Hedgeye Capital Allocation Fund (HECA)
Performance and Current Positioning
May 1, 2026 - David A. Salem, Portfolio Manager

A Tale of Two Markets

The 43 trading days since February 27 comprise two distinct market regimes or phases. Phase 1 comprised 21 trading days ending on March 30—an interval during which armed conflict in the Middle East catalyzed material declines in broad equity indices [FTSE Global All Cap Index down 9.18%, S&P 500 down 7.78%] and material increases in commodities in general and oil in particular (S&P GSCI Total Return Index up 22.63%, Brent crude front-month futures up 47.64%). Phase 2 is ongoing, comprising 22 trading days marked by the swiftest snapback in the S&P 500 Index from an 8%+ drawdown since 1950. Over this interval, the S&P 500 and FTSE Global All Cap Index have returned 13.64% and 11.92% respectively, with commodities as measured by the GSCI Index and front-month Brent returning 2.57% and -1.89%, respectively. [1]

[1]   Unless labeled otherwise, all data cited herein were sourced from FactSet Please see page 4 for Index Definitions.

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Disciplined Process, Disappointing Results

HECA is managed using a hybrid process that combines model-based security selection and sizing with human judgments respecting the precise timing of buys and sells. In general, the team making the judgments just referenced defers to the model (by-named Hubble)—a model that at this point in its evolution bases security selection and sizing choices on market data as of the close of trading on the prior trading day. This boundary condition is noteworthy because Hubble as distinct from the people implementing buys and sells on HECA’s behalf doesn’t “know” during a given trading day whether and to what extent an actual or potential holding has moved up or down in price since the prior trading day’s close nor its intra-day volume or volatility. Nor does Hubble “know” myriad other facts germane to HECA’s optimal positioning, including regulatory limits on the fractions of other ETFs’ outstanding shares HECA is permitted to own as well as tax factors unworthy of discussion here.

 

Importantly, Hubble does “know” this: investment processes driven primarily by measurable changes in securities’ price, trading volumes and volatilities – a/k/a “Signal Strength” in Hedgeye parlance – are highly vulnerable to whipsaw, i.e., return-sapping turnover spawned by excessively rapid responses to highly ephemeral changes in a security’s Signal Strength. To minimize whipsaw, Hubble is programmed to essentially wait for nascent trends to become reasonably well-established before raising the scores of eligible securities’ (ETFs’) with generally improving prospects or vice versa.

 

The “waiting” discipline just described seeks to enhance HECA’s capacity to participate meaningfully in major bull markets in a given asset class while avoiding meaningfully major bear markets in same. Alas, this same discipline tends to hamper returns when securities eligible for inclusion in HECA are moving rapidly and continuously in a single direction, with sales of depreciating securities being frustratingly slow when viewed in hindsight and purchases of rapidly appreciating exposures being likewise. Needless to say, when a rapid and material downdraft in risk assets is followed immediately by a rapid and material updraft – i.e., a steeply-sided “V” when plotted in two dimensions – a “patient” investor will likely get banged up, incurring a drawdown on the left side of the “V” while recovering slowly at best on the right side.

 

Poor Choices, Right Reasons(?)

Of course, HECA hasn’t “recovered slowly” since broad U.S. stock indexes began an unprecedentedly rapid climb up the right side of an ultra-steep “V” 22 trading days ago: HECA’s NAV has lost further ground over this time, worsening its drawdown from -5.6% to −10.57% and – 11.29% in NAV and MP terms, respectively. What accounts for this additional slippage? An estimated 1% of the slippage is attributable to price declines in ETF holdings flattered by Phase 1 as defined above but unflattered by Phase 2; the residual estimated slippage is attributable to losses on options-based hedges implemented as stock prices were accelerating to the downside during the last 10 days of March. [2]

[2]   The “slippage” highlighted here is estimated rather than precise because it includes my crude guesstimate of opportunity as well as actual costs associated with the options-based hedges in question: as readers who’ve managed options know well, selecting, sizing and adjusting options-based hedges is a time-intensive task whose conscientious tackling can hamper portfolio managers’ performance of other duties. 

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Why did I establish these hedges during this interval, one in which stocks became increasingly “oversold”? I did so for two reasons: (1) because markets that ultimately crash typically do so from “oversold” conditions; and (2) because I was and remain laser-focused on HECA’s -15% drawdown constraint and thought further declines in stock and other risk assets were probable enough to justify the purchase of options-based hedges.

 

Some of these hedges proved profitable, including puts on U.S. stocks that generated realized gains when “rolled” into longer-dated contracts; in aggregate, however, the hedges in question proved unprofitable. Incompetence on my part? Some would say yes, with the slippage flagged above undeniably supporting that judgment. At the risk of seeming overly defensive, I’d suggest alternatively that the losing hedges in question reflected what ultimately became poor choices made for the right or prudential reasons.

 

HECA’s Investment Process, Rightly Understood 

With a hat tip to Tocqueville, who praised Americans of his day for pursuing what he called “self-interest rightly understood”, I’m compelled to note that human- as distinct from Hubble-based determinations of buys and sells on HECA’s behalf aren’t extraneous to or “outside” the investment process governing HECA’s evolving portfolio; rather, such judgments are an integral part of that process and indeed one that contributed positively to HECA’s stellar performance from inception through the peak of its NAV 44 trading days ago. 

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Believe me, I’d like nothing more than to refine Hubble so it can competently handle aspects of HECA’s stewardship currently reliant on real-time judgments by my team. I’m especially keen to refine Hubble so that the model rather than my team makes intra-day buy and sell decisions. These potential refinements plus others are underway, with substantial progress being made that bodes well for HECA and investors attracted by its distinctive mandate as stated in the first sentence of this note.

 

Current Positioning

Meantime, the Hubble-centric process we’ve employed since HECA’s inception is catalyzing noteworthy changes in Fund holdings—changes aptly described by quoting words spoken with increasing frequency of late by Hedgeye CEO Keith McCullough: “Higher for longer”. By this, Keith means general price inflation as well as price rises on specific goods and services in coming months and beyond that’ll likely exceed consensus expectations materially.

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The Journey Ahead

I don’t know with certainty what the future holds for HECA or the myriad economic, geopolitical or other factors that’ll shape its future returns. What I do know with reasonable certainty is that refinements to Hubble we expect to make can’t be relied upon to generate consistently positive returns if and when financial markets traverse “V”-shaped trajectories like those witnessed of late. If you’re a HECA holder and are troubled by the caveat just filed you should consider selling some or perhaps all of your HECA shares. Similarly, if you think HECA’s current positioning as described in the prior paragraph is misguided you should consider a partial or full exit. 

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That said, we certainly hope that current holders will stay the course and that HECA’s investor base will expand in due course—an outcome that concededly and obviously depends on HECA’s regaining the generally favorable trajectory it displayed from inception through its peak in NAV terms 169 trading days later (i.e., February 25, 2026). Are 169 trading days enough to prove conclusively that HECA’s investment process is sound? Not by my lights. Are the 44 trading days that’ve unfolded since HECA’s NAV peaked enough to prove conclusively that this process is unsound? Not by my lights. Rather, if I were an outsider looking into HECA’s process and its ongoing execution by my team, I’d focus on (a) the suitability of this process in pursuing HECA’s mandate as stated at the start of this note and (b) the team’s fidelity to this process, including its discipline or lack thereof in making judgments not delegated to Hubble, at least yet. We appreciate the ongoing support of HECA holders and encourage them or others reading this note to ping us with questions or concerns via CapitalAllocation@hedgeyeam.com.