During the quarter, the iMGP DBi Hedge Strategy ETF fell 4.76% at NAV and 4.80% at market price versus the Morningstar category’s 7.14% loss. For the first half of the year, the ETF declined 6.02% at NAV and 6.07% at market versus the Morningstar category’s 9.65% loss.
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
2021 was a challenging year for hedge funds — and, for that matter, most active managers. Beneath the market surface, investors faced wrenching volatility. Bubbles in disruptive tech, meme stocks, SPACs, and crypto seemed to inflate and deflate overnight, catching both long and short investors offsides. COVID subsided then surged then morphed, whipsawing value and growth investors along the way. China launched a surprise crackdown on the tech industry and some popular hedge fund stocks lost significant amounts of value in a matter of days. The Fed flipped on a dime from easy-forever to aggressive tightening and punished macro investors betting on a policy mistake and runaway inflation. This chaotic market environment meant that a few prescient macro calls – the return of inflation and rising equities (especially relative to bonds) – were difficult to fully monetize. Consequently, after a historically good 2020, when hedge funds were early on both the recovery and value rotation, 2021 can best be characterized as “two steps forward and one step back.”
We see three important lessons. First, the consensus shifts radically and often. Just a year ago, few market observers expected any inflation at all – forecasts showed a decade of perpetually low interest rates. Even by mid-August, most expected no rate hikes in 2022; today the debate is between three and four. Second, the broad macro call is only half the battle: predicting how markets respond presents its own challenges. Handed a crystal ball in December 2020 that showed 7% Consumer Price Index a year later, who would have expected gold to decline, 10-Year Treasuries to struggle to breach 2%, and commodity-heavy emerging market stocks to underperform global equities by 25%? Third, we think this is just the beginning. That is, we are in a regime shift from a decade of soaring equity and bond prices, deflation, near zero interest rates, and endless monetary easing to something more complicated. No one knows precisely what the world will look like in a few years, nor how these changes will ripple through markets, but we are confident that hedge funds will be presented with many compelling opportunities to profit. Our wagon is hitched to their train.
Positioning
The Fund entered the quarter with most equity risk allocated to small/mid cap and international developed stocks. Additionally, the portfolio shifted to a neutral and then a short position in emerging markets, which proved accretive as the China crackdown continued to cause instability. While midcap stocks performed well during the quarter, underweight tech was costly as Nasdaq returned 11%. Since inception, DBEH has outperformed the Morningstar Category by over 500 basis points per annum.
Portfolio Characteristics
| Net Asset Class Exposure (%) | |
| US Equities | 21% |
| International Developed Equities | 14% |
| US Dollar | 8% |
| Emerging Market Equities | -2% |
| Fixed Income | -70% |
| Top 5 Holdings | |
| 2 Yr Treasury | -36% |
| Eurodollar | -36% |
| EAFE | 14% |
| S&P 400 Midcap | 11% |
| Nasdaq | 6% |