Dynamic Alpha Macro Fund (DYMIX) – July 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, Coffee
• Short: Feeder Cattle, E-Mini S&P 500

Detractors:

• Long: Copper, Silver
• Short: None

Current Positions:

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

Macro Observations and Market Analysis

The fund outperformed the S&P 500 in July (1.92% vs 1.22%).  As we have mentioned in previous letters, diversification means our strategy will perform differently than the benchmark. This is often referred to as non-correlation. 

Non-correlation means there will be times we move with the market and times we move in the opposite direction.  Last month the S&P 500 went up and we underperformed.  This month, the S&P 500 also went up, but instead of underperforming again, we outperformed.  This, my friends is what non-correlation should look like! 

Over time, the goal of the strategy is to provide equity-like returns while providing non-correlation.  We also illustrate our performance to the S&P Target Risk Growth Index, which is a more diversified index targeting a traditional 60:40 allocation.  Since inception our fund has outperformed this index (17.39% vs 12.38%).  This is a testament to our strategy, and philosophy on overall diversification and balance, and can help to illustrate it’s impact on an overall portfolio.

A Day in the Life

We are occasionally asked how we spend our time in managing a global macro long/short futures portfolio. We’ll speak about our own firm, as we have limited insight into peer operations.  Outsiders often believe that funds look as they’re portrayed on shows like the Showtime series ‘Billions’ or perhaps vignettes from newspaper write-ups on the lifestyles and exploits of the wealthiest, swashbuckling managers on the planet.  It’s a reasonable mistake: I’m guessing many took their cues on medical doctors from Grey’s Anatomy, a wildly unrealistic show that had residents acting with minimal supervision while performing advanced procedures.

Most funds aren’t what you think. Our environment is closer to a library than a wild trading desk with lots of blinking lights, swearing, and shouting. This preamble ties into our section on our current portfolio below, so bear with us as we briefly highlight what we actually do, and what many (most?) other funds also probably actually do. 

At a high level, the portfolio management of the global macro futures portfolio is broken down between (1) New idea generation & (2) Position and trade management.  We spend around 1/3 of our time on new idea generation, researching and exploring new investment opportunities.  Shocking I know, but it’s true.  The 3-5 mega themes that are of our highest conviction and that we believe will drive the lion’s share of performance don’t need to be rediscovered daily.  The additional 20-30 short-term ideas that we try over a year bubble up organically and don’t need to be dwelled on for 15 hours a day.

The other 2/3 of our portfolio management time is spent on reviewing and managing our current positions.  This encompasses critical questions such as: 

• How much should we risk on this trade?
• What is the portfolio’s open heat right now (i.e., the potential loss incurred if all our positions were to go against us simultaneously).
• How are we tracking overall risk in real time and adjusting as needed? In markets, as in sports and warfare, the best laid plans often require real-time adjustments mid-flight.
• Where do we add and where do we trim?
• Where is the market relative to our profit target? Do we hold fast or adjust it with news?

Almost all the items above need to be figured out before a trade is placed and dealt with simultaneously in real time – both physically and psychologically. It’s undoubtedly more important than our new idea generation when it comes to delivering sustained long-term performance across multiple decades.

Regular followers of Dynamic Wealth Group will know our “Cookie Analogy” towards investing.  So, you’ll understand this comparison:  Getting the right ingredients is the first and a very important step, but what you do after you get those ingredients can have a much greater impact on the outcome, whether we are discussing baking cookies, or managing a global macro long/short futures portfolio. (We also discussed our “Cookie Analogy” with Kevin Simpson from Amplified Funds. View the podcast here.)

Portfolio in July, with a lens on position and trade management

We always touch on position and trade management when we cover our portfolio, but this month’s letter affords us a chance to do a deeper dive on this topic.

Copper (long)

Copper is our highest conviction long idea over the next 3-5 years. We’ve outlined the case in previous letters – growing demand for green technology inflecting higher and outpacing the loss of demand from legacy infrastructure in China, coupled with a lack of new mine supply. The known risk to the thesis was always that a global slowdown, and a continued drop in Chinese infrastructure demand, would lead to a near-term renewed decline in copper. That risk bore out in July.

We did what many managers might be loath to do with a “best idea”: we removed the copper position completely. On July 18^th we sold half the position for risk management purposes. In the days that followed, the price action did not align with a market that had a near-term supply/demand mismatch. Instead, building inventories and speculator liquidation took the price down further. We closed the remaining position on July 22^nd as the short-term price movement didn’t align with our long-term thesis.

