The Easterly Hedged Equity Fund (JDIEX) returned -1.19% vs -3.27% for the S&P 500 in Q3. YTD , the fund has a 7.61% return vs. 13.07% in the S&P.
While volatility levels had been dropping for most of the year on more optimistic inflation, the Fed, economic growth scenarios and recent yield curve shifts, have called into question whether that is durable. The Fund usually benefits from elevated levels of volatility, but throughout the year the option overlay has been positioned in a manner that has benefited the Fund, despite the softer levels of the VIX. With the VIX heading higher since August, the Fund has benefitted from greater potential option income that accompany higher and wider range levels of the VIX. While levels of volatility can be explained by cyclical factors such as Fed policy and economic and earnings growth, we see some secular forces that may support higher levels of volatility going forward. The Fed has been fairly consistent in reducing the size of its balance sheet (quantitative tightening) for the past year, with a slight exception during the regional bank scare. Since 2008 however, the Fed has been increasing its balance sheet with monthly purchases of US treasury bonds and mortgage-backed securities (quantitative easing). Quantitative easing served to add liquidity to the markets, which has kept the VIX better maintained as it reduced the likelihood of liquidity shocks that can impact credit and equity valuations. Now that bonds held at the Fed are being shed (quantitative tightening), after the massive almost $5 Trillion expansion from early 2020 to 2022, there is a risk that Treasury yields will have more of an upwards bias (now evident), and that liquidity pinches will be more prevalent, regardless of whether the Fed eases rates or not. That ongoing risk looks like a reasonable expectation to us, and one that could elevate the normal range of the VIX from the 10-16 range to the 20-30 range going forward. Those liquidity impacts and increased levels of the VIX could also impact corporate credit and high yield valuations, regardless of whether a significant slowdown or recession are the outcome of elevated rates or not. The asset allocation implications of the liquidity and volatility impacts of quantitative tightening should not be ignored, nor seen to only impact equity strategies. If this expectation is realized, the value of risk mitigation strategies will increase as a focus of overall portfolio construction.
From a Fund perspective, we see Q3 as an excellent example of why the Fund has provided solid absolute and risk-adjusted returns. John Maynard Keynes has been quoted as stating ” Markets can remain irrational longer than you can remain solvent”. In that vein, trying to time when fundamentals will matter, or when there is a real “new” thing such as a work-from-home and AI-based productivity miracle that bends valuations higher, can be costly. As a result, being positioned consistently and systematically to benefit from reasonable upside and well defended at levels of losses that become painful, is a prudent approach. We also find the current environment of short termism around Fed meeting dates, payroll and other economic datapoints can cause investors to lose sight of the more important factors that should drive asset allocation. The equity risk premium, economic growth and inflation trends, geopolitical developments and the direction of rates and volatility levels are factors that continue to matter, but often take quarters or years to play out. Over the Fund’s eight-year history, we have seen a full range of bull, bear and range trading environments that have challenged traditional approaches to the market. We continue to believe in the Fund’s approach that combines the use of volatility instruments (call and put options) to attain solid value and risk adjusted return regardless of the market environment.
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. For performance information current to the most recent month-end, please call 888.814.8180 or visit Funds.Easterlyam.com.
| 9/30/2023 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | SINCE INCEPTION (8/3/2015) |
|---|---|---|---|---|---|---|
| I Shares | -1.19% | 7.61% | 13.50% | 6.02% | 6.26% | 5.32% |
| Morningstar Options Trading Category | -1.57% | 9.67% | 14.98% | 4.75% | 4.27% | 3.64% |
| S&P 500 TR | -3.27% | 13.07% | 21.62% | 10.16% | 9.92% | 11.16% |
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 or visit Funds.Easterlyam.com.
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 Funds.EasterlyAM.com.
Risks & Disclosures
IMPORTANT FUND RISK
Mutual funds involve risk, including possible loss of principal. Options involve risk and are not suitable for all investors. Writing a covered call option allows the Fund to receive a premium (income) for giving the right to a third party to purchase shares that the Fund owns in a given company at a set price for a certain period of time. There is no guarantee of success for any options strategy. Increased portfolio turnover may result in higher brokerage commissions, dealer mark- ups and other transaction costs and may result in taxable capital gains. Investments in lesser-known, small and medium capitalization companies may be more vulnerable to these and other risks than larger, more established organizations.
There is no assurance that the portfolio will achieve its investment objective. A CLO is a trust typically collateralized by a pool of loans. A CBO is a trust which is often backed by a diversified pool of high risk, below investment grade fixed income securities. A CDO is a trust backed by other types of assets representing obligations of various parties. For CLOs, CBOs and other CDOs, the cash flows from the trust are split into two or more portions, called tranches. MBS and ABS have different risk characteristics than traditional debt securities. Although certain principals of the Sub-Adviser have managed U.S. registered mutual funds, the Sub-Adviser has not previously managed a U.S. registered mutual fund and has only recently registered as an investment adviser with the SEC.
Structured investments are formed by combining two or more financial instruments, including one or more derivatives. Structured investments may carry a high degree of risk and may not be suitable for many members of the public, as the risks associated with the financial instruments may be interconnected. As such, the extent of loss due to market movements can be substantial. Prior to engaging in structured investment transactions, you should understand the inherent risks involved. In particular, the various risks associated with each financial instrument should be evaluated separately as well as taking the structured investment as a whole. Each structured investment has its own risk profile and given the unlimited number of possible combinations, it is not possible to detail in this Risk Disclosure Statement all the risks which may arise in any particular case.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.
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. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities, LLC. Easterly Investment Partners, LLC and EAB Investment Group LLC, LLC are affiliates of Easterly Securities, LLC, member FINRA/SIPC. Orange Investment Advisors, LLC and Ranger Global Advisers are not affiliated with Easterly Securities, LLC. Certain associates of Easterly Securities, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
Easterly Funds LLC serves as the investment adviser to the Easterly Fund family of mutual funds and related portfolios. Easterly Funds LLC is an SEC registered investment adviser; see Easterly Funds’ Form ADV at www.sec.gov. Registration does not imply and should not be interpreted to imply any particular level of skill or expertise.
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