Key Insights and Takeaways from the AIP Quarterly Report Q1 2025

CIO DESK

From inside to outside money

The world changed on February 24, 2022.

Not merely because a major war returned to European soil for the first time in generations, but because a foundational pillar of the international monetary system, trust in reserves as apolitical assets, was shattered.

When the G7 froze Russia’s foreign exchange reserves, it marked a quiet coup in the architecture of global finance. What had been treated as sacrosanct, central bank reserves, the deepest layer of trust between sovereigns, was shown to be contingent, conditional, and political.

In a moment, inside money, claims on Western banks, central banks, and sovereigns, became a weapon. And with that, the world began pivoting from Bretton Woods II to Bretton Woods III.

This was not a market event. It was a monetary Rubicon. Central banks around the world took note. In an uncoordinated but unmistakable fashion, they began reallocating away from G7 paper and into outside money, gold, and to a lesser extent, commodities that can’t be sanctioned, seized, or frozen.

The result? A visible erosion in U.S. Treasuries as a percentage of global FX reserves. Not because of yield differentials. Not because of inflation expectations. But because of sanction risk, the monetary equivalent of counterparty risk in a world where the counterparty is a sovereign with a military.

On March 7, 2022, Zoltan Pozsar, then at Credit Suisse, formerly at the U.S. Treasury and the New York Fed, published a note titled “Bretton Woods III.” It was not just a piece of analysis. It was a blueprint for the world that is now unfolding before our eyes.

He wrote:

“We are witnessing a regime change in funding markets... and a sea change in FX reserve management. If you believe the West can craft sanctions that maximize pain for Russia while minimizing financial and price stability risks at home, you might also believe in unicorns.”

Three years on, the unicorns are dead.

President Trump’s reciprocal tariff regime announced on April 2, 2025, targeting both allies and adversaries, has added further entropy to an already fraying system. Diplomatic alliances have weakened, and what remains is a volatile equilibrium where every country is re-evaluating the sanctity of their reserves and the neutrality of the U.S. dollar.

Escalation risks loom, but the true threat lies in the unknown unknowns, the parts of the dollar system that are brittle but not yet visible.

“After this war is over, money will never be the same again...”

That was Pozsar’s warning in 2022. And the world appears to be proving him right, faster than even he might have expected.

The U.S. dollar remains dominant, but not unchallenged. What was once a privilege is now seen by many as a liability. The move from inside money to outside money is not just symbolic, it’s practical, defensive, and necessary in a world where trust is no longer presumed.

Since the invasion, central banks have been net buyers of gold at the fastest pace in decades. This is not a bet on inflation, it’s a hedge against confiscation. Against volatility. Against the end of innocence in the global monetary order.

In this new regime, where money, collateral, and trust are being redefined, we’ve positioned our portfolios accordingly.

Gold has been a core allocation, not just as an inflation hedge, but as a strategic asset in a world transitioning from inside to outside money. As central banks accumulate gold at historic levels, the metal is not simply a commodity, it's becoming a reserve asset once again. Not because of price action, but because of monetary insulation.  When trust in fiat wanes, gold does not rally, it reprices.

In parallel, we’ve been long defense stocks, not as a short-term trade, but as a response to the reordering of global priorities. In a multipolar world where geopolitics trumps globalization, national security has become the foundation of fiscal policy. Defense spending is no longer cyclical, it’s structural. It’s not just about budgets; it’s about sovereign optionality in a fragmented world.

The rules of engagement, economic, political, and military, are being redrawn. What was once seen as a peace dividend has now inverted into a security premium.

GLOBAL MARKET OVERVIEW

The first quarter of 2025 unfolded against a backdrop of geopolitical uncertainty, sectoral disruption, and divergent monetary policy signals, contributing to notable volatility across global financial markets. Despite these headwinds, South African assets displayed resilience, particularly within the resource sector, which benefited from strong commodity tailwinds.

