Although the S&P 500 has declined -19.97% year-to-date, other bear markets have experienced more severe drawdowns. With remaining uncertainty around inflation, earnings, and the ongoing geopolitical stress, the need for consistent risk management and true diversification has never been more important. Many asset allocation models are struggling due to negative fixed income and equity returns and an increase in equity-market correlation across portfolios. The diversification benefits that Hedged Equity can provide continues to merit consideration.
During the second quarter, the investor narrative continued to focus on inflation, with the Federal Reserve tightening and an increased probability of a recession. The rise in inflation readings early in the quarter was negative for investors, who were hoping to see some reduction in top-line inflation readings due to Federal Reserve hawkishness. Unfortunately, the soft read on Q1 GDP data and elevated inflation readings began to convince equity investors that the traditional FED put (bailing out investors with lower rates whenever GDP dipped), was not a reality. As the quarter progressed, the hopeful narrative that assumed a gentler tightening cycle proved fruitless as the FED announced the end of quantitative easing and began the strongest cycle of rate hikes in decades. More problematic for equity markets, what began as an interest rate-based valuation compression cycle to drop P/E ratios, transitioned into wholesale concern that earnings expectations would likely need to be downgraded to accommodate the muting impacts on consumption, due to elevated inflation and the high rates needed to vanquish it.
In this volatile environment, our Hedged Equity strategy provided solid returns, declining -3.88% compared to a loss of -16.11% for the S&P 500 Index. Avoiding over 75% of the market drawdown is consistent with our previous performance during market stress events. Our strategy was designed to consistently meet objectives during market extremes and high volatility environments. The short duration of our put spreads and covered calls can provide opportunities to monetize profits and create income.
The continuing need for the Federal Reserve to fight inflation with further rate increases, along with the growing uncertainties around corporate earnings, means the current volatile investment environment will likely continue, showcasing the value of our approach. Hedged Equity’s risk characteristics, our tendency to reduce correlation to the S&P 500 in market declines, while still exhibiting solid market participation under normal market environments, has provided our investors with a smoother ride and improved risk-adjusted efficiency. These traits are shown in our Sharpe ratios to the S&P over the past three and five years.
| 6/30/2022 | QTD | YTD | 1-Year | 3-Year | 5-Year | Since Inception 08/03/2015 |
|---|---|---|---|---|---|---|
| I Shares | -4.18% | -6.37 | -1.81% | 5.11% | 5.68% | 4.61% |
| Morningstar Options Trading Category | -9.39% | -11.35 | -7.53% | 3.32% | 3.29% | 2.66% |
| S&P 500 | -16.10% | -19.96 | -10.62% | 10.60% | 11.31% | 10.95% |
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 March 19, 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 1.92%, 2.12%, 2.76% and 1.92% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.38%, 1.63%, 2.38% and 1.12% 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 March 19, 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.EasterlyFunds.com.
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 EAB Investment Group, 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.
15373228-UFD 07/26/2022