Our team wanted to reach out to give a quarterly update on our investment thesis and where our portfolio stands. The first quarter of 2021 was an outstanding quarter for our portfolio. During our last letter, we discussed our strategy of selling calls 3%-5% out of the money to finance the purchase of puts to hedge a potential correction. While we did not see a correction on the market in a technical sense (a drop of greater than 10%), we did see this correction in technology. Our options overlay, mixed with our underweight positioning in technology led to outperformance of the index throughout the quarter.
The largest development this year has been the move in interest rates. With the 10-year treasury now hovering around 1.7%, the market has needed to digest what that means for growth stocks that typically have high borrowing rates and tend to underperform with GDP potentially reaching 10%in 2021. While in a historical sense 1.7% does not represent high interest rates, this was a significant move for growth stocks that had one of their best years on record. As a result, these equities have accrued extremely high multiples. However, with interest rates creeping higher and GDP having a sharp rebound, the rotation out of growth has led to a significant rotation into energy, financials, industrials, and materials. While this theme started to become apparent in the fourth quarter last year, it cemented itself as the dominating market driver during the first quarter of 2021.
As part of this bifurcated market climate between growth and value, our team has taken this opportunity to engage in select derivates positioning to enhance yield. With the value names that make up a large chunk of our portfolio such as GS and GM, we have been able to sell calls regularly as these equities hover at or near all-time highs. The record growth seen in value has allowed for significant appreciation and an opportunity to collect call premium far out of the money.
While we collected premium selling calls on value due to their outperformance this past quarter, we have been harvesting put premium in technology. We deployed several bull-put spreads on technology throughout this past quarter to collect the elevated put pricing. The selling seen in technology this year has allowed us to collect premium far out of the money on securities such as the QQQ.
Our latest conviction call is in the transports sector. Tony’s private companies came across a significant development in freight that seemed to surface this past quarter. Sea-bound freight demand is at an all-time high due to the pandemic. The United States’ West Coast ports cannot keep up with the number of containers that need offloading from ships. Hundreds of container ships are floating offshore waiting for an opportunity to unload in California. With ports at capacity and trucking at capacity, freight prices have risen significantly. The price increase has troubled many companies and given other companies immense opportunity. We began amassing positions in JBHT, ODFL, and UNP in early March.Prices have doubled, tripled, and sometimes even quadrupled for certain types of freight. So long as these companies keep costs in check, our investment team believes there will be record earnings reported throughout this year.
Stocks that our team will avoid throughout this freight development include any company that holds a lot of inventory. We currently hold a few big box retail giants in the portfolio like Home Depot and Walmart, however, these are companies that have proprietary logistics solutions that should give them a better chance to navigate this freight marketplace. Several companies that our fund does not hold such as Nordstrom’s and Lululemon have already released negative guidance citing inventory cost control issues tied to freight. Our investment team believes this is only the beginning of the inventory problems for companies across the country. Thus, our portfolio is positioned to both take advantage of the cost increase and avoid companies that are threatened by the developing inventory problem.
Another conviction our investment team made in the fourth quarter last year was in the chip space.As you know, Tony receives significantly important information in this segment because of his ownership in VisionTek. We learned in September of 2020 that supply could not keep up with demand. This is partially due to an anticipation in PC demand throughout 2021, but also from another explosion in crypto. However, unlike the chip shortage seen in 2017 due to the first explosion in crypto, automobiles are now a very large consumer of chips, which is driving chip demand even further this time around. This led to a significant investment in GM in early Q4 and is a continued conviction call of our investment team.
This past week, Micron reported earnings which beat expectations on both the top and bottom lines. The most notable story out of Micron’s shareholder meeting was their reiteration of the strength in the chip space and their forecasts for a strong chip market throughout the calendar year.
With the S&P 500 crossing 4,000 to begin the second quarter, we do believe the upside on the overall market will be somewhat limited through year-end. However, while the overall index might have limited upside, there will be companies that continue to do well. This stock-picker’s market is an excellent opportunity for active fund management. Our investment team believes the positioning in our fund will continue to benefit as interest rates rise and the economy continues to reopen. Additionally, our team will continue to collect call premium to enhance yield in an environment with elevated stock prices.
As of the close on April 1st, our fund is up approximately 9.5% YTD net of fees, compared to an S&P 500 return of 7% and an HFRX return of approximately 2%. As a reminder, our fund introduced the Hedge Fund Research Index(HFRX)as a secondary benchmark that tracks aggregate hedge fund performance.