While much of the optimism around Fed policy moving towards a dovish bias was removed in Q1 2024, there was further uncertainty in the interplay between the inflation data and Chair Powell’s messaging. Ultimately, economic data did not clearly signal the weakening of the economy, labor, or inflation. Still, the market decided to pivot away from a stance dependent on the easing narrative to embracing the momentum and AI tech narrative. While small and mid-cap stocks performed a bit better in Q1, the divergence between the equally weighted S&P 500 Index and the market cap weighted (mega-cap influenced) S&P 500 Index (“Index”) grew once again in Q2. So, while the second quarter provided solid returns, there remains some unease about the high valuation and earnings dependency the Index has developed on the very largest tech names rather than a contribution to earnings growth from a broader group of securities. With the Index up 4.28% for the quarter, the Easterly Hedged Equity Strategy gained 3.65% net (85% capture) within a relatively calm volatility environment (VIX opened at 13 and closed at 12.4). It achieved this performance while maintaining lower volatility and relatively consistent defensive characteristics. With significantly less volatility, the Strategy has returned 9.46% net YTD vs. 15.29% for the Index (62% capture).
Investors have been encouraged by earnings improvement and broadening small and mid-cap company earnings expectations. However, we remain concerned that avoiding an index correction relies on a few mega-cap stocks continuing to meet ever-growing earnings expectations. We saw some of this in action with Nvidia’s post-split performance and think relying on these large momentum names could be problematic if the market isn’t willing to recognize smaller and mid-cap performance more tangibly. However, without some support from Fed easing, investors will remain unwilling to commit to those sectors. The narrative from the Fed and its speakers supports the idea that easing will be gradual and limited in scope. While no one would complain about the Index’s 4.28% return in Q2, its tighter trading ranges and negative equal-weighted S&P 500 return (in contrast to the 10.5% first quarter and positive equal-weighted S&P return) highlight this rally’s unusual nature.
As we look at the risks in the market, we find the opportunities to participate in gains but still defend with our established structure, giving us confidence that our investors are being well served. This is because the low levels of volatility and the bullishness in the options market provide affordable and efficient positioning. When we look at various risk metrics such as stock-bond correlations, intra S&P 500 stock correlations, and credit spreads, we see a good measure of complacency that justifies a strong allocation to the Strategy as a core position for investors. Intra stock correlations are at decade lows, implying that macro risks are nearly non-existent. From global conflicts and Fed policy to the approaching highly contested US Presidential (as well as global) elections, we believe systematic or macro risks are actually elevated and worthy of prudence. We remind investors that fixed income is typically more volatile than expected at these elevated yields. As we said last quarter, the Fed’s policy is laser-focused on yields and whether inflation is at a sustainable target level yet. As the uncertainty remains, fixed income has not offered the traditional negative correlation to equities investors expect in times of crisis. With the market currently hoping for an outcome that would benefit both bonds and stocks, we see inherent risk to the traditional asset allocation. And, of course, if fears of an economic slowdown gain credibility, the credit cycle may worsen and increase levels of market volatility. We expect to perform well during those moments as we are always hedged and positioned for drawdown protection with attractive capture. In that kind of environment, the Strategy’s ability to drop its correlation to equities and benefit from rises in volatility could make it a good diversifier.
