The Easterly Hedged Equity Fund in Q1 generated a 4.40% return vs. 7.48% in the S&P 500, for a 59% capture. The narrative of the quarter, similar to the end of 2022, was the market’s forecasting of a less hawkish Federal Reserve in connection with some evidence that softening inflation data signaled a coming end to interest rate hikes.
While the economic data provided some evidence that a disinflation process was visible, notably pointed out by Chairman Powell at a February post FOMC press conference, the pace of improvement remained up for debate due to stickiness in some components. The push and pull of disinflation expectations versus somewhat hawkish FED speakers, created a more volatile environment than one might have expected given the S&P performance of the quarter. This was further complicated by a banking deposit crisis emanating from Silicon Valley Bank’s and Signature Bank’s poor risk management that spilled over to First Republic National Bank and other regionals. Rather than cause equity investors to question risk taking in general, the crisis’ primary impact was to lower expectations of FED hawkishness significantly. This served to support high PE valuation sectors and stocks despite concerns that credit repercussions could exacerbate recession realities.
As the quarter ended, the S&P 500 earnings expectations for the full year stand at approximately -1% growth. We find this somewhat optimistic, given the greater concerns about recession and the impacts from tightening credit standards. We would expect those figures to bottom closer to -7 to -10% earnings growth as recession reality coalesces. Similarly, volatility (VIX) ended the quarter at about 19, down from about 22 EOY 2022 and the banking system spike in the 31 range. Tranches of option positions also shortened in duration from 4–6-weeks to 2–3-weeks. The call options we sell, to help finance the defensive put spreads, will also move from the typical 2% OTM to potentially 5-10% OTM, giving the Fund greater potential for upside participation. These adjustments are not discretionary, but result from the changes in option premiums that are a by-product of heightened volatility.
In the past, strong quarters for the S&P 500 would have led to a closer to 40% participation rate for the Fund. But as we have mentioned before, elevated levels of volatility (above 16) and highly reactive environments, provide opportunities for the Fund to benefit from both downside put positioning and the higher premiums we collect from elevated volatility. This provides additional support to our historically solid risk adjusted ratios as our systematic approach delivers a consistently low level of volatility versus the market.
As we look out to the rest of 2023, we see signs the Fed will maintain its tight monetary policy which could lead the economy towards recession. We are also convinced that the energy and geopolitical uncertainties the market has ignored will create bigger headwinds to growth, but not necessarily lead to greater disinflation. That conclusion, when added to credit concerns, implies the recent drops in volatility may be temporary. The fact that the VIX futures curve stays anchored above 24 well out into 2023 indicates that investors remain concerned that certainty is quite low in their estimation. Seeing this and knowing how elevated volatility can often disrupt diversifying correlations across asset classes, we continue to suggest investors avail themselves of the stability and predictability of the Fund’s strong diversification characteristics.
Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot invest directly into an index. For performance information current to the most recent month-end, please call 888-814-8180.
| 3/31/2023 | QTD | 1-Year | 3-Year | 5-Year | Since Inception (8/3/2015) |
|---|---|---|---|---|---|
| I Shares | 4.40% | 3.91% | 9.19% | 6.53% | 5.26% |
| Morningstar Options Trading Category | 5.65% | -2.39% | 8.12% | 4.60% | 3.39% |
| S&P 500 TR | 7.50% | -7.73% | 18.62% | 11.19% | 11.20% |
Performance data quoted above is historical. Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot directly invest in an index, and unmanaged index returns do not reflect any fees, expense, or sales charges. For performance information current to the most recent month-end, please call 888-814-8180.
Source: Morningstar Direct.
Total return for all periods less than one year is an aggregate number (not annualized) and is based on the change in net asset value plus the reinvestment of all income dividends and capital gains distributions.
The Fund’s management has contractually waived a portion of its management fees until December 31, 2023 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.85%, 2.10%, 2.85% and 1.85% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.36%, 1.61%, 2.36% and 1.10% respectively. 5.75% is the maximum sales charge on purchases of A shares.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least December 31, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.25%, 1.50%, 2.25% and 0.99%, respectively, subject to possible recoupment from the Fund in future years.
Glossary
VIX: The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.EasterlyAM.com.
Risks & Disclosures
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and Orange Investment Advisors, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
The Fund will borrow money for investment purposes. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity. Derivatives may be volatile, and some derivatives have the potential for loss that is greater than the Fund’s initial investment. If the Fund sells a put option, there is risk that the Fund may be required to buy the underlying investment at a disadvantageous price. If the Fund purchases a put option or call option, there is risk that the price of the underlying investment will move in a direction that causes the option to expire worthless. The Fund’s ability to achieve its investment objective may be affected by the risk’s attendant to any investment in equity securities.
Shares of ETFs have many of the same risks as direct investments in common stocks or bonds. In addition, their market value is expected to rise and fall as the value of the underlying index or bonds rise and fall. It is possible that the hedging strategy could result in losses and/or expenses that are greater than if the Fund did not include the hedging strategy. The use of leverage by the Fund or an Underlying Fund, such as borrowing money to purchase securities or the use of derivatives, will indirectly cause the Fund to incur additional expenses and magnify the Fund’s gains or losses. Because a large percentage of the Fund’s assets may be invested in a limited number of issuers, a change in the value of one or a few issuers’ securities will affect the value of the Fund more than would occur in a diversified fund.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.