As painful as it may be, you must (temporarily) kill off your best ideas if technical analysis doesn’t affirm them. We plan to re-enter at some point but are content to wait and watch for now.

Silver and gold (long)

Silver, along with gold, constitutes our long precious metals theme. Like copper, we expect this theme to play out over the next few years. Although we took a larger percentage loss in silver during the month than in copper, we left our position intact, as both the fundamentals and price action are telling a different story than copper’s.

Both silver and gold pulled back during the month, and in both cases the pullbacks appear healthy, and due mainly to crowded long speculative positioning being reduced by short-term traders. Silver broke out to a 10-year high in May, while gold hit an all-time high in April. With real rates in very restrictive territory at +2.75%, it seems to us that rate cuts are coming. This now aligns with the broader financial community as the debate is centered on how many cuts and how quickly. As communicated in prior letters, our view remains that these cuts will be deeper than expected as a mild recession finally unfolds, driving silver and gold into a renewed leg higher.

Nevertheless, we carry a meaningful starter position in silver and are prepared to trim the position if necessary based on price action.

Coffee (long)

Our coffee thesis boils down to the observation that Brazil’s crop, which is coming to market as we speak, will not be enough to prevent Vietnam’s heat damaged Robusta crop from continuing to have spillover effects on the Arabica price. After an initial move higher early in July, the coffee market sold off over the latter part of the month, as a large spec position drip-fed consistent selling and Brazil’s harvest pressure catalyzed the near-term move lower in price. The overall chart still looks bullish from a multi-month perspective, and despite the pullback the price is above our risk point. As with silver, we will trim/remove this trade if need be.

Feeder cattle (short)

Despite a severe shortage of animals, the feeder cattle market has gone sideways since late February in what appears to be a bearish topping pattern. The cattle market has surged over the past few years, and often when a market no longer is responding to its underlying catalyst, the trend is completed and likely to move in the other direction. In addition to the technicals, our anticipatory fundamental reason for shorting cattle is our view that a large percentage of U.S. consumers are financially exhausted and trading down to cheaper cuts of protein (e.g. chicken, pork) from expensive red meat.

Unlike the previously noted positions, where our antennae are up and ready to act in a defensive fashion, feeder cattle is a position where we are primed to act on offense, ready to add to the position in line with the add points identified by our pre-trade modeling.

S&P 500 (short)

For the third time in 12 months, we are attempting to short the mighty S&P 500. This is perfectly normal – it’s rare to get the timing right the first time when entering a core idea as it often takes a few attempts.

We anticipate that the 16-year-old equity bull market is on its last legs. Long secular bull markets in equities are followed by secular bear markets that are comprised of 2-3 cyclical bear markets. We think we are headed into the first cyclical bear of what we think will end up being a secular bear by the time it ends in the middle of the 2030s.

You could characterize this trade as a new position but it’s certainly not a new idea. It fits with this letter’s overarching theme that how you spend your mental energy on trade and position management supersedes whether you scope out interesting and differentiated new ideas all the time.

2-year Treasury Notes (long)

The forward curve is pricing in ~150 bps of cuts by the end of 2025. To make money in front-end rates, you must expect more cuts. There is an active debate about this in the financial community, with commentators who expect a continued soft landing or a reacceleration in the economy looking to fade current rates pricing (i.e. sell front-end notes) whereas we have been and continue to be in the hard landing camp. We expect a recession and a Fed that races to cut rates once they realize they’ve been held too high for too long.

Reviewing our trade and position management, the open 2-year position traded against us in February, when it was reduced two-thirds for risk management purposes. Since then, the market has consolidated and more recently has quietly traded in our favor, continually moving to lower yields. Like feeder cattle, we look to play offense and add to this position should it power through our upcoming add points in the weeks ahead.

Japanese yen (long)

Lastly, we opened a long Japanese yen trade in late July.

Yet again, this is not a new idea, but rather a position management exercise on an existing idea. We originally opened a long yen position in January 2024, only to close it for a small loss later as the yen continued its relentless decline.

As the chart above indicates, Japanese wages and inflation are finally trending firmly higher after numerous false dawns over the decades. Political leaders in Japan must be aware of the extent to which they are impoverishing ordinary Japanese voters given the yen’s decline and the expense of rent, food, and energy. Only large exporters likely approve of the BoJ’s policy.

This trade doesn’t rely on a hawkish BoJ – a rate cutting cycle by the Fed should be enough to turn the tide for the yen. But the BoJ’s hawkish rate hike in late July may act as an accelerant for the yen – the currency has a long way to go just to decrease its cheapness.

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.