GIPS® Report
EAB Investment Group Hedged Equity Composite
Composite Inception Date: August 1, 2015
| Composite Performance | Annualized 3-Year Standard Deviation | Total Assets (millions) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Year End | Gross | Actual Net | Model Net | Benchmark | Composite | Benchmark | Internal Dispersion | Firm | Composite | Number of Accounts |
| 2023 | 16.02% | 14.58% | 15.38% | 26.29% | 7.99% | 17.54% | N/A2 | 136 | 136 | 1 |
| 2022 | -1.51% | -2.75% | -2.05% | -18.11% | 8.45% | 21.16% | N/A2 | 82 | 82 | 1 |
| 2021 | 13.07% | 11.27% | 12.45% | 28.71% | 5.98% | 17.41% | N/A2 | 54 | 54 | 1 |
| 2020 | 9.25% | 7.32% | 8.66% | 18.40% | 6.18% | 18.79% | N/A2 | - | 49 | 1 |
| 2019 | 14.13% | 12.11% | 13.51% | 31.49% | 3.87% | 12.10% | N/A2 | - | 50 | 1 |
| 2018 | 3.50% | 1.52% | 2.93% | -4.38% | 4.25% | 10.95% | N/A2 | - | 21 | 1 |
| 2017 | 8.81% | 6.67% | 8.21% | 21.83% | N/A1 | N/A1 | N/A2 | - | 13 | 1 |
| 2016 | 4.41% | 2.36% | 3.84% | 11.96% | N/A1 | N/A1 | N/A2 | - | 6 | 1 |
| 2015 | -0.89% | -1.71% | -1.12% | -1.90% | N/A1 | N/A1 | N/A2 | - | 6 | 1 |
* Composite and firm assets exclude discretionary leverage.
N/A1 – Information is not shown as 36 months of performance is not available.
N/A2 – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.
Firm Definition
EAB Investment Group LLC is a United States based, SEC registered Investment Advisor (since 2015). The firm was founded in 2011 as an LLC incorporated in Delaware and specializes in derivatives strategies. EAB works as a risk advisor and adds value by developing strategy, product and hedging solutions using proprietary solutions. EAB Investment Group maintains its office in Philadelphia PA.
Firm Verification Statement
EAB Investment Group, LLC (EAB) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. EAB has been independently verified for the periods August 1, 2015 through December 31, 2023. The verification report is available upon request.
A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report. Policies for valuing investments, calculating performance, and preparing GIPS reports are available upon request.
Composite Description
The previous name of the composite was the “US Large Cap Hedged Equity Composite”. This composite was created in April 2021, and the inception date is August 1st, 2015. A list of composite descriptions and a list of broad distribution pooled funds are available upon request.
The Hedged Equity composite invests in the US stock markets through being long the S&P 500 based ETFs and total return swap on S&P 500 based ETFs and hedged using S&P listed put and call option to hedge portfolio downside risk. The portfolios allows up to 30% leverage using Total Return Swap executed with large investment bank. The swaps were implemented on November 9th, 2016. Inherent in derivative instrument investments is the risk of counterparty default. Leverage may also magnify losses as well as gains to the extent that leverage is employed. Swaps are settled on a monthly basis to decrease the default risk. The minimum account asset size for inclusion in the composite is $500,000; prior to April 2021, the composite had no minimum investment requirement.
Benchmark Description
The benchmark is S&P 500 Total Return Index.
Performance Calculation
Valuations are computed and all information is reported in U.S. dollars.
Gross-of-fees total returns are presented before management and custodial fees but after all trading expenses. Gross-of-fee returns for pooled funds are calculated by dividing the applicable total annual fund expense ratio, by 12, then adding back that monthly prorated expense to each monthly net return reported by the administrator to derive a monthly return gross of investment management and fund fees that is net of transaction costs and interest and dividend expense. Gross -of-fee returns for pooled funds are presented for the I share class through December 31, 2023.
Net-of-fees total returns are presented after the deduction of actual management, trading expenses, and custody (custodian bank) fees. Net-of-fee segregated account returns are based on actual fee schedules of each account in the composite, irrespective of whether the fee is taken from the corpus of the account or paid separately by the client. Net-of-fee pooled fund returns also reflect the deduction of all fund fees (including any waivers and/or reimbursements) as reported by the administrator. Actual net returns are net of actual transaction costs, management fees, as well as other fund operating fees and expenses. Net-of-fee returns for pooled funds are presented for the I share class through December 31, 2023. Model Net returns are supplemental to actual net returns and are calculated by reducing the monthly composite gross return by a model fee of 0.046%, which equates to an annual model fee of 0.55%, the highest fee charged to any segregated account client. Returns reflect the deduction of all fees and expenses charged by underlying pooled fund investments.
