Why Managed Futures Are Ripe for Replication
"Research shows that replication, rather than investments in single manager hedge funds, may make sense for most allocators.", writes Andrew Beer. MORE
Interviewee: Andrew Beer, Dynamic Beta investments (DBi)
Interviewer: Mike Pacitto
Date: October 6, 2023
Mike Pacitto:
Hi everyone, I’m Mike Pacitto with iM Global Partner. Thanks for joining our monthly update on the iM Global Partner DBi Managed Futures ETF Strategy – ticker: DBMF.
This month’s video update is going to be short but sweet, as we’ll be hearing as always from Andrew Beer, co-founder of DBi and co-portfolio manager of DBMF. He’ll be touching on macro, performance, positioning and other interesting touchpoints after an excellent month for the strategy.
Along those lines, we believe that 60/40 is badly in need of a reboot and update.
That’s exactly what we are seeking to change with DBMF, and we hope you feel that we’re delivering.
With that, I