Commentary iM DBi Hedge Strategy ETF Third Quarter 2021 Commentary

During the quarter, iM DBi Hedge Strategy ETF declined by 1.94% versus the HFRX Equity Hedge benchmark gain of 1.28%. Year to date through September 30, the ETF gained 3.27% versus the benchmark’s 9.28% gain.

Performance data quoted represents past performance. Past performance 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 than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Short term performance is not a good indication of the fund’s future performance and should not be the sole basis for investing in the fund. Performance data current to the most recent month end may be obtained by visiting www.imgpfunds.com.

Quarterly Review

During the third quarter, markets struggled with three issues: slowing growth coupled with persistent supply chain bottlenecks raised the alarming prospect of global stagflation; despite this, the Federal Reserve appears ready to taper asset purchases by year-end; and China, opaque under the best of circumstances, expanded a mysterious economic crackdown just as the domestic real estate industry (e.g., Evergrande) buckles after years of debt-fueled expansion. The “good” inflation thesis of early 2021 has shifted to a “bad” one, with the transitory versus permanent debate still raging. With shifting expectations, global equites in general rose sharply in July and August only to reverse in September; rates fell then spiked; growth materially outperformed value then gave back most of it; and crude oil plummeted then recovered. Growing uncertainty caused a flight to safety to the US dollar and out of emerging markets and small cap stocks.

Hedge funds had a mixed quarter. While equities, as measured by the S&P 500 Index, soared 5% over July and August, returns were disappointingly flattish – blamed on the sharp reversal of the value trade and inflation theme. By contrast, when equities fell the same amount in September, hedge funds rose slightly – by some measures, one of the best months in a decade. Overall, stock pickers fared poorly as longs underperformed shorts by more than 300 basis points, and many emerging markets focused funds were caught offsides as some Chinese stocks became “uninvestable.” On the positive side, supply side inflation created short-term windfalls, such as the 30%+ spike in natural gas in the last few weeks of the quarter. Single manager dispersion is the norm, and among our target hedge funds, the spread between best and worst performers this year is well over 50%.

Performance and Positioning

During the quarter, DBEH returned -1.94% based on market price and -2.70% on NAV versus a return of 1.28% for the HFRX Equity Hedge Index (“HFRXEH”). Since inception on December 18, 2019 to September 30, 2021, the Fund has returned 14.19% on market price and 14.24% on NAV on an annualized basis, compared to 7.82% for HFRXEH.

During the quarter, underperformance relative to the HFRXEH index and target portfolio of hedge funds was larger than expected. The Fund entered the quarter with approximately two thirds of its equity exposure allocated to small/mid cap stocks and emerging markets. That exposure proved costly as those market segments declined 3% and nearly 9%, respectively – the latter due primarily to the unexpected economic crackdown in China. While overall equity risk remained relatively constant during the quarter, emerging markets exposure was significantly reduced in favor of tech, international developed and small/mid cap markets. We believe the difference in performance is attributable primarily to the fact that hedge funds rotated out of emerging markets faster than our models detected. Since inception, DBEH has outperformed the performance of the illiquid, high-cost target portfolio of hedge funds, and with the client-friendly features of an ETF, and we believe this performance should continue.

Portfolio Characteristics