Last August, we published our Liquidity Cascades research, arguing that markets will continue to exhibit “weird” behavior while they are being driven by flows rather than fundamentals (paper, podcasts, and other resources available here).
Since publishing, we believe subsequent headlines confirm our thesis: the retail call option bonanza, short-/gamma-squeezes in “meme stocks” (e.g. GameStop and AMC), the Archegos leverage unwind, and crypto’s hyper de-leveraging are all microcosms of the same liquidity-driven themes that we wrote about last year.
In addition to explaining the dynamics behind these events, we redesigned the Newfound Risk Managed U.S. Growth Fund (NFDIX) in an effort to help investors better navigate these escalating market extremes.
With the new approach live for just over six months, here are three reasons why investors have been adopting NFDIX:
- Core Equity Factor Exposure
- The fund seeks to create a persistent edge through well documented market anomalies.
- We pair defensive and aggressive factors in effort to create resilience in both positive and negative market regimes.
- An ensemble implementation of factor exposures attempts to smooth out returns by reducing idiosyncratic “process risk” and rebalance timing luck.
- Active Tail Hedging
- With markets exhibiting greater extremes to both the upside and the downside, we believe tail-hedging – for both the left and right tails – can act as a critical portfolio ballast.
- Put and call option¹ exposures can provide convexity in portfolios: as markets become more extreme, these positions may pay off non-linearly.
- Capital Efficiency
- NFDIX uses futures contracts² to introduce a U.S. Treasury bond overlay, increasing the capital efficiency of the portfolio.
- Active management of the overlay seeks to reduce the drawdown risk of bonds during a rising rate environment.
- Through the higher capital efficiency created by the overlay, investors can free up capital to deploy opportunistically, allocate to diversifiers, or simply hold in cash.
For more information on NFDIX, CLICK HERE.
If you’re looking to better understand why we believe markets are moving faster than ever before, and how we’re seeking to better insulate portfolios from those extremes, just reply to this email!
Dillon Pierce, CAIA
Vice President, Advisor Solutions
|¹ Call options give the purchaser the right to buy the underlying asset at a specific time. Put options give the purchaser the right to sell the underlying asset at a specific time.
² U.S. Treasury futures contracts are an agreement to buy (or sell) a U.S. Treasury bond at a predetermined price at a specified time in the future.
Past performance is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call toll-free 1-855-394-9777 or visit our website, www.thinknewfoundfunds.com.
Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of an investment managed using any of the investment strategies or styles described in this document may differ materially from those reflected in such forward-looking statements. The information in this document is made available on an “as is,” without representation or warranty basis.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Newfound Risk Managed U.S. Growth Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-855-394-9777. The prospectus should be read carefully before investing. The Newfound Risk Managed U.S. Growth Fund is distributed by Northern Lights Distributors, LLC, Member FINRA/SIPC. Newfound Research LLC is not affiliated with Northern Lights Distributors, LLC.
There is no assurance that any Fund will achieve its investment objectives.
Mutual Funds involve risk including the possible loss of principal. ETFs are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Typically, a rise in interest rates causes a decline in the value of fixed income securities. A higher Fund turnover will result in higher transactional and brokerage costs.
Like all quantitative analysis, the adviser's investment model carries a risk that the mathematical model used might be based on one or more incorrect assumptions. No assurance can be given that the fund will be successful under all or any market conditions. Overall equity and fixed income securities market risks affect the value of the Fund. Factors such as domestic economic growth and market conditions, interest rate levels, and political events affect the securities markets. The earnings prospects of small and medium sized companies are more volatile than larger companies and may experience higher failure rates than larger companies.
This communication has been provided solely for informational purposes and does not constitute a current or past recommendation or an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This communication should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.
Click HERE for the current NFDIX prospectus.
Newfound Case # 12966689
NLD Case # 1261-NLD-06092021