4Q25 - MEAN REVERSION DELUSION

February 12, 2025

For the third consecutive year, all OppoQuest strategies outperformed their respective benchmarks.  Below is the summary of our full year’s performance:

OppoQuest Strategy	YE 2025 Return*	Strategy Benchmark	YE 2025 Return*	Outperformance / (Underperformance)
GROWTH	19.83%	S&P Target Risk Growth Index	16.60%	+3.23%
MODERATE	15.26%	S&P Target Risk Moderate Index	13.38%	+1.88%
CONSERVATIVE	16.54%	S&P Target Risk Conservative Index	11.73%	+4.81%

*Gross Returns

2025 turned out to be another strong year for our strategies primarily because we

had positioned for continued market uptrend even against the backdrop of prior two years providing very strong returns.  We resisted the tendency to expect mean-reversion after a stretch of strong market returns based on our conviction that business cycle had not yet seen an organic upturn after the Federal Reserve (FED) reversed some of its aggressive interest rate hikes of 2022. 

Our performance looks even more meaningful considering that 2025 also brought unique challenges in terms of disruption to global trade set in motion by the Trump administration.  A big test came post Liberation Day in April, when reciprocal tariffs were announced on almost all trading partners by the U.S.  In the face of extreme volatility, we held onto our positive view that global trade disruptions would not be negative for the U.S. economy.  We were convinced that U.S. trading partners would not risk delinking trade with the largest and most vibrant economy in the world.  Aiding that expectation immensely was also our belief that the Artificial Intelligence (AI) theme would be an economic force multiplier and had a long runway ahead.  The combination of these factors led to our equities-heavy and tech-centric positioning which resulted in strong performances across our strategies as equities rallied for the rest of the year.

Below is some more color on the drivers of our strategies’ performance in 2025:

1)    AI theme was unquestionably the most important factor contributing to our performance.  From semiconductors (Nvidia, Marvell, ARM Holdings) and software (Palantir, Snowflake) to infrastructure (GE Vernova, Oracle, Corning) – these exposures did very well and our conviction on this theme paid off handsomely. 

2)    Healthcare exposures were also strong contributors.  Particularly impressive were the returns in genomic (ARK Genomics ETF) and biotech (State Street Biotech ETF) positions.  When we initiated them in 2023, risk-reward equations were very attractive due to underperformance over the previous year due to higher interest rates.  Despite pronounced volatility, these exposures have produced strong returns when our lower interest rates expectations started playing out.       

3)    Finally, our position in Warner Bros Discovery (WBD) contributed handsomely as a bidding war erupted to takeover WBD.  Paramount Skydance and Netflix are locked in this battle.  As of today, the flight has yet to be settled.  While we liked the assets WBD held, we were unwilling to let go of this opportunity to book gains.  We may reenter the consolidator if an opportunity is presented, which typically comes after a big merger falters on execution.  WBD itself was a product of that opportunity for us when Warner Bros and Discovery merged in 2022.

With respect to strategy reallocations, there were two major actions:

1)    We increased our exposure to Decentralized Finance (DeFi) area with the addition of multiple names (Figure, Circle, Bullish) in the GROWTH strategy and some in the MODERATE strategy.  With the passage of the GENIUS Act last year, we expect stablecoins adoption to expand significantly.  We also believe tokenization of financial assets is also set to expand dramatically over the next several years.  These expectations and the material pullback in this space form the basis for our bullishness on DeFi and the names we have picked are best positioned to execute on the opportunity.

2)    We also initiated exposure to floating rate notes (FRN).  As we explain later in the outlook section, we do not think there is much room for interest rates to go down from this point.  Therefore, FRNs look very attractive and our preferred way of playing that idea is through closed end funds (CEF).

Outlook

As I write this letter, the markets have just witnessed an extreme bout of volatility.  Particularly severe were the moves in the sectors we participate in – AI and DeFi.  Software names specifically were hit the hardest in AI space on news of Anthropic releasing tools to develop some software products.  While the software sector has been weak for some time now, recent action resembles a classic capitulation as can be seen from the ishares Software ETF (IGV) chart below:

The narrative of AI impact on the software sector is very negative.  Our view is more measured as we think not all sub sectors will be impacted negatively.  In fact, we think some may even benefit.  And so, we have carefully discriminated within the universe and only hold exposures we think will thrive from AI. 

The action in Crypto Complex (CC) has been similarly very negative as can be seen from the chart of the largest Bitcoin ETF, ishares Bitcoin Trust (IBIT) below:

We attribute the sell-off in the CC largely to the failure of the U.S. Senate to pass the CALRITY ACT, which was supposed to have provided much needed regulatory framework for the Crypto industry and thereby generate huge institutional interest in this asset class.  While the legislation has stalled currently, we believe it will eventually pass as there is bipartisan support in ensuring U.S. becomes the crypto capital of the world.

Interest rates expectations, as is invariably the case, are another important factor shaping our outlook.  Interest rate futures indicate two more 25-bps rate cuts in 2026 followed by one 25-bps cut in 2027.  In that respect, the nomination of Kevin Warsh by President Trump, who has made his desire for lower rates quite clear, is clearly influencing market expectations. 

On the other hand, U.S. economic data has been quite strong (4Q25 GDP estimates, January non-farm payroll, and January ISM among others).  This strength in underlying economy is in line with the expectations we laid out in our 3Q25 letter.  Our current thinking is that at least the first half of 2026 is likely to be very strong with capital investment exploding (because of the incentives in the tax bill) and trade deficit shrinking (because of tariffs).   

However, that strength is likely going to push inflationary expectations higher especially due to increasing labor costs.  Given the complete stoppage of illegal border crossings, we expect labor tightness to be very pronounced.  We are already seeing the bond market pricing in

higher inflation expectations in the 5-year breakeven spreads as seen in the chart below. 

For reference, the breakeven spread is the market’s expectation of inflation rate for the next five years.  The spike since the beginning of this year is quite notable and we don’t think equity markets are set up to handle a reversal in rate cutting expectations.  We see the ensuing volatility, when markets realize fewer rate cuts are more likely, as a huge tactical opportunity to capitalize on.

Another risk factor that remains outstanding is the U.S. Supreme Court (SCOTUS) decision on tariffs.  While we have been very concerned that an adverse decision for the administration would slow down the reshoring investments, equity markets have remained quite unperturbed even by reports that an adverse is likely.  Indeed, prediction markets give around 25% chance of a favorable decision for the administration. Although seemingly baked in the market expectations, we think there is still a chance that markets may not receive an adverse decision well.

Our gameplan for 2026 then is to sell into strength of equity markets as economic data improves and raise the cash levels in all our strategies from the current 10-15%.  While we don’t have a hard target to achieve, we will remain on that path for as long as we get selling opportunities.  We expect to get a decent correction in equities later in the second half of 2026 which would give us the opportunity to reload into our best ideas for the next leg up.  Stay tuned for another exciting year ahead!

Sincerely,

For OppoQuest, LLC

PARESH JAIN

Founder & Portfolio Manager