic. The year began with a surprisingly conciliatory tone from the newly inaugurated Trump administration. But with April came the defining crucible of the year: in a rapid and unprecedented sequence of escalations, the perceived worst-case scenario in U.S. – China trade relations became a temporary reality. Tariff threats soared to levels that implied economic decoupling between the world’s two largest economies. Markets gapped down violently, correlations broke down, and realized volatility shattered risk models. Adhering to our risk disciplines, we reduced exposures during a time of heightened uncertainty. To add insult to injury, a swift policy reversal from Washington led to a classic market whipsaw. It was a sobering demonstration of how markets driven by the whims of policymakers could render even careful analysis momentarily inert.

This period highlighted the key challenge of the year—and likely the foreseeable future: balancing short-term volatility and uncertainty from a constant and often contradictory 24/7 stream of policy missives, tweets and feints against long-term fundamentals and economic shifts. Looking back, our discipline and process held firm in a time of uncertainty as we applied our analytical framework to dissect the chaos, separating the Foundation Layer of China’s enduring economic transition from the Policy Layer of reversible political posturing and the Economic Layer of second-order effects. This structured thinking provided clarity amidst the noise, leading us towards the view that the April crisis was a policy shock rather than a fundamental negation of China’s innovation trajectory or rebalancing. In short, we retained conviction that our core thesis remained intact.

This discipline laid the groundwork for recovery. As the immediate decoupling fears subsided post-April, and our foundational thesis began to reassert itself in the data; resilient exports, tangible progress in “anti-involution” policies curbing overcapacity, and concrete AI capex and monetization milestones. We scaled our positions to match our investment conviction and focused on liquid, precise exposures: long Chinese equity indices with a deliberate barbell of long “new economy” sectors (small cap, AI, tech, pharma) against short “old economy” proxies, while maintaining macro-hedges, such as short U.S. duration to express our parallel view of a structurally higher global cost of capital. The market’s journey from May onward validated this approach as we were beneficiaries of the subsequent rally, a move very much driven by market recognition of capital reallocation and systemic deleveraging.

The result was a performance recovery both deliberate and decisive. By adhering to a rigorous investment process—one that combines deep fundamental research with stringent risk management—we were able to navigate our way back and then some from a historic drawdown. The volatility of 2025 demonstrated that in a world of unpredictable headlines and policy shocks, the sharpest edge lies not in predicting the next twist, but in maintaining the discipline to separate transient noise from fundamental structural change and having the tenacity to act accordingly.

Current Outlook

Several key themes from 2025 are poised to extend into the new year. Geopolitically, the persistent shift from multilateralism toward unilateralism—where national self-interest dictate actions and world orders—continues to elevate the risks of conflict. This environment is driving heightened global spending on defense, critical supply chains, manufacturing capacity, and strategic technologies. These fiscal pressures, evident across many nations, are exacerbating budget deficits and raising the cost of capital. Consequently, we observe strengthening demand for gold, alongside weakening foreign appetite for U.S. debt and dollar-denominated assets. The path of least resistance therefore points to higher long-term yields, firmer gold prices, and a softer U.S. dollar, though the pace of these moves remains uncertain. A critical variable is secondary risk sentiment: while equities will likely tolerate a gradual rise in yields, the margin for error is thin. A bearish scenario in which bond vigilantes question debt sustainability could precipitate sharper dislocation.

Meanwhile, China’s economic rebalancing is expected to continue, marked by ongoing deleveraging and advancing innovation. While equity markets in 2025 recognized and rewarded this transition, the robust returns were driven almost entirely by multiple expansion—underneath the 22% return of HSCEI in 2025, the P/E ratio expanded by 23%, whereas earnings per share actually declined by 64bps. Beneath this stagnant earnings growth, revenue increased 5% but profit margins contracted by 6%, pressured by intense competition and aggressive capital expenditure. While effective and return-oriented capital allocation should ultimately result in increasing margin, presently the room for error is thin against a backdrop of persistent demand-side weakness. Further progress in innovation and corporate profitability must continue to outweigh the hangover from a property sector that is still working on completing its deleveraging cycle.

In this vein, both US and China confront significant questions in 2026. Which segment of the bifurcated K-shaped economic distribution will dominate consumption and, in turn, overall growth? How will evolving capital expenditure trends affect corporate margins and equity prices as investors scrutinize monetisation progress? How will FX markets digest the growing divergence in global macroeconomic trajectories? Regardless of the answers, volatility is likely to remain abundant, setting the stage for another year of consequential macroeconomic opportunities.

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