Capital Allocation in the Age of Dislocation: Lessons from 1 Main Capital's Q2 2025 Fund Letter

In an era marked by market dislocation, where volatility has become the norm rather than the exception, the art of capital allocation has evolved into a high-stakes game of patience, precision, and asymmetric thinking. The Q2 2025 Fund Letter from 1 Main Capital (Annaly Capital Management) offers a masterclass in navigating such turbulence, blending disciplined risk management with a forward-looking lens on undervalued opportunities. For investors, the letter is a blueprint for how to thrive in chaos by identifying structural advantages in sectors poised for transformation.

The Framework: Liquidity, Leverage, and Strategic Hedging

At the core of 1 Main Capital's approach is a disciplined capital allocation framework that prioritizes liquidity, leverages asymmetric risk-reward dynamics, and maintains a defensive posture against macroeconomic headwinds. By the end of Q2 2025, the firm's total portfolio under management stood at $89.5 billion, with $79.5 billion allocated to its highly liquid Agency mortgage-backed securities (MBS) portfolio. This liquidity buffer, combined with a GAAP leverage ratio of 7.1x and an economic leverage ratio of 5.8x, underscores a balanced approach to scaling returns while managing downside risk.

The firm's hedging strategy further exemplifies this discipline. A 92% hedge ratio—positioning swaps and Treasuries at the long end of the yield curve—ensures that rising interest rates do not erode returns. This defensive stance is critical in a market where short-term volatility often overshadows long-term fundamentals.

Asymmetric Opportunities: Alibaba, Tesla, and the Rise of Chinese Tech

The letter's most compelling insights lie in its identification of asymmetric risk-reward frameworks. One standout example is Alibaba, which the firm views as a deeply undervalued asset in a stabilizing regulatory environment. At a depressed valuation, Alibaba's dominance in China's digital economy—spanning e-commerce, cloud computing, and fintech—offers a compelling upside if the company's strategic reset pays off. The downside, however, is mitigated by its robust infrastructure and free cash flow generation.

Similarly, Tesla's robotaxi launch in Austin, Texas, is framed as a generational milestone in autonomous transport. The firm highlights Tesla's vertically integrated AI and software stack, which could enable a zero-marginal-cost mobility network. This creates an asymmetric scenario where the upside—high-margin software revenue—is exponential, while the downside is capped by Tesla's existing market leadership.

The letter also underscores the underappreciated potential of China's technological ecosystem. Despite geopolitical tensions, the nation's rapid innovation in AI, robotics, and industrial automation presents opportunities for patient capital. Chinese firms, operating in a hyper-competitive, digital-first environment, are iterating at a pace that could redefine global value chains.

The Long Game: Robotics, Automation, and Structural Advantage

Beyond individual stocks, 1 Main Capital emphasizes the structural shift toward automation as a long-duration growth driver. Amazon's robotics-driven fulfillment operations and Xpeng's foray into industrial humanoids are cited as early-stage bets with asymmetric potential. These investments are not about picking winners but about positioning for themes—automation, AI, and the reconfiguration of enterprise value—that are reshaping industries.

The firm's approach mirrors the early 21st-century internet boom, where geofenced platforms created localized but scalable value. Today, the same logic applies to robotics and AI, where early adopters could capture outsized returns.

Investment Advice: Patience, Diversification, and the Power of Compounding

For investors, the lessons from 1 Main Capital's strategy are clear. First, volatility is not a barrier but an opportunity to identify undervalued assets. Second, asymmetric risk-reward frameworks require a long-term horizon. As the letter notes, “long-term, generational compounding arises from innovation, not from short-term political or macroeconomic noise.”

Third, diversification across sectors and geographies is essential. The firm's balanced portfolio—spanning Agency MBS, Residential Credit, and Mortgage Servicing Rights—demonstrates how a diversified capital structure can weather market dislocation.

Finally, the importance of mental flexibility cannot be overstated. In a world of rapid technological change, the ability to adapt theses and scale positions when the investment story improves is critical.

Conclusion: Capital Allocation as a Strategic Imperative

The Q2 2025 Fund Letter from 1 Main Capital is a testament to the power of disciplined capital allocation in volatile markets. By combining liquidity, leverage, and asymmetric thinking, the firm has positioned itself to capitalize on dislocation while managing risk. For investors, the takeaway is simple: in an age of uncertainty, the best opportunities often lie in the shadows of volatility, waiting for the patient and the bold to uncover them.