Dynamic Alpha Macro Fund (DYMIX) – October 2024 Overview

Welcome to the Monthly Summary

The Dynamic Alpha Macro Fund aims to outperform its benchmark by employing a dual-strategy approach. The fund combines a fundamental global macro strategy with a balanced portfolio of U.S. equities. This blend of non-correlated assets is designed to manage risk and generate what we refer to as “Dynamic Alpha.”

The portfolio is comprised of U.S. Equity ETFs, a global macro futures strategy, and short-term fixed income. The global macro strategy provides long/short exposure to over 40 diverse and non-correlated markets, including currencies, metals, energy, commodities, and financial indices.

We are committed to our shareholders, keeping you informed and ensuring our strategies align with the ever-evolving financial landscape. If you have any questions, feel free to contact us at info@DynamicWG.com.

peRFORMANCE METRICS

* Gross Expense Ratio: 1.99%
* Fund inception: 7/31/2023
Performance data shown represents past performance and is not a guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Updated performance information and daily net asset value per share (“NAV”) is available at no cost by calling toll-free 1-833-462-6344.

Dynamic Alpha Macro Fund PORTFOLIO OVERVIEW

Contributors:

• Long:   None
• Short: Feeder Cattle

Detractors:

• Long:   2-Year Treasuries, Japanese Yen, Silver, Strategic Equities
• Short: E-Mini S&P 500, Sugar, Crude Oil

Current Positions (as of 10/31/2024):

• Long:   Japanese Yen, 2-Year Treasuries, Strategic Equities
• Short: Feeder Cattle, Sugar

Macro Observations and Market Analysis

This Month’s Performance

We have often said, non-correlation isn’t simply outperforming when markets are down.  It means moving differently than the market at times.  As with last month when the fund was up 10% while the S&P was only up 2.14%, this month the fund was down -6.63% while the S&P was only down -0.91%.

While this outcome is disappointing, it is not unexpected. Our strategy can be volatile at times. Over the long term, it aims to be less volatile than the broad market, but in any given month, its performance may vary significantly.

We encourage you to read the rest of the commentary as our Global Macro Manager goes into the challenges the fund faced and how he managed risk throughout the month.

Classic Risk Management

October was a rough month. Many of the themes that did well in September reversed; some more than expected. Our risk management procedures kicked in during the month. The way that we managed the downside this month was prototypical for how we manage risk in general, so we’ll write this letter from the perspective of how our exposures and trades played out from a risk perspective. 

We began the month using approximately 7.2% margin-to-equity (MTE) and ended at approximately 4.1%. Margin requirements are a function of perceived risk based upon rules set by the exchanges (e.g. the CME) as well as the carrying Futures Commission Merchants (FCMs), who may add additional margin to exchange levels. You can think of this as us cutting our risk exposures in half (technically reduced by about 40%).

We look at risk from three perspectives:

1. VaR (value at risk), which uses variance analysis and historical data to highlight potential expected losses at 95% or 99% confidence levels
2. MTE (as defined above)
3. Through an internal tracking model that focuses on drawdowns per trade and for the portfolio overall 

We focus most of our attention on the third metric above, as drawdowns (percent declines from a peak level) are the most important number to keep under control. Long-term success depends upon it.

VaR can be helpful but suffers from its backward-looking nature: it’s not helpful to tell clients that the model stated that there was only a 1% chance of losing more than 7%, but somehow, we lost 55% this month in a 7-standard deviation event (side note: there are no 7-standard deviation events in financial markets; you’ve simply mis-specified the underlying distribution).  Think of how often 1,000-year floods are happening (the Great Financial Crisis was supposed to be a 5 standard deviation event).

MTE is also hindered by some of the drawbacks of VaR – exchanges often ramp up margin requirements after volatility has exploded higher in a particular market, and not before. Nevertheless, it’s still helpful to track, as common sense tells you that 5% MTE means you are carrying far less risk than 45% MTE, almost irrespective of how volatility is changing in the underlying markets.

