During the quarter, the iMGP DBi Hedge Strategy ETF gained 3.08% at NAV and 3.49% at price versus the Morningstar Long-Short Equity Category benchmark gain of 6.81%.
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.
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Quarterly Review
Well, hedge funds are no longer bearish.
In our June letter last year, we described the (rational, we argued) defensive positioning of hedge funds as follows:
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 see 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, a potential regional or global banking crisis, US debt default, profits collapse, and even “recession by June.”
Now by early 2024 the economic world looks downright sunny. The Fed says their shock hiking cycle is over. Economic growth is accelerating. Corporate profits are rising. Governments show few signs of pulling the fiscal reins. Even disturbing social, political, and geopolitical trends – while certainly not abating – have settled into a stable if somewhat depressing equilibrium.
All this has been good for stocks and, as forecasts for rate cuts dwindle, decidedly mixed for bonds. Hedge funds have been adding equity risk because — to borrow from Keynes – when the facts change, they change their minds. As a result, many hedge funds have been participating in this year’s “risk on” market more so than during the episodic relief rallies that began in late 2022.
Of course, as we have discussed, there is a tricky relationship between good news and the markets. Right now, good news is good news, but too much of a good thing, and the cursed inflation genie might try to escape the bottle. Perhaps because of this, and as discussed below, we see fundamental hedge funds as only back at “normal” risk levels, while more nimble trend followers are decidedly all in.
Positioning
The Fund returned 3.08% net in the first quarter. Gross equity exposure in the replication portfolio rose steadily throughout the quarter, with most of the increase in EAFE and the tech heavy NASDAQ. To be clear, gross equity exposure has reverted to “normal” ranges – around 55% — which is double the lows of the past few years but about half the peak in the post-Covid monetary-driven euphoria. The replication portfolio also flipped to a long position in the US dollar and has maintained a hedge in a yield curve steepener – arguably hedges against a resurgence of inflation in the US.
Portfolio Characteristics
| Net Asset Class Exposure (%) | |
| Fixed Income | 90% |
| US Equities | 34% |
| US Dollar | 21% |
| International Developed Equities | 15% |
| Emerging Market Equities | 8% |
| Top 5 Holdings | |
| 2 Yr Treasury | 50% |
| 3 Month SOFR | 50% |
| NASDAQ 100 | 16% |
| MSCI EAFE | 15% |
| S&P Midcap 400 | 11% |