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Hedged Equity Q3 2021 Market and Fund Commentary

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The 3rd quarter of 2021 was a literal tale of two cities. The September 2nd’ quarterly peak drove S&P returns up about 5.8% rising on significant reopening optimism. However, concerns about a Chinese growth roll over and credit issues combined with the potential for a more hawkish FED nearly erased all the S&P’s gains. September’s SPX -4.65% return notably muted investor sentiment but shouldn’t have come as a complete surprise.

Interestingly, while equity returns had shown promise for July and August, the signals of concern were visible as the general level of the VIX was rising with notable spikes in both months. The increase in the VIX from 16 to about 24 at quarter end was also accompanied by a rapid steepening in the US yield curve the last 2 weeks of September. This also gave fixed income investors a scare impairing some of the expected diversification investors might have customarily looked for in an almost 5% monthly drop.

For the quarter JDIEX provided a .45% return vs .58% in the SPX. That represents a 78% capture ratio with about 1/3 the volatility. For the month of September, JDIEX defended particularly well, dropping -1.67% versus the S&P’s -4.77% (avoiding ~65% of the market loss). With the market starting the quarter in a bullish mode, the fund’s positioning was an expected 39% exposure(beta) to the market but as volatility rose and the S&P began to drop into our put spread ranges, the exposure of the fund ended the quarter at a 22% exposure(beta) to the market. The change in beta was due to the price action of the market and levels of volatility. As volatility rose in the quarter, the duration of tranche expiries shortened to keep the costs and benefits of the structure sound. As volatility recedes, we would expect to gradually move back towards our more customary 4–6-week options expiry tranches.

From a risk management point of view, we think the elevated level of the VIX, steep VIX futures curve and the concerns around growth and inflation make this upcoming Q3 earnings reporting season an increasingly risky one. We would expect inflationary pressure to squeeze margins and potentially mute the demand side as well. With 2022 VIX futures trading at the 25 level as we enter this quarter, we see continuing concerns. The 25% level implies daily moves of about 1.25% and much larger monthly moves. In that kind of environment, JDIEX’s ability to drop its correlation to equities and benefit from increases in volatility make it a very solid diversifier. We continue to see this as a very important characteristic for investors that have traditionally relied on fixed income for that role. With rates very low and credit exposures increasingly correlated to equities, we think JDIEX can be a solid diversification tool for our investors.

 

9/30/2021 YTD 1-Year 3-Year 5-Year Since Inception (8/3/2015)
I Shares 6.59% 9.05% 7.43% 7.03% 5.57%
Morningstar Options Trading Category 6.41% 12.32% 6.25% 6.00% 4.32%
S&P 500 15.92% 30.00% 15.99% 16.90% 14.53%

 

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. 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.

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 1.70%, 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.

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.

Definitions

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.

Important Risk 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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