Here is a broad chronological summary of the changes in MTE in October and the associated changes in our positions:

1. We added to our long 2-year Treasury note position at the start of the month. This is a high-conviction position premised on the notion that recent economic data is obscuring increasing hidden economic weakness, particularly around the area of initial and continuing unemployment claims. We had closed out large positions in gold and silver in late September, freeing up margin space which we used to add to our 2-year position on a slight pullback. This would prove to be a mistake in hindsight. Margin use increased from about 5.9% to 7.2% on this move.
2. Although MTE didn’t move much, our performance took a hit as oil moved higher on the market’s fears of Israeli strikes on Iranian production and export facilities, and as 2-year yields rose and the Japanese yen fell due to strong payrolls data. We covered our oil short to reduce risk – the risk/reward of the oil short became less asymmetric: our original thesis was that high spare capacity and a fading global economy would cause oil to slide toward $60; Israeli military action (before or after the election) is hard to handicap and could cause a spike in oil. We left our 2-year position alone, as it remains well above our exit point and price action continues to look like a healthy pullback in an uptrend that began back in May.
3. As performance for the month continued to slide and hovered around -7% month-to-date on the macro side, we covered our E-Mini S&P 500 short, well before it reached our loss target. We often remove positions in advance of them hitting their risk limits to keep monthly losses in check – one of our stated risk objectives is to keep single month losses below -10% (the other being to keep multi-month losses below -20%). Tactically, we remain bearish the major stock indices, based on what we believe are peak earnings that are set to decline, and we can always put this position back on in the months ahead. As always, we remain long strategic equities at the fund level.
4. Although we were down a little over -6% for the month and in a place where we normally would look to hold the portfolio steady, we made an exception for a very high conviction set-up that we did not want to miss. Long precious metals is a core theme for us on a multi-year investment horizon. Although we closed out our gold and silver positions in September on the premise that they had become overextended, gold continued to grind higher in October, and silver finally broke out on October 18th to a new 10-year high. Silver often makes its strongest moves toward the tail end of a gold move, and with no meaningful resistance until the $50 level that marked the high in silver in both 1980 and 2011, we re-initiated a starter position.
5. As performance continued to slide into month-end, we closed the silver trade for risk management purposes on the evening of October 30th, bringing MTE back down below 5%.

Overall while losses are never desirable, we managed risk well during the month. We followed our procedures and trimmed positions throughout the month, limiting losses.

Our margin use stayed below 10% for the entire month, ending closer to 5%. This is what we want to see. When we are in a drawdown, we want to see MTE in the 5-10% range. When we have positions that are built up and doing very well across months, we will often be in the 15-20%+ range.

Portfolio In October

We’ve covered some of our views above but let’s tie things together with our current positioning and our outlook. We remain tactically bearish equities (no current position), bullish precious metals (no current position), bullish on 2-year Treasury prices, bullish the Japanese yen, and bearish select agricultural commodities (feeder cattle and sugar).

Why is our core view unchanged and predicated on an economic downturn and equity bear market?

Job losses are expanding under the hood of the economy – not something that you see during the middle of an expansion.

Figure 1: Source: Pantheon Macro

The black bars in the chart above are the largest part of the unemployment data in each of the last 18+ months. An expanding economy is attracting some people back to the labor force (the purple and orange parts of each bar), but the overall profile of unemployment looks very late cycle. Recessions are non-linear processes that always start when booming conditions soften at the margin. We believe that front-end rates will be cut by much more than the markets expect. Given how much debt – both consumer mortgages and business lending – was termed out before rates rose, the Fed will not be able to stimulate the economy in a recession unless they cut rates by much more than expected. We see front-end rates heading to 2%, and hence remain long the 2-year Treasury note. We look to add back exposure in the weeks ahead.

We are bullish the Japanese yen, with a long position, trimmed for risk purposes as noted above. It’s incredibly rare for a developed market currency such as the yen to become 40% undervalued versus the dollar. Inflation finally seems to have a purchase in Japan. Forget about the yen carry trade – it may make Bloomberg headlines but is not the catalyst for a 12 month or longer appreciation in a currency. Regardless of what one thinks the BoJ will do, the real yield gap between the U.S. and Japan will shrink rapidly if the Fed cuts rates at the pace that we expect, forcing the yen higher.

