The iMGP Alternative Strategies Fund’s (Institutional Share Class) performance was -0.66% in the final quarter of 2024. During the same period, the Morningstar Multistrategy Category was up 0.30%, the Bloomberg US Aggregate Bond Index (the Agg) was down 3.06%, and the ICE BofA 3-Month Treasury Bill Index returned 1.17%. For the full year, the fund was up 6.83%, compared to the category’s 5.70% return, the Agg’s 1.25% return, and a 5.25% gain for the ICE BofA 3-Month Treasury Bill Index.
Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less that their original cost. Current performance of the fund may be lower or higher than the performance quoted. The Advisor has contractually agreed to waive a portion of the management fee through April 30, 2025. Performance data current to the most recent month end may be obtained by visiting www.imgpfunds.com.
For standardized performance click here: https://imgpfunds.com/alternative-strategies-fund/
Quarterly Review
The Alternative Strategies Fund was down less than a percent during the quarter, resulting in a full year return of 6.8%. It is disappointing not to finish the year on a high note in absolute terms, but the fund did beat the Agg significantly for the quarter, and quite significantly again for the year, also outperforming the category by over a percentage point.
While we include manager commentaries below, we will not comment as much as usual in this section because, barring anything unforeseen occurring, the Alternative Strategies Fund will be merged into the iMGP High Income Fund by the end of the first quarter 2025. We think this will be a positive outcome for shareholders of both funds for several reasons, and we note that both iMGP co-portfolio managers of the Alternative Strategies Fund are also co-portfolio managers (and significant shareholders) of the High Income Fund. It has been a privilege to be entrusted with managing your capital over the years. For that, we sincerely thank you. We wish you a happy and prosperous 2025.
Quarterly Portfolio Commentary
Performance of Managers
For the quarter, four of six sub-advisors produced positive returns, although they were relatively modest. Water Island was up 0.52%, followed by FPA (+0.47%), Blackstone Credit – Systematic Group (+0.32%), and Loomis Sayles (+0.14%). On the negative side, DoubleLine was down 0.77% and DBI was down 2.28%. (All returns are net of the management fee charged to the fund.)
For the full year, all six sub-advisors were solidly positive. Returns were as follows: FPA up 12.03%, Loomis Sayles up 9.70%, DBi up 9.09%, DoubleLine up 8.01%, Blackstone up 5.16%, and Water Island up 3.05%.
Key performance drivers and positioning by strategy
Blackstone Credit Systematic Group (DCI):
The Long-Short Systematic Credit portfolio was modestly positive in the fourth quarter. Credit spreads narrowed a bit over the quarter (and remain quite narrow historically) and rates were significantly higher. The 5-year Treasury yield jumped, rising +80 bps over the quarter, as strong economic data and an improved labor market underscored the resiliency of the U.S. consumer and set the table for a “hawkish” Fed rate cut in December and a pivot to more cautious monetary policy. Credit conditions remain constructive as the realized economic resiliency has trumped concerns about risk and uncertainty to keep default risk low while demand technicals have been extremely supportive.
The portfolio is systematically constructed to be well-diversified and to be broadly neutral over time to the macro and beta exposure of the market and to rates. Strategy returns therefore are mostly due to the underlying bottom-up credit selection in the portfolio and market correlations remain low.
Over the quarter, credit selection was modestly positive and the account added to the year’s strong alpha performance. The portfolio’s excess returns were driven by the CDS sleeve, with the bond sleeve about flat and hedges performing in line. The CDS strategy delivered positive performance as gains in Airlines continued, along with Cruise, Travel, and Materials. This was against negative performance in Consumer, Energy and Telecom. The bond sleeve saw modest, but largely positive, returns across the board, led by Hospitals, Energy and Mining names and within Consumer and Technology. Equipment and Telecom were detractors. On a single name basis, contributions were generally well behaved, in keeping with the diversified nature of the portfolio. The portfolio has been thematically underweight CCC names, preferring lower-spread, higher-quality names, and even long BBB. This “tilt” delivered volatility over the quarter as CCC names jumped higher, and on net was a drag on performance.
Portfolio positioning has rotated a bit, following on from the Q3 moves, selling down in rate-sensitive Consumer Durable and reloading long into the Technology sectors (which we are no longer net overweight), as well as getting longer in Energy and selling out of REITS and Financials. The underweight position in high spread CCC names has remained but narrowed, as the model continues to see a benefit from avoiding deteriorating names, especially in Telecom. The differentiation between credit winners and losers looks set to continue into 2025 as active management should be at a premium amidst low spread levels.
