Credit markets endured significant stress during the first quarter. On a high level, investors quickly tried to sell
all types of credit instruments and go to cash. This behavior created a negative feedback loop where
indiscriminate selling caused lower prices, which led to more selling and so on. During the worst week,
investors were not even able to transact in AAA munis and corporate bonds. Lower rated and less liquid forms
of credit were hit even harder such as preferred stocks, high yield bonds, and non government backed
mortgages. Fearing even lower prices, banks moved quickly to pull repo lines causing forced selling from
mortgage REITs and other levered investors. The frozen nature of the credit markets spurred the Federal
Reserve to take measures to stabilize markets. Despite the cries of moral hazard, the Fed’s purchasing of
corporate bonds has created a backstop in the system which has allowed corporations to return to the debt
issuance market. All is not well however. Despite various areas of the credit market recovering, numerous
spaces are still dislocated and well below levels seen in February. Housing related debt has sold off rapidly as
investors grapple with how many borrowers decide to forbear on their mortgage and rent payments. Similarly,
corporations which have debt outstanding are in a stressed position with profitability strained during the
shutdown. A lot of the outcomes will hinge on how long the shutdown lasts, and when some degree of normalcy
returns. In this environment we favor high grade corporate debt, and housing related debt with low loan to
values and strong collateral support.

Municipal bonds also had a volatile month, falling an average of 7.5% in mid-March and rallying back post
government intervention to close down 1% for the quarter. Meanwhile, US treasury yields plunged on the
quarter with the 10y yield falling from 1.91% at year end to 0.67% at quarter end. Similarly, the 2y US treasury
yield fell from 1.57% at year end to 0.25% at quarter end. This dramatic drop in yields reflects the Fed cutting
the overnight funds to rate down to 0.25% and also the likelihood that rates stay at this level for the foreseeable
future. In summary, risk free yields fell dramatically while any type of fixed income with a credit spread
widened rather significantly as investors begin to price the longer run ramifications of the pandemic.

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Hedge funds started the year with declines as the HFRI Fund-of-Funds Composite Index fell by 7.3% during the
first quarter. Equity and Fixed Income markets experienced steep losses during the quarter as countries all over
the world went into lockdown to try and contain the spread of Covid-19. Specifically, ‘Event Driven’ and ‘Equity
Hedged’ strategies were among the worst performing strategies as the HFRI Event Driven (Total) Index and the
Equity Hedged (Total) Index decreased by 15.3% and 12.9%, respectively, during the quarter. Hedge Fund
Research noted that the alternative industry experienced a “historical dispersion” of performance during the
quarter. We also witnessed this divergence across our platform as a few core managers generated positive returns
while others underperformed their respected benchmarks. Our largest underperformers during the quarter were
‘Event Driven’ Equity and Fixed Income managers that have a strong focus on stressed/distressed credit. During
the month of March, there were historic levels of selling and outflows in every type of credit asset, which resulted
in a lack of liquidity for these markets. As discussed above, the lack of liquidity was so pronounced that the
Federal Reserve was forced to enter the market and buy investment grade corporate bonds. We remain confident
with the managers we have on our platform and believe they all will be able to take advantage of the many
opportunities the Covid-19 crisis has presented to the market.

*Data taken from HFRI (Hedge Fund Research Indices) as of April 15th, 2020

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The S&P 500 closed the first quarter of 2020 down 19.6%, its worst three-month start to a calendar year on
record. After closing at record highs on February 19th, the S&P ended March 23.5% below the all-time high
levels. The magnitude and speed of the sell-off was unprecedented as investors quickly wrestled with the reality
that COVID-19 was more than a temporary disruption, but rather a global pandemic where nearly a quarter of
the US economy had an immediate shutdown. The S&P 500 is market cap weighted and thus fared much better
than the average stock. The equal weighted S&P 500 index fell 26.7% during the first quarter. Mid-cap and
small cap indices were down even further, falling 30% and 32.6% respectively. Thus, the best protection during
the first quarter was exposure to mega-cap technology companies such as Amazon, Apple, Google, Facebook,
and others which acted as a safe haven. Markets rebounded during the final week of March as the Federal
Reserve brought actions on an unprecedented scale to combat the disruption including a promise to buy
unlimited amounts of investment grade corporate bonds. Investors believed that this took the “left tail” scenario
off of the table and likely prevented a further downward spiral of financial asset prices. Indeed, the Federal
Reserve’s balance sheet grew from $4T to over $6T in a matter of weeks as the Fed purchased mortgages, US
treasuries, and now corporate bonds. Currently, the market appears to be pricing in a situation of the “haves”
and “have nots”, favoring higher mega-cap companies with strong balance sheets and the ability to survive the
pandemic. Meanwhile, small companies and larger cyclical firms are still down substantially from the highs as
investors try to price in the downside risks.

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