We remain short feeder cattle. On the supply side, the bull case is that herd sizes are the smallest in 75 years and are less likely to recover than at any time in the past, due to drought and challenging ranching economics. Prices could certainly go higher in the years ahead. But in the next 12 months, already financially challenged consumers should continue to cut back on expensive red meat, and a demand-driven bear market in live and feeder cattle should ensue.

Finally, we are short sugar. The sugar price rallied on Brazilian weather issues in September, and we used that rally to initiate a short position. Despite Indian export restrictions and Brazilian crop fears, overall global stocks look fine – the sugar bull market peaked in November 2023 and the recent price bump higher looks like a counter-trend rally in a bear market.

While the timing of these themes may shift, we remain confident in our overall outlook and approach. We will always strive to maintain flexibility, manage risk, and capitalize on opportunities.

Conclusion

As we look ahead, we are grateful for the continued trust and confidence placed in us by our investors. The Dynamic Alpha Macro Fund is well-positioned to navigate both the short-term market shifts and the longer-term macroeconomic trends that will define the next decade. We will continue providing monthly updates on our performance, outlook and strategy to inform our investors about our approach and market developments.

Thank you for your continued support, and we look forward to sharing more insights in the coming months.

Sincerely,

Your Team at Dynamic Alpha Funds

OUR dynamic alpha macro fund LONG/SHORT INVESTMENT UNIVERSE

The list above is not all inclusive.

CONTACT INFORMATION for the Dynamic Alpha Macro Fund

If you’re an advisor or investor interested in learning more about the Dynamic Alpha Macro Fund, you can get in touch through the “Contact Us” page on their website at https://dynamicalphafunds.com/contact-us/. Alternatively, you can directly email your inquiries to info@dynamicalphafunds.com.

IMPORTANT RISK INFORMATION

Disclaimers:

• An investor should consider the investment objectives, risks, charges, and expenses of the Dynamic Alpha Macro Fund carefully before investing. The Fund and summary prospectus contain this and other information about the Fund and should be read carefully before investing. To obtain a prospectus, please call 1-833-462-6344 or access online at https://regdocs.blugiant.com/dynamic-alpha-macro/
• S&P 500 Total Return Index: The Standard and Poor’s 500 is a capitalization-weighted index of 500 stocks representing all domestic industry groups. S&P500TR assumes reinvestment of any dividends.
• S&P Target Risk Growth Index: The S&P Target Risk Growth Index is designed to measure the performance of equity allocations, while seeking to provide limited fixed income exposure to diversify risk .
• The views, opinions, or advice contained above are solely those of the author and do not necessarily reflect those of Ceros Financial Services LLC or its affiliates. The strategies and/or investments referenced may not be appropriate for all investors, as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
• All investment strategies and investments involve the risk of loss. Nothing within this communication constitutes financial, legal, tax, or other advice, nor should any investment or strategy be undertaken without fully understanding all the risks associated with such an investment or strategy. 
• Ceros Financial Services, Inc., member FINRA/SIPC, serves as a distributor of the funds and is a commonly held affiliate of Advisors Preferred. Advisors Preferred and Ceros are not affiliated with the funds’ subadvisor. Dynamic Wealth Group serves as the subadvisor to the Dynamic Alpha Macro Fund.
• The performance figures reported are historical and should not be taken as an indication of future performance. Investment in the financial markets involves risk, and there is always the potential of losing money when investing in securities.
• The views expressed about market trends, including opinions on bonds, equities, gold, and the crude oil market, are based on current market conditions and are subject to change without notice. These views should not be construed as a recommendation for any specific investment or financial strategy.
• Discussions of supply and demand, including historical context and future forecasts, involve estimates and assumptions that are subject to significant uncertainties. Actual future conditions (including oil supply, demand, and prices) may vary markedly from the analysis presented.
• The commentary regarding our trading approach and investment views, including short-term trading outcomes and long-term market predictions, represents the opinions of our investment team at the time of writing. They are not a promise or guarantee of future investment strategies or performance.
• Our economic outlook, including predictions of a hard-landing recession and its impact on investments such as Nasdaq 100, gold positions, and U.S. Treasuries, is speculative and should not be relied upon for making investment decisions. Economic conditions are complex and can be affected by various unforeseen factors.
• Investors cannot invest directly in an index.