DBi:
U.S. stocks saw a significant sell-off after the Federal Reserve announced a 0.25% interest rate cut, accompanied by signals of a slower pace of easing in the coming year. Although the rate cut had been widely expected, investors were disappointed by the Fed’s forward guidance, which fell short of the more dovish stance and accelerated rate reductions they had hoped for to boost economic growth. The cautious outlook on future liquidity and growth prospects weighed on market sentiment, pushing stock prices lower. Bonds also fell while the U.S. dollar rallied on the uncertainty of future rate cuts.
The first half of 2024 saw disinflation across the globe which helped to prompt global central bank easing. However, as inflation stays stubborn, normalizing is not proving to be easy. Continued AI excitement drove equities higher this year and may continue to broaden to other non-tech sectors in 2025. However, with elevated equity valuations, asset allocators should consider uncorrelated alternatives to diversify portfolios and navigate potential volatility in the year ahead.
Performance and Positioning
The Enhanced Trend portfolio was down approximately 2% in the fourth quarter, as the portfolio faced whipsaws across multiple asset classes. At the start of the quarter, the portfolio was significantly long bond duration, expecting yields to come down as the Federal Reserve (the “Fed”) continues to ease. However, inflation data proved that prices were stickier than economists expected and there was a repricing within both stocks and bonds. The portfolio de-risked but by the end of the quarter, the Fed revised their dot plots and markets took another dive. The volatility in both stocks and bonds detracted from performance. Commodities also took a periphery shock from the volatility in interest rates and detracted from performance as well. Currencies were an accretive asset class as the dollar surged. Going into 2025, the portfolio is short the Euro versus the U.S. dollar, long gold, short oil, long U.S. stocks versus emerging, and modestly short bonds.
DoubleLine:
The DoubleLine Opportunistic Income portfolio fell by about 0.8% during the quarter, significantly outperforming the Agg’s 3.7% loss. The fourth quarter of 2024 proved challenging for fixed income markets. Despite the Fed lowering interest rates by 25 bps in both November and December, concerns about the stickiness of inflation combined with a more cautious rate-cutting stance from the Fed led to rising yields and falling prices for intermediate and long-term bonds.
The portfolio’s outperformance was driven by both asset allocation and security selection, as its overweight positioning towards credit and security selections within the credit market were accretive to performance. Sector performance was mixed, with the top-performing sectors consisting of shorter duration credit and Emerging Markets fixed income. The portfolio’s exposure to floating rate assets such as CLOs outperformed over the period as these assets continue to provide high interest income and benefitted from credit spread tightening.
Agency Mortgage-Backed Securities (MBS) and were the primary detractor from performance. These longer duration assets have the most sensitivity to changes in interest rates relative to credit in the portfolio, resulting in greater price declines as the belly and the long end of yield curve ended the quarter higher. The portfolio ended the quarter with a duration of 4.3 and a yield of 8.9%.
FPA:
The Contrarian Opportunity portfolio rose modestly during the quarter. The top contributors to performance for the quarter interestingly included both internet and financial companies: Alphabet (0.5%), Wells Fargo & Company (0.4%), Sound Holdings (0.3%), Citigroup Inc. (0.3%) and Amazon.com, Inc. (0.3%). The only detractors greater than 30 bps were International Flavors & Fragrances Inc. (-0.40%) and Heineken Holding N.V.
New positions throughout the quarter included: long equity positions in MAC Copper, NOV Inc, and Grupo Mexico. There were no material position increases or decreases during the quarter. Long equity positions in Netflix, Just Eat Takeaway, and Herbalife were closed, as well as a short position in Costco. Long exposure to equities ended the quarter at 54%, comprised of 34% US exposure and 20% non-US. Long credit exposure is 11% and cash is 34%.
Loomis Sayles:
The Absolute Return strategy was very slightly positive in the quarter. The portfolio’s allocation to securitized assets led positive contributions to performance. Select exposure to ABS and CLO names was particularly additive. Positioning within convertible assets was also additive to performance, with Consumer Cyclical sector names having the greatest impact. On the negative side, exposure to investment grade bonds detracted for the period, particularly within the energy sector. Global sovereigns and FX exposure also detracted due to the strength of the dollar during the period.
