Dynamic Alpha Macro Fund (DYMIX) – June 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: 2-year Treasury Note, and Strategic Equity Holdings
• Short: None

Detractors:

• Long: Copper, Gold, Silver, and Coffee
• Short: Feeder Cattle, and E-Mini S&P 500

Current Positions:

• Long: Copper, Gold, Silver, Coffee, 2-year Treasury Note, and Strategic Equity Holdings
• Short: Feeder Cattle

Macro Observations and Market Analysis

Our global macro strategy underperformed the S&P 500 in June (0.00% vs 3.59%) but managed to outperform it on the quarter (4.94% vs 4.28%).  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.  The last quarter is a testament to that; our strategy zigged while the market zagged.

Overall, futures positions were detractors from performance, led on the downside by Copper and Silver.  Bucking that trend, we did see gains from our position in the 2-Year Treasury.  Strategic equity positions were all positive for the month, which offset losses from the futures side.

Where’s the bubble?

At the tail-end of a long bull market in equities, excesses build up. In the 1980s it was leveraged buyouts and savings & loans that fizzled out in the recession of 1990. In the 1990s, tech stocks and dot-com stocks collapsed leading to the 2000-2002 bear market. The ensuing bull market of the 2000s led to excesses in commodities and housing-related derivatives, culminating in the 2008 financial crisis. Where are the excesses today?

They likely aren’t where you would look first. AI, Nvidia, and mega-cap tech seem like obvious candidates. Because they are front-and-center of the media cycle, they seem like the clear candidates for where a bubble might be today. Parallels (warranted in our opinion) are being drawn between Nvidia today and Cisco in the year 2000. Nvidia trades at 40x trailing revenues; that’s exactly the multiple Cisco had at its peak in 2000. Cisco’s stock price is still below where it was 24 years ago. Despite this, focusing on tech stocks seems like first-order thinking that misses a deeper area of excess that could have a larger impact on markets.

We believe that Private Equity and Private Credit markets (i.e the non marked-to-market “alternative” assets) are the source of the excesses that have built up in the 2009-present bull market cycle. Given that no public markets exist for the underlying holdings in these asset classes, it requires a bit of digging, and some second-order sleuthing, to grasp the magnitude of the issue here. (Note: “alternative” was in quotes because there is strong evidence to show a high correlation with broad markets. After all, the second word in Private Equity is … Equity.  Stay tuned for future commentary on this topic.)

Since 2009, Private Equity has grown to become a massive part of the U.S. economy, with minimal real-time transparency. The chart below surprised us when we first saw it:

Number of Publicly listed vs Private Equity backed US companies

Private Equity (“PE”) now controls 2.5 times as many companies as are publicly listed. Yet only 20 years ago it controlled a fraction of the amount. With a trend of rising interest rates, many of these PE-held companies will fail to generate anything remotely close to the IRRs that these PE funds realized from 2009-2021. Meanwhile, Private Credit claims to deliver mid-teens returns with minimal risk (i.e. credit risk better than what publicly traded corporate debt offers). But how? Middle market companies can’t survive long-term by borrowing at 13%. For short periods of time – particularly during a period of tight credit spreads and benign economic conditions, this might work – but over any full-cycle investment horizon, this is bound to end in disappointment for investors.

How does it burst?

If we are correct that private markets are the source of the excess in the long bull market since the 2009 lows, then we could implement the following scenario:

Macro – big picture: The lesson policy makers took from 2008 – and which they deployed during Covid – is that any downturn in a “too big to fail” asset class will be met with unlimited liquidity. We believe that private markets are now too big to fail. Endowments and pensions are loaded to the gills with PE and private equity managers can make the political case to policy makers that the average pensioner gets hurt if everything gets marked-to-market during a recession. We surmise that during the next -30% S&P 500 bear market, when PE is down closer to -60%, open-ended government liquidity will be provided. Nominal values will be held up. The best multi-year macro expression to play this trend is with a mix of long gold and short long-term Treasuries. The sovereign balance sheet will ultimately underwrite losses that public and private markets – both too big to fail – no longer are allowed to bear.

As we expect an S&P 500 bear market over the next 9-12 months, as further evidence of these excesses in private markets, one of the stocks that appears to be egregiously overvalued is Blackstone (BX), the largest private markets firm in the world. A short-hand to value asset managers would be to look at them on a multiple of revenue basis (2-3x revenue is reasonable). When your local financial advisor sells their book of business, historically the multiple is often 2.5x. Blackstone trades at 19x revenue ($8B in trailing 2023 annual revenue; $150B market cap). Peer private equity firms are in the 3-5x range. Blackstone is the premier PE firm in the world – there is plenty of brand equity there. It would still be a great company if it were cut in half, and traded at a $75B market cap.

Portfolio

We made a few changes to our portfolio during June, including reinitiating a coffee position and trimming metals for risk management purposes. 

Opened positions

• Long coffee: We reinstituted a coffee trade that we had removed in May for risk purposes. Lower Robusta coffee supply from Vietnam due to heat is pressuring upward the Arabica contract that we hold. The coffee market rebounded strongly from lows in mid-May and technically looks bullish.

Current positions (as of 6/30/24)

• Long copper: Core long-term position related to both lack of mine supply and massive incremental demand from the green transition (EVs, solar, etc.). We added to this position during the pullback in prices mid-month.
  
• Long gold and silver: Core long-term positions that we believe are in the 2^nd inning (of 9) of a multi-year move as precious metals reclaim their market share as reserve assets for both sovereign and private investors. Note: we trimmed both positions twice in the month, solely for risk management purposes; we’ll look to add back that exposure in the weeks ahead. 
  
• Short feeder cattle: Short-term trade related to consumer retrenchment and demand destruction for expensive beef despite low inventories of cattle in the supply chain. Both live and feeder cattle markets appear to be putting in broad multi-quarter topping processes, as fundamentals battle between low inventories (supply issues) and very high beef prices (demand issues) – we believe the demand issues will lead to these markets breaking lower in the back half of the year as the U.S. consumer continues to dial back spending.
  
• Long 2-year Treasuries: High-conviction idea that by holding rates high to ensure the defeat of inflation, the Fed will be forced to cut interest rates by far more than the market has priced in to reinvigorate consumer and corporate demand during an economic downturn. If the Fed were truly data dependent, they would have already started cutting rates, as many forward-looking measures argue in favor of cuts. It’s quite possible that the embarrassment of having reacted late in hiking rates in 2022 will lead to the Fed reacting late in cutting rates.

Lastly, although we closed our S&P 500 short in May (last month; not a June trade) as it hit our risk limit, we could look to re-open it again– this is a high conviction idea that parallels our core view that the U.S. economy is headed for a long-delayed recession.

As always, we continue to be nimble. If the data and/or our views change, we can pivot our positioning 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.

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