During the quarter, the iMGP DBi Hedge Strategy ETF declined 1.21% at NAV and 1.16% at price versus the Morningstar Long-Short Equity Category benchmark loss of 1.00%. Year-to-date, the ETF is up 3.71% at NAV and 3.21% at price, compared to a 3.89% gain for the benchmark.
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
As discussed extensively in prior letters, this has been a humbling period for most market strategists. The taper trade was dead wrong. The “Year of the Bond” turned into the “Year of Cash.” The overnight banking crisis … was solved by morning. We’re still waiting for the “delayed impact” of higher rates. Nothing big broke.
For hedge funds, an added complication has been how to make money off “correct” calls. Nail “sticky inflation” – as did the CTA world — and good luck holding your positions through the Silicon Valley Bank/Credit Suisse bond market unwinds. Stock pickers who rationally concluded that higher rates would translate into higher returns in value stocks flat out missed the AI wave. For relative value investors, the long-awaited valuation convergence between non-US and US stocks has yet to materialize.
For traditional investors, two big trades have worked this year: growth stocks and cash. Ironically, in January those were contradictory macro calls – i.e., higher rates should have been good for cash but bad for growth stocks. Then AI fever hit – and who cares about rates when you’re on the cusp of a new tech revolution? — and the Nasdaq popped 35% through September, pulling the S&P 500 with it. Outside the Magnificent Seven and a few others, the report card is dismal: most equity categories have underperformed cash, most bond categories are in the red, REITS are down, and the obvious inflation hedges — TIPS and gold – are not working for the second year in a row.
The great challenge is how to think about where we go from here. Our simple view is as follows: spending is addictive. Governments like to spend money because their voters (today) like it. Companies prefer to hire than fire. Splurging on another vacation is a lot more fun than adding to a rainy day fund. Throw in structural issues like deglobalization, and all this suggests that inflation will be a tough nut to crack. For two years, many allocators have hoped that the surge was ephemeral; it might be time to battle plan for a very different world order.
Positioning
Short exposures to developed market currencies weighed on the portfolio’s performance during the quarter. Net long exposure to equities also detracted from performance as global equities fell 3-5% on the back of rising rates. Developed market stocks were the hardest hit, but a short in emerging markets helped to portfolio to contain some losses.
Portfolio Characteristics
| Net Asset Class Exposure (%) | |
| US Equities | 19% |
| International Developed Equities | 8% |
| Emerging Market Equities | -4% |
| US Dollar | -19% |
| Fixed Income | 10% |
| Top 5 Holdings | |
| Nasdaq | 9% |
| EAFE | 8% |
| Dollar Index | -7% |
| Euro | 7% |
| 2 Yr Treasury | 7% |