The strategy continues to be anchored by securitized credit, accounting for almost one-third of the portfolio, while HY (16% net) and IG (15% net) account for the other largest exposures. Convertible bonds, equities, and emerging markets credit combine for approximately 10%. The portfolio yields 6.7% as of quarter end, with a duration of 3.4.
Water Island:
The Water Island Arbitrage and Event-Driven was up about 0.7% in the quarter. Both sub-strategies contributed positively, though merger arbitrage contributing the vast majority of returns, and special situations was very slightly positive.
Deal Highlights
On an individual deal basis, the top contributor in the portfolio for the quarter was a position in the acquisition of Endeavor Group Holdings by Silver Lake Management. Endeavor is a holding company operating multiple subsidiaries across the entertainment landscape, including film and television production, entertainment content and event management, marketing and licensing, and talent representation for athletes, models, and artists in industries such as film, television, music, theater, and publishing. The company is also the majority owner of TKO Group Holdings, which was formed through the merger of Ultimate Fighting Championship – which Endeavor owned – and World Wrestling Entertainment. In April 2024, US-based private equity firm Silver Lake Management – already a majority owner of Endeavor’s voting shares – announced it had reached an agreement to acquire the remaining shares of Endeavor it did not already own at a $13 billion valuation. A significant portion of Endeavor’s overall value is linked to its ownership position in TKO, and TKO shares have increased nearly 57% since Silver Lake’s takeover announcement. As Endeavor’s sum-of-the-parts valuation has increased, so too have questions from investors as to whether the premium Silver Lake is paying is sufficient, and speculation about a potential topping bid has led to gains for the fund. Water Island continues to monitor this situation closely, with expected completion in Q1 2025.
Conversely, the top detractor for the quarter was a position in the acquisition of Revance Therapeutics by Crown Laboratories. In August 2024, Revance – a clinical stage biotechnology company with a focus on botox products – agreed to be acquired by Crown Laboratories – a specialty pharmaceutical company manufacturing therapeutic skincare products – for $958 million in cash. The deal was structured as a tender offer, though the tender deadline was extended multiple times amidst allegations from Teoxane that Revance has materially breached an exclusive agreement it had to distribute Teoxane products. Revance denied the allegations and entered discussions with Teoxane that ultimately led to modifications in the distribution agreement. The revised economics of this agreement ultimately led Crown Laboratories to cut its per-share offer for Revance by more than 50%, which drove the company’s shares lower. While that led to mark-to-market losses during the quarter, as of this writing in early January, Teoxane has announced its own competing bid for Revance. Water Island continues to maintain a position and monitor this situation closely.
Water Island Market Commentary
For our event-driven strategy, despite generating a small gain for the fourth quarter, the period marked a difficult quarter of a difficult year – primarily stemming from pervasive regulatory challenges. Although a quiet third quarter seemed to indicate a shift to a more permissive approach at the Federal Trade Commission (FTC) and Department of Justice (DOJ), in just the last three months of the year, several headline-grabbing mergers and acquisitions (M&A) encountered significant headwinds, including Capri/Tapestry (which was officially blocked in a court case brought by the FTC), Albertsons/Kroger (which also officially lost their case against the FTC), Amedisys/UnitedHealth (which the DOJ launched a suit to block), and United States Steel/Nippon Steel (which President Biden officially blocked, after weeks of rumors and speculation, mere days after year-end). While some of these actions may just have been the last gasp efforts of a lame duck regulatory regime, they nonetheless caused heightened volatility for merger arbitrageurs and are just a small sample of the regulatory roadblocks that M&A confronted throughout the year.
Despite recent challenges, looking ahead, we are more excited about the prospects for the merger arbitrage strategy in 2025 than we have been in years. The election of Donald Trump in November signals a coming sea change in the regulatory environment in the US. While “big tech” may still face hurdles in getting M&A done, given criticism of the industry from both sides of the aisle – for distinct reasons – in Washington, DC, antitrust reviews are still anticipated to be more permissive and predictable under Trump than under the Biden administration. In December, Biden’s antitrust head at the DOJ, Jonathan Kanter, stepped down, while FTC Chair Lina Khan will almost certainly be replaced shortly after Trump’s inauguration. New commissioners could even be confirmed before the end of January given the Republicans’ complete control of Congress. A clearer antitrust path could lead to a surge in total deal flow, with the announcement of both more deals and larger deals being likely, as strategic acquirers pursue growth through M&A and private equity firms seek to put their copious amounts of cash to work. Sectors with pent up demand for consolidation, such as health care, energy, financials, and media/telecom, may be especially active. Indeed, there may be signs that dealmakers are already at work post-election, as the holiday weeks were unusually active for new M&A deals, and the quarter saw the announcement of multiple transactions that were unlikely to have been attempted should Harris have won the presidency. Overall, with deal spreads remaining at attractive levels and a deal flow recovery underway, we believe 2025 could prove especially fruitful for the merger arbitrage strategy.
