Commentary iMGP DBi Managed Futures Strategy ETF Second Quarter 2022 Commentary

During the quarter, the iMGP DBi Managed Futures Strategy ETF gained 13.31% at NAV versus the SG CTA Index benchmark’s 7.39% gain. For the first half of 2022, the ETF gained 25.60% a NAV versus the benchmark’s 21.14% return.

Performance data quoted represents past performance. Past performance 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 fund may be lower or higher than the performance quoted. Short term performance is not a good indication of the fund’s future performance and should not be the sole basis for investing in the fund. Performance data current to the most recent month end may be obtained by visiting 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 (Special Purpose Acquisition Companies), 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% CPI (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.

Portfolio Positioning

During the quarter, the Fund maintained short positions in the EUR and Yen – a bet on faster rate hikes in the US — while also pivoting from short to long gold.  Additionally, the portfolio maintained its profitable long position in crude oil and rotated from international developed to large cap US equities.  During the quarter, the Fund outperformed the SG CTA Index by 290 bps, more than recovering from the previous quarter’s underperformance (which, as noted previously, was driven by the lack of direct exposure to some esoteric commodity futures).  The Fund ended the year ahead of the Index by approximately 520 bps and 438 bps per annum since inception.

Portfolio Characteristics