Current Fee Schedule for Segregated Accounts: 1st $50mm is 55 bps, 2nd $50mm is 45 bps, and anything over $100mm is 40 bps.
Composite Dispersion
Internal dispersion is calculated using the equal-weighted standard deviation of annual gross returns of those portfolios that were included in the composite for the entire year. Internal dispersion is not presented for annual periods in which there were five or fewer portfolios in the composite.”
Standard Deviation
The three-year annualized standard deviation measures the variability of the composite gross returns and the benchmark returns over the preceding 36-month period.
Trademark
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
Important Information
© 2024. Easterly Asset Management. All rights reserved.
This information has been prepared solely for the use of the intended recipients; it may not be reproduced or disseminated, in whole or in part, without the prior written consent of Easterly Asset Management LP.
Easterly Asset Management LP (“Easterly”) is the holding company of Easterly Investment Partners LLC, an SEC registered investment adviser. Easterly serves as the growth platform for the firm’s asset management business. In 2021, Easterly formed Maritime Logistics Equity Partners (MLEP) to take advantage of opportunities and dislocations in the international shipping markets. In November 2023, Easterly announced a strategic partnership with Lateral Investment Management where Easterly will provide access to its technology, fundraising, and operations expertise, and will invest alongside the firm in certain deals. In March 2024, Easterly announced a strategic partnership with Harrison Street, a leading investment management firm exclusively focused on alternative real assets. In April 2024, Easterly announced an agreement to acquire the ROC Municipals municipal bond team from Principal Street Partners. More information about each registered investment adviser, including its investment strategies and objectives, can be found in the firms’ Form ADV which is available on the www.sec.gov website. Registration does not imply a certain level of skill or training.
No funds or investment services described herein are offered or will be sold in any jurisdiction in which such an offer or sale would be unlawful under the laws of such jurisdiction. No such fund or service is offered or will be sold in any jurisdiction in which registration, licensing, qualification, filing or notification would be required unless such registration, license, qualification, filing, or notification has been affected.
The material contains information regarding the investment approach described herein and is not a complete description of the investment objectives, risks, policies, guidelines or portfolio management and research that supports this investment approach. Any decision to engage the Firm should be based upon a review of the terms of the prospectus, offering documents or investment management agreement, as applicable, and the specific investment objectives, policies and guidelines that apply under the terms of such agreement. There is no guarantee investment objectives will be met. The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. Client portfolios are managed according to mutually agreed upon investment guidelines. No investment strategy or risk management techniques can guarantee returns or eliminate risk in any market environment. All information in this communication has been obtained from sources believed to be reliable but cannot be guaranteed. Investment products are not FDIC insured and may lose value.
Investments are subject to market risk, including the loss of principal. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate. The information contained herein does not consider any investor’s investment objectives, particular needs, or financial situation and the investment strategies described may not be suitable for all investors. Individual investment decisions should be discussed with a personal financial advisor. Any opinions, projections and estimates constitute the judgment of the portfolio managers as of the date of this material, may not align with the Firm’s opinion or trading strategies, and may differ from other research analysts’ opinions and investment outlook. The information herein is subject to change without notice and may be superseded by subsequent market events or for other reasons. EAM assumes no obligation to update the information herein. References to securities, transactions or holdings should not be considered a recommendation to purchase or sell a particular security and there is no assurance that, as of the date of publication, the securities remain in the portfolio. Additionally, it is noted that the securities or transactions referenced do not represent all of the securities purchased, sold or recommended during the period referenced and there is no guarantee as to the future profitability of the securities identified and discussed herein. As a reminder, investment return and principal value will fluctuate. The indices cited are, generally, widely accepted benchmarks for investment performance within their relevant regions, sectors or asset classes, and represent non managed investment portfolio. It is not possible to invest directly in an index.
This communication may contain forward-looking statements, which reflect the views of EAM and/or its affiliates.