During the quarter, the iMGP DBi Hedge Strategy ETF fell 0.92% at NAV and 1.26% at Market Price versus the Morningstar Long-Short Equity Category benchmark loss of 3.40%. Year-to-date, the ETF declined 6.88% at NAV and 7.25% at Market versus the benchmark’s 12.73% 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.
In the third quarter, reality set in. The 2010s will likely be remembered as unique and anomalous: a period where a decade of monetary easing – and then an unprecedented fiscal splurge – drove many asset prices to unsustainable levels. Inflation appears entrenched and central banks – especially the Fed – are responding in kind. The fracturing of the geopolitical landscape adds fuel to the fire through supply disruption and deglobalization. As we have been writing about since early 2021, this is a once-in-a-decade regime shift. Dan Loeb noted that signs of the shift – sometimes subtle, sometimes obvious – are all around us; it’s time for a new playbook, he said. Stan Druckenmiller, whose call on inflation in early 2021 ranks among the best of the past decade, says this is the most difficult environment he has seen in his career.
The regime shift rippled through markets last quarter. The MSCI World Index declined -6.2% and is down -25.4% for the year; the Bloomberg Global Agg Bond index dropped in tandem and is down -19.9% year to date. The Fed is slamming on the brakes: the 2-year Treasury yield – at 0.7% in January and 2.9% in June – now stands at 4.2%. The dollar soared higher – up an astonishing 20% and 14% versus the Yen and Euro, respectively – causing cracks to spread through the markets. As noted in a prior letter, hedge funds overall de-risked early and put on inflation hedges in the first half, which helped to preserve capital during the quarter.
Performance and Portfolio Positioning
While the Fund has declined this year, we are very pleased with performance given the bullish positioning of most hedge funds (and most investors) entering 2022. Relative to the 25.4% year-to-date decline in developed markets equities, a decline of less than 6% represents material alpha generation. In our case, it derives from four sources. First, equity long/short hedge funds reduced equity risk in the first half of the year, and we followed suit. Second, they migrated exposure to value centric small/mid cap and international developed markets, which performed somewhat better in the rising rate environment. Third, we have maintained hedges against rising rates – in the US dollar and by shorting Treasuries – which have partially offset losses on equities. Finally, we have avoided single stock risk, which has been critical in a year when hedge fund longs have materially underperformed shorts.
Reflecting the “smart money” view of the current challenges outlined above, the Fund remains conservatively positioned: underweight equities, a bias to cheaper markets like small/mid cap US stock and non-US developed markets equities, underweight tech and emerging markets, and with inflation hedges in currencies and rates.
|Net Asset Class Exposure (%)
|International Developed Equities
|Emerging Market Equities
|Top 5 Holdings
|2 Yr Treasury