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Jan 2022 Hedged Equity Commentary

January 2022 was a turbulent month, with volatility and valuation pressure appearing during the first week of the New Year and lasting most of the month, until a late-month 4% rally spared investors from a much worse fate. During the period, Hedged Equity outperformed the S&P 500, returning -1.32% gross of fees (-1.43% net of fees) versus -5.17%, avoiding over 74% of the market’s decline. The reality of a hawkish Federal Reserve interest rate and balance sheet normalization process began to impact front-end US treasury rates and equities more clearly. That actuality also impaired the bond market’s ability to provide diversification with high yield, investment grade, and long US treasuries underperforming our strategy for the month as well. With expected 2022 rate hikes moving from 3 to 5 (or more), the thought that the FED would accelerate reduction in its balance sheet fostered a view that a roll over in US growth was more distinct than previously forecast. Initially, equity declines were primarily felt in the higher PE and tech sectors of the market, but as the month progressed, equity volatility levels rose (VIX from ~17 to 32) and more generalized equity bearishness occurred. As is consistent with our approach, Hedged Equity outperformed during the period, benefitting both from our overweighted put spread positioning in the -2 to-7% target decline zone and our sensitivity to volatility as declines increase.

Our performance for the period was predictable and we believe that so long as uncertainties remain around inflation levels and how FED policy is executed, that our approach will serve as an excellent portfolio diversifier. It’s also important to note that a characteristic of the strategy, to be increasing equity exposure as market declines progress (and to be reducing exposure as the S&P rises), has historically allowed the strategy to recover well once the decline reverts. While we foresee a period of volatility ebbs and flows that can be advantageous to the strategy’s defensive characteristics, we also believe that the economic cycle will eventually stabilize into a rotation that allows equities to garner solid returns. During this market cycle, as in others, we expect to deliver meaningful total returns but most importantly, provide superior risk-adjusted returns that help balance our clients’ overall portfolio risk.

*Performance is Hedged Equity Composite gross-of-fees.


All information herein is from sources generally available to the public and believed to be reliable but have not been independently verified. No representation or warranty can be given with respect to the accuracy or completeness of the information, and is subject to updating, revision, and amendment. Easterly EAB Risk Solutions LLC (“Easterly EAB”) disclaims any and all liability relating to this information, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, this information. Subscribers to any service provided by Easterly EAB should consult their own financial advisors, legal counsel, and accountants as to financial, tax, legal, and related matters concerning their subscription to Easterly EAB’s service. No part of this presentation constitutes financial, tax, or legal advice. Easterly EAB reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security.

This communication also contains forward-looking statements, which reflect the views of Easterly EAB. These forward-looking statements can be identified by reference to words such as “believe”, “expect”, “potential”, “continue”, “may”, “will”, “should”, “seek”, “approximately”, “predict”, “intend”, “plan”, “estimate”, “anticipate” or other comparable words. These forward-looking statements or other predications or assumptions are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Should any assumptions underlying the forward-looking statements contained herein prove to be incorrect, the actual outcome or results may differ materially from outcomes or results projected in these statements. Easterly EAB and its affiliates do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law or regulation.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of share outstanding), with each stock’s weight in the Index proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of US equity performance. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. No statement contained herein should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this document is available from Easterly EAB upon request. Easterly EAB is a registered investment adviser. Registration does not imply a certain level of skills or training.

More information about the firm, including its investment strategies and objectives, can be found in Easterly EAB Risk Solutions LLC ADV Part 2, which is available, without charge, upon request. This information has been prepared solely for informational purposes for institutional investors only. This information is for the use of the intended recipients only; it may not be reproduced or disseminated, in whole or in part, without the written consent of Easterly EAB.

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