Dynamic Duration Fund

This is a marketing communication for professional investors only. Capital at risk.

Past performance does not predict future returns.

​

In 2025, global fixed income and inflation markets were defined by macroeconomic instability, driven by geopolitical tensions, shifting monetary policy, and tariff uncertainty. The new US administration introduced fiscal unpredictability, coinciding with persistently elevated inflation in both the UK and US. 

​

Central banks began easing rates toward expected 3% terminal rates. The Federal Reserve (Fed) shifted its focus from price stability to employment, citing asymmetric risks and the transitory impact of tariffs, while maintaining independence from political interference. For the Bank of England (BoE), sticky prices, particularly for services, remained a key consideration. Both central banks explicitly highlighted tariff-related uncertainty when maintaining steady policy rates. 

​

The Atlantic House Dynamic Duration Fund's systematic, rules-based strategy aims to deliver capital growth by dynamically adjusting duration exposure. The strategy demonstrated resilience in 2025 through diversification across rate and inflation exposures and across UK and US markets. 

​

The fund’s core philosophy—dynamically allocating between interest rate swaps (rate exposure) and inflation swaps (pure inflation protection)—was frequently tested and proved effective. Inflation swap positions provided crucial offset when fixed income faced headwinds, affirming their negative correlation. For example, strong US rates swap performance in February was met with small, offsetting losses in inflation swap sleeves. In July, negative contributions from interest rate swaps were more than offset by gains in inflation exposures amid rising tariff-driven inflation expectations. Geographic diversification also supported returns, with strong US performance in March and August offsetting weaker UK results. Overall, the systematic process delivered a consistent and predictable path of performance. 

​

The fund’s duration positioning is systematic, derived from three signals: Inflation Trend, Real Yield, and Inflation Target. Each contributes a score (0 to 2) for a combined signal out of 6. A higher score favours bonds while a lower score favours inflation. 

​

The UK sleeve maintained a neutral signal of 3/6 throughout the year, reflecting the persistent nature of UK core inflation, moderate changes in headline inflation and high real yields. Core inflation is trending down steadily and by April 2026 should be well below the 3% threshold, thereby increasing fixed income exposure. 

​

The US sleeve experienced a key systematic adjustment and reversal, locking in a gain from the decline in nominal swap rates over the period: 

​

1. Shift to 4/6 in April: US core inflation declined to 2.8% (March data), raising the Inflation Target signal from 0 to 1, and the combined signal from 3/6 to 4/6, substantially increasing fixed income duration to 10.4 years. 

2. Reversion to 3/6 in September: Subsequently, US core inflation rose to 3.1%, reversing the Inflation Target signal back to 0, and the US combined signal reverted to 3/6. Rates duration reduced (to 8.1 years) while inflation duration increased (to 4.3 years). 

 

To improve operational efficiency, signal thresholds bands were introduced in April to reduce whipsaws and transaction costs. There were occasions in 2025 where this saved the fund from executing on marginal changes in information. 

​

Limits for the US and UK real rate signals (Signal 2) were also adjusted in March and October 2025. Aside from these and a minor averaging change to the inflation momentum input last year, the framework has remained unchanged since the fund’s launch. 

​

As 2025 concludes, both UK and US sleeves held neutral 3/6 combined signals, corresponding to 100% exposure to interest rate swaps and 50% to inflation swaps. 

​

This neutral configuration is advantageous given the persistent inflation backdrop. As of September, UK core CPI is 3.5% and US core CPI is 3.0%, while 10-year inflation swap rates remain historically low, implying little inflation risk premium built into prices. 

​

The fund’s systematic 50% allocation to inflation swaps acts as an inexpensive hedge. Should inflation reaccelerate, the fund's inflation swap positions are well-positioned to generate returns and provide diversification, perfectly positioning the fund for a potential stagflation scenario.