As the summer progressed, the Federal Reserve (Fed) made significant strides toward its inflation targets, creating a favorable environment for easing. This was eagerly anticipated by both Fed Funds Futures and equity markets. Despite a typical pullback in August and early September due to concerns about a potential economic slowdown, the Fed’s 50 basis point cut, and Chair Powell’s press conference, reinforced a dovish outlook. This reassured investors, enabling the S&P 500 (SPX) to recover past early July highs, ultimately closing the quarter up 5.89%. Despite maintaining a defensive posture, the strategy posted a solid 5.30% net return for the period. Notably, the VIX experienced substantial volatility, starting the quarter at 13, peaking at nearly 38 amid recession fears in early August, and closing around 17—35% higher than where it began. This volatility provided us with valuable opportunities for monetization, allowing us to enhance our defensive options structure while positioning for upside performance.
Economic indicators remain mixed, leaving uncertainty regarding a potential slowdown. However, the market is anticipating an additional 200 basis points of easing by the end of 2025, suggesting confidence that inflation is under control despite CPI remaining above target. Chair Powell’s shift toward policy normalization rather than strict inflation targeting is notable. Still, the market’s forecast of rates dropping to sub-3% by the end of 2025 seems ambitious, especially given the current positive GDP growth and SPX earnings. With the SPX up 22.08% year-to-date and forward P/Es at 22.3 (source Bloomberg), one might question how much further stimulus is necessary. It’s worth noting that credit spreads on high-yield bonds are at yearly lows, yet the VIX remains elevated, indicating underlying uncertainty despite robust equity performance. Our strategy has delivered a 15.66% net return this year (70% participation) with less than 40% of the SPX’s volatility, allowing for effective risk management and downside protection for our investors.
While the supportive Federal Reserve has contributed to solid earnings, we remain cautious regarding election and geopolitical uncertainties that could introduce negative surprises. As highlighted last quarter, risks stemming from over-concentration persist, with smaller and mid-cap stocks still lagging. A more dovish Fed could support finance-dependent sectors, but current cyclical signals remain neutral, underscoring the need for systematic defense. We see complacency in several risk metrics, which could clarify a strong allocation to our strategy. The Fed’s focus on yields complicates the typical asset allocation balance between equities and fixed income. Currently, fixed income does not provide the expected negative correlation to equities in times of crisis, creating risks for traditional strategies. If fears of an economic slowdown materialize, credit cycles may worsen, increasing market volatility. We believe, our hedged approach positions us well for such scenarios, and the strategy’s ability to decouple from equities while benefiting from rising volatility makes it a robust diversifier in uncertain times. We remain committed to delivering solid risk-adjusted returns for our investors, adapting our strategies as market conditions evolve.
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.