Dynamic Alpha Macro Fund (DYMIX) – August 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 1-833-462-6433.

Dynamic Alpha Macro Fund PORTFOLIO OVERVIEW

Contributors:

• Long:    Gold, 2-Year Treasury, Japanese Yen, Strategic Equities 
• Short:  Feeder Cattle, Crude Oil

Detractors:

• Long:    Silver, Coffee 
• Short:  E-Mini S&P 500 

Current Positions:

• Long:    2-Year Treasury, Gold, Silver, Japanese Yen, Strategic Equities 
• Short: E-Mini S&P 500, Feeder Cattle, Crude Oil

Macro Observations and Market Analysis

Our global macro strategy outperformed the S&P 500 in August (4.36% vs 2.43%). As we have mentioned in previous letters, diversification means our strategy will perform differently than the benchmark. Over time, the goal of the strategy is to provide equity-like returns while providing non-correlation. This month is yet another testament to this goal.

We also benchmark our performance to the S&P Target Risk Growth Index, which is a diversified index targeting a traditional 60:40 allocation. Since inception, our fund has outperformed this index (20.58% vs 13.39%). This helps to illustrate to our philosophy on overall diversification and highlights the fund’s potential to enhance an overall investment portfolio.

Overall, futures positions were contributors to performance, led primarily by our long Gold, long 2-Year Treasury Bill and short Feeder Cattle positions. Strategic equity positions were also positive, which contributed to overall outperformance for the month. Continue reading for more insights on what has led to this out performance.

Taking the impact of interest rate cuts for granted

When you hear about rate cuts you think cheaper mortgage rates, reduced refinancing rates for businesses, and an overall decrease in financial stress. A new re-leveraging cycle usually emerges. For 40 years, rates made lower lows each cycle, alleviating borrower stress and allowing for such re-levering.

Today, it’s different for the first time in two generations. Wherever the terminal rate ends up in the coming Fed rate cut cycle – perhaps 3.5% in a soft-landing scenario or 2% in our expected mild recession scenario – rates will likely bottom well above the recent zero percent lows from the previous economic cycle.

Even more interesting: due to the stock of debt that had been financed at low levels in the 2010s and early 2020s, the average interest rate paid by both household and corporate borrowers will continue to increase despite Fed rate cuts of 200 or 300 basis points. This point is important and easy to gloss over. It’s worth spending a few minutes unpacking it slowly.

Source: BCA Research, Federal Reserve, Bureau of Economic Analysis:

The green line in the top panel on the graph above is the effective mortgage rate. It followed long-term interest rates lower over the past 40 years but has hooked higher in the last 3 years.

The bottom panel’s green line shows the percent of mortgage debt outstanding at rates above 6%. It’s rising. Assuming the 10-year Treasury declines to 3.5% in a recession, mortgage rates may briefly decline to 6% or just below. But probably not for long. This green line is likely to keep rising during and heading out of the next recession.

Ultimately, even if the Fed cuts rates aggressively over the next 12 months, the green lines are likely to continue to head higher. Why? The amount of outstanding debt from the 2010s must be refinanced at higher rates today, negating the impact of any Fed cuts.

That’s something different – it’s not what happened when the Fed cut rates from 9% to 3% in the early 1990s; it’s not what happened when the Fed lowered rates from 6% to 1% in the 2001 dot-com bust; and it’s not what happened when the Fed dropped rates from 5% to 0% post the 2008 GFC and held rates low for years thereafter.

There are two key points to take-away:

• The average mortgage (and corporate) interest rate will likely rise next year even if the rate on new mortgages and corporate loans goes down.
• This may be the first rate-cutting cycle in 40 years that does not stimulate a new leveraging cycle.

Fiscal policy is currently slowing growth as year-on-year fiscal spending is decreasing. While we anticipate a mild recession, the combination of reduced fiscal support and the uncertainty of a “higher lows” rate-cutting cycle—where debt is reset at higher rates—suggests the recession could either be deeper or longer than expected.

For the first time in decades, we will likely not get a major lift from consumer refinancing or corporate financial engineering heading into and coming out of a rate cutting cycle. What are the investing implications? Both fiscal and monetary authorities may have to do more heavy lifting than markets anticipate in order to stimulate the economy. That bodes well for precious metals and poorly for long-term bond prices. We plan on remaining long gold for years to come and plan on transforming our long 2-year Treasury note position into a short 30-year Treasury bond position sometime in the future.

Portfolio in August

Our portfolio performed well in August despite carrying a small tactical short position in U.S. equities (overall, the fund was net long equities). Not much has changed with our core set of views on the global macro side: we maintain a tactical short position in equities (S&P 500) and feeder cattle, and long positions in precious metals, 2-year Treasuries, and the Japanese yen.

We opened one new position during the month: we shorted crude oil.

As can be seen in the chart above, oil demand in China is rolling over just as U.S. production hits new highs. China doesn’t import much U.S. oil, so the two series don’t have a direct relationship, but there is an underlying link and point to be made: global demand is weak, and production is high.

Speaking of supply, there is currently 4-5m b/d (millions of barrels per day) of spare capacity, the bulk of which lies with OPEC+ in the Gulf States. For comparison, in a sustained oil bull market (like the 2000s, which culminated in $140/barrel oil in 2008), spare capacity was half as much.

We sized the crude oil short to be a small starter position with a very wide stop due to: a) our portfolio being almost fully allocated; and b) the risk of Iranian retaliation to Israel’s assassination of former Hamas leader Haniyeh. We view any Iranian action as having a low probability of destabilizing the oil market, but it’s difficult to handicap and could cause the market to gap against us. Our global macro manager’s memory here is long: as they were short crude oil heading into the Saturday, September 14, 2019 Houthi missile attack on Saudi Arabia’s oil processing facilities – they covered the oil position in the overnight hours with a slightly larger than expected loss.

In commodities, asymmetric risks can be to the downside (cattle in 2003, when mad cow disease caused the market to gap lower), or the upside (crude oil in general, due to supply shutdowns from military action). We tend to size trades down when trading in the direction of asymmetric risk.

As always, we continue to be nimble. If the data and/or our views change with any of our global macro futures positions, we can pivot and find other trades within the 40+ markets we have available. This is also why we maintain a strategic allocation to U.S. equities in our overall fund strategy, balancing a buy-and-hold approach with active global macro long/short positions. We appreciate your continued trust and partnership, and we look forward to updating you on our progress in the coming months.

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 1-833-462-6433 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.
• The S&P Target Risk Moderate Index is designed to measure the performance of moderate stock-bond allocations to fixed income while seeking to increase opportunities for higher returns through equities.
• 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.