Strategy Allocations
The current allocations, reflecting the DoubleLine tactical overweight are 27% to DoubleLine, 17% each to DBi and Water Island, 15% to Loomis Sayles, 13% to Blackstone Credit Systematic Group, and 11% to FPA. (The fund’s strategic targets are: 20% each to DBi and DoubleLine, 18% to Water Island, 15% each to Blackstone Credit Systematic Group and Loomis Sayles, and 12% to FPA.) We use the fund’s daily cash flows to bring the manager allocations toward their targets when differences in shorter-term relative performance cause divergences.
Sub-Advisor Portfolio Composition as of December 31, 2024
Blackstone Credit Systematic Group (DCI) Long-Short Credit Strategy
| Bond Portfolio Top Five Sector Exposures | |
| Consumer Discretionary | 17.7% |
| High Tech | 11.6% |
| Consumer Non-Discretionary | 9.2% |
| Energy | 7.4% |
| General | 7.1% |
| CDS Portfolio Statistics | ||
| Long | Short | |
| Number of Issuers | 70 | 64 |
| Average Credit Duration | 4.4 | 4.4 |
| Spread | 91 bps | 88 bps |
| DBi Enhanced Trend Strategy | |
| Asset Class Exposures (Notional) | |
| Rates | -49.3% |
| Currencies | -72.9% |
| Commodities | 1.9% |
| Equities | 26.4% |
| DoubleLine Opportunistic Income Strategy | |
| Sector Exposures | |
| Cash | 3.5% |
| Government | 2.2% |
| Agency Inverse Interest-Only | 20.0% |
| Agency CMO | 0.7% |
| Agency PO | 0.7% |
| Non-Agency Residential MBS | 24.0% |
| Commercial MBS | 19.7% |
| Collateralized Loan Obligations | 19.7% |
| ABS | 8.3% |
| Bank Loan | 0.7% |
| Emerging Markets | 0.5% |
| TOTAL | 100.0% |
| FPA Contrarian Opportunity Strategy | |
| Asset Class Exposures | |
| U.S. Stocks | 34.2% |
| Foreign Stocks | 19.9% |
| Bonds | 10.8% |
| Limited Partnerships | 1.1% |
| Other | 0.3% |
| Cash | 33.7% |
| TOTAL | 100.0% |
Loomis Sayles Absolute Return Strategy
Strategy Exposures
| Long Total | Short Total | Net Exposure | |
| Securitized | 31.8% | 0.0% | 31.8% |
| High-Yield Corporate | 18.0% | -2.2% | 15.9% |
| Investment-Grade Corp. | 15.1% | 0.0% | 15.1% |
| Bank Loans | 2.7% | 0.0% | 2.7% |
| Convertibles | 2.4% | 0.0% | 2.4% |
| Dividend Equity | 4.5% | 0.0% | 4.5% |
| Emerging Markets | 3.3% | 0.0% | 3.3% |
| Global Sovereign & FX | 8.9% | 0.0% | 8.9% |
| Subtotal | 86.8% | -2.2% | 84.6% |
| Cash & Equivalents | 13.1% | 0.0% | 13.1% |
Water Island Arbitrage and Event-Driven Strategy
Sub-Strategy Exposures
| Long | Short | Net | |
| Merger Arbitrage – Equity | 78.8% | -16.5% | 62.3% |
| Merger Arbitrage – Credit | 12.3% | 0.0% | 12.3% |
| Total Merger-Related | 91.1% | -16.5% | 74.6% |
| Special Situations – Equity | 0.4% | 0.0% | 0.4% |
| Special Situations – Credit | 7.5% | -0.1% | 7.8% |
| Total Special Situations | 7.9% | –0.1% | 7.8% |
| Total | 99.0% | -16.6% | 82.4% |