During the quarter, the iMGP DBi Hedge Strategy ETF gained 3.15% at NAV and 3.19% at price versus the Morningstar Long-Short Equity Category benchmark gain of 3.10%.
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 than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain standardized performance of the funds, and performance as of the most recently completed calendar month, please visit www.imgpfunds.com.
Quarterly Review
Since last Fall, the markets have been like a drunk stumbling across a highway. You watch an eighteen-wheeler barrel down and clench your eyes shut — only to open them seconds later and find that he’s still standing. Then it happens again. And again. And, to your utter surprise, you soon find that he’s standing on the other side.
Here we are in mid-2023 and we have been grazed, not flattened, by a long list of economic eighteen wheelers: most recently, no regional or global banking crisis, no US debt default, no profits collapse, no “recession by June.” We’re still standing.
Now place yourself back in early January. The market gods tip you off: inflation will prove sticky and the Fed will keep hiking. With a wink and a nod, they tell you that the Two-Year Treasury, then 4.4%, will hit nearly 5% by mid-year. Armed with this inside information, would you have bet that the Nasdaq, decimated by higher rates last year, would rise nearly 40% by mid-year, a record? Or that value would underperform growth by 25%, a tad more than its historic rebound last year? Or that equities would simply ignore the bond market which, with the most inverted yield curve in five decades, has breathlessly screamed recession for months?
We have two observations. Hedge funds have been cautiously positioned this year and are up single digits. While this might seem paltry relative to the 14% gain in the MSCI World Index, should they have predicted an overnight frenzy in AI that added $5 trillion to tech stocks? On the other hand, those numbers do look healthy relative to the 1% return on the Bloomberg Global Aggregate Bond Index – a disappointment given the unexpected headwind of higher rates. This clearly has been a year to manage risk and live to fight another day. Great investors sometimes put on a sensible trade and it doesn’t work out – statistical tails do happen, after all. Over time, sensible trades have the potential to generate alpha. That’s our bet, at least.
Further, we would like to remind people about the math of drawdowns. Bold cap headlines on Meta and Tesla tout year-to-date returns of 140% and 113%, respectively – not that both, after 65% drawdowns last year, are down 17% and 27% over eighteen months. The current obsession with respectable yields on corporate credit – and a decent 3% total return this year – glosses over the 18% drawdown last year. Investing is a long game and our math should reflect it.
Performance Commentary
A rally in equities during the quarter aided portfolio performance, particularly exposure to equity with growth bias and developed market equities excluding the U.S. Furthermore, short interest rate positions in 2-year Treasury futures also contributed to portfolio performance. Current positioning remains conservative: underweight equities with a bias to growth and international equities.
Portfolio Characteristics
| Net Asset Class Exposure (%) | |
| US Equities | 18% |
| International Developed Equities | 13% |
| Emerging Market Equities | 9% |
| US Dollar | 0% |
| Fixed Income | -63% |
| Top 5 Holdings | |
| 2 Year Treasury | -27% |
| SOFR | -26% |
| EAFE | 13% |
| Nasdaq | 10% |
| Emerging Markets | 9% |