The year opened with renewed investor caution as the U.S. administration imposed fresh tariffs on imports from Canada, Mexico, and China, reigniting fears of a broader trade conflict. This shift toward protectionism led to a marked increase in risk aversion, driving demand for safe-haven assets. Gold surged above the $3,000/oz threshold by quarter-end, gaining significant momentum in March amid rising geopolitical tensions and a weakening U.S. equity market.

U.S. technology stocks were particularly hard-hit in January following competitive disruptions from Chinese AI firm DeepSeek. Its cost-effective AI model raised structural concerns about capex-heavy U.S. tech giants, triggering a sharp correction in the sector. Nvidia, emblematic of this shift, saw a historic drop in market capitalization, reflecting investor anxiety over long-term profitability in an increasingly competitive AI landscape.

On the policy front, the U.S. Federal Reserve held interest rates steady at 4.25%–4.50% throughout the quarter. With January inflation data showing a year-on-year CPI of 3% and core PCE at 2.6%, the Fed signaled a continued pause in easing, awaiting more definitive signs of disinflation. Other major central banks followed suit, with the ECB and Bank of Canada enacting modest rate cuts in March, while the Bank of Japan held rates at 0.5%—its highest level since 2008—reflecting a notable policy shift.

Chinese markets were a relative bright spot. Buoyed by Q4 2024 GDP growth of 5.4% year-on-year, equity markets rebounded sharply in February. The Hang Seng rose 13.4% for the month, supported by investor optimism and a stable policy stance from the People’s Bank of China, which left key lending rates unchanged for the third consecutive month.

South African Market Landscape

Locally, the South African Reserve Bank (SARB) initiated the year with a 25 basis point rate cut, lowering the repo rate to 7.50%. While the move was in line with expectations, a divided Monetary Policy Committee underscored underlying concerns about global risk escalation and domestic inflation pressures.

The national budget process proved eventful, with a delay in February due to VAT policy debates. The revised budget was eventually delivered in March, helping to stabilize fiscal expectations. Meanwhile, load shedding resurfaced intermittently in January and February, further dampening sentiment, although the impact was somewhat mitigated by NERSA’s more measured electricity tariff adjustments.

Inflation rose modestly to 3.2% in January, remaining below the SARB’s midpoint target of 4.5%. The rand experienced intra-quarter volatility but ended Q1 firmer, appreciating just over 1% against the U.S. dollar to close around R18.30/USD.

Despite these challenges, domestic equity markets staged a strong recovery in March. The JSE All Share and Capped SWIX indices each gained 3.6% for the month, led by outsized gains in the resource sector. The sharp rally in gold prices—surging over 33% month-on-month to exceed $3,000/oz—boosted gold miners, while platinum group metals also delivered strong performances, with rhodium prices up 21% month-on-month.

South African bonds posted modest gains, with the All-Bond Index (ALBI) up 0.1% in March and 1.1% year-to-date. Inflation-linked bonds (ILBs) were more mixed, reflecting inflation dynamics and changes in investor risk appetite over the period.

The first quarter of 2025 marked an important milestone for the AIP RCIS Multi-Strategy Retail Hedge Fund, as it reached its three-year anniversary since inception on 1 February 2022. We are proud of the progress made and remain deeply appreciative of the clients who have supported us throughout this journey. While the fund experienced a challenging initial period, particularly during 2022, we used that time to enhance our investment process, improve operational alignment, and secure partnerships with service providers who share our long-term vision.

These efforts have translated into stronger and more consistent outcomes. As of 31 March 2025, the fund has delivered a year-to-date return of 4.13%, outperforming both the Cash (1.82%) and CPI+5% benchmark (2.53%). Over one year, the fund returned 15.27%, well ahead of its reference benchmarks. While the fund’s since inception return of 7.17% remains below its inflation-plus-5% target of 10.49%, we are steadily narrowing this gap. Importantly, the fund has now outperformed CPI+5% over the 1- and 2-year periods, and delivered returns meaningfully ahead of cash (STeFI) across all measured time horizons.

Looking ahead, we are pleased to share that the AIP Concentrated Growth Qualified Investor Hedge Fund will reach its two-year milestone in Q2 2025. We continue to focus on delivering risk-adjusted returns, underpinned by a robust investment framework, thoughtful risk management, and long-term alignment with our clients’ objectives

Source: Morningstar; Date of performance data: 31/03/25

  Source: Morningstar; Date of performance data: 31/03/25

Our fund suite delivered a strong start to 2025, with the majority of strategies outperforming their internal objectives and relevant comparators. The AIP RCIS Multi-Strategy Retail Hedge Fund gained 4.13% year-to-date, extending its lead over cash and continuing to close the gap to its inflation-plus-5% objective. The AIP Equity Long Short QIHF delivered a standout 4.46% return for the quarter and over 25% for the year, significantly ahead of its benchmark, while the newly launched retail version brings this high-performing strategy to a broader investor base. The AIP Concentrated Growth QIHF continued to perform well, returning 12.13% over one year and exceeding its CPI+6% objective since inception. The AIP Concentrated Arbitrage QIHF maintained its consistent return profile, with 2.16% YTD and strong multi-year numbers.

Performance Drivers and Detractors

Performance across our various strategies in Q1 2025 reflected both strategic resilience and selective headwinds. January was a strong month, with standout gains from our Global Distressed Strategy(+3.78%) driven by recoveries in Ukraine, Argentina, and the restructuring of Azul. Our Commodity Strategy also performed well early in the quarter, supported by strength in tankers, oil and gas, and base metals. Local equity exposure—particularly to gold counters such as African Rainbow Minerals, Harmony Gold, and New Gold—was a key contributor amid the rally in precious metals. Offshore, exposure to Chinese tech stocks and the Golden Dragon Index added meaningfully as sentiment improved following the launch of DeepSeek AI.

February and March saw more challenging conditions, particularly for our Equity Long/Short Strategy, which declined in February due to relative value underperformance such as the long Naspers/short Tencent position, and a short in OUTsurance, which rallied on strong earnings. Individual names like ARM and NextSource Materials also detracted, while corporate arbitrage trades weighed on returns. The Commodity Strategy faced a pullback in March, with weakness in energy transition and LNG equities offsetting gains from tactical trading in metals. The Global Strategy declined modestly, primarily due to commodity-linked equity volatility.

Despite these short-term pressures, we remain constructive on our medium-term positioning. Structural themes—such as global defence spending, energy logistics, and select distressed credit opportunities—continue to offer attractive upside potential. Portfolios are well-diversified, and enhancements made in prior periods have helped insulate overall performance, with many strategies outperforming their internal objectives and benchmarks year-to-date.

Q1 2025 offered a stark reminder of how quickly sentiment can shift in an interconnected world. The re-emergence of trade tensions, persistent inflationary pressures, and sector-specific disruptions underscored the importance of diversification and active portfolio management. While global volatility remains a risk, we continue to find value in select areas in line with our esoteric and niche market approach.

LOOKING AHEAD

During April we experienced the full force of “THE DON” with his tariff announcements on “Liberation Day” – 2 April 2025. Uncertainty regarding tariffs will dominate the economic and financial markets environments. If the full suite of tariffs are implemented it can lead to substantial higher inflation in the USA. This scenario will require some serious defensive investment positions away from the USA markets. We remain focused on risk-aware positioning, opportunistic asset allocation, and disciplined execution in line with our investment framework. One thing is for certain, volatility is here to stay, and our investment portfolios are positioned to attract maximum value from these volatile opportunities. We thank you for your continued trust and remain committed to navigating this evolving landscape on your behalf.

DISCLAIMER

AIP Capital Investments (Pty) Ltd is an authorised Category 2 financial services provider in terms of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (“FAIS Act”) with FSP number 48828.

The information contained herein, should not be construed as advice as defined in the FAIS Act, neither does it constitute a solicitation, invitation or investment recommendation. Investors should take cognisance of the fact that there are risks involved when buying, selling or investing in any financial product.

The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. Past returns may not be indicative of future returns and an investor should seek independent professional financial, legal and tax advice relevant to their individual circumstances before making any investment decision.

The validity and accuracy of any illustrations, forecasts or hypothetical data are not guaranteed and are only provided for illustrative purposes.