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Hedged Equity Fund Q2 2021 Market and Fund Commentary

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The US equity markets were up meaningfully during the second quarter of 2021 accompanied by a subsequent drop in volatility as reopening expectations gathered steam. Expectations of reopening fervor began to be realized through the quarter. In addition, inflation fears, the yield curve steepening and treasury taper oriented risks that had been a part of that move began to relent counterintuitively.

As a result of strong foreign treasury buying and some technical issues in the bond market, we began to see the US yield curve flatten, contrary to the improving fundamentals of US growth and inflation. While it was difficult to pinpoint the exact cause of the treasury strength, it seems increasing concerns about the Delta variant in international markets and some anti-speculation steps taken by Chinese authorities in the commodities and financial markets generally increased interest in US Treasuries. Most strategists had been expecting the beginning of a hand off of global growth to international markets. The somewhat uncharacteristic Dollar strength at this point of the recovery also started to highlight that the flattening of the yield curve could be a sign of dropping inflation or growth expectations.

These realities helped revert some of the damage high PE and growth stocks had experienced in Q1 and slowed down the very buoyant value-cyclical trend that had driven the Q1 S&P returns.  With the strong US reopening expectations and continued accommodative financial conditions, the equity markets took the yield curve flattening and rotation towards growth in stride. In fact, the flattening yield curve, and slight drops in inflation expectations through the quarter, supported a drop in most tangible risk measures, such as the VIX and MOVE (treasury) Index, through the quarter because it confirmed the idea that the FED would be appropriately vigilant but not excessively hawkish until the data warranted it.

During the quarter, Hedged Equity provided a 2.30% return vs the S&P 500’s 8.55% return. In this volatility dropping environment, the strategy captured 27% of the index’s Q2 return, while continuing to operate with substantially less volatility than the broad market – 66% lower during 2Q21. With only one modest drawdown period of ~4% in early May (5/7 to 5/12) through the quarter, the S&P 500 realized volatility did not provide any meaningful opportunities for the strategy to monetize its’ put spreads. In addition, the steady march upward of the index, made the short calls less effective compared to a more range traded or volatile period. We think investors should remember that we have experienced periods like this in the past. Often, we find that they are followed by a mean reversion or regime change towards increased volatility that benefits our approach.

Looking ahead, we believe the strength of the US economy and the potential for a rapid increase of US labor hiring into the fall will begin to legitimize FED taper expectations. We think that reality may or may not be accompanied by a Delta variant struggling international recovery that complicates the FED calculus. We also see elevated equity valuations and longer-term earnings expectations that look ambitious given the above concerns. With the low S&P implied and realized correlation levels driving stock picking returns this year, we think the risks to investor portfolios may be very underestimated when tapering conversations start in earnest. We continue to see wisdom in the approach we take to consistently defend against downside risks and the accompanied productive Sharpe and Sortino risk adjusted measures that result from it. We hope you will not hesitate to contact us should you have any questions on our approach.

 

6/30/2021 YTD 1-Year 3-Year 5-Year Since Inception (8/3/2015)
I Shares 6.11% 13.35% 8.00% 7.09% 5.74%
Morningstar Options Trading Category 6.27% 16.26% 7.39% 5.80% 4.49%
S&P 500 15.25% 40.79% 18.67% 17.65% 15.08%

Source: Morningstar Direct. 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. 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 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.

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 1.70%, 1.95%, 2.69% and 1.69% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.70%, 1.95%, 2.69% and 1.45% respectively. 5.75% is the maximum sales charge on purchases of A shares. For performance information current to the most recent month-end, please call 888-814-8180.

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 1.79%, 1.99%, 3.00% and 1.34%, respectively, subject to possible recoupment from the Fund in future years.

About EAB Investment Group, LLC:

EAB Investment Group, LLC specializes in risk mitigation strategies and works with hedge funds, family offices, high-net-worth individuals, investment companies and other advisors. EAB Investment Group uses equity and index option strategies based on a proprietary process with the goal to reduce portfolio risk and increase the probability of success. A deep understanding of options pricing enables EAB Investment Group to manage carry and attempt to mitigate costs over time, and potentially optimize monetization.

 

Risks & Disclosures

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.

Past performance is not a guarantee or a reliable indicator of future results. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. As with any investment, there are risks. There is no assurance that the portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. Certain members of Easterly Funds, LLC are also registered representatives of FDX Capital, LLC, member FINRA/SIPC. Easterly Funds, LLC and EAB Investment Group, LLC are not affiliated with Ultimus Fund Distributors. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC, member FINRA/SIPC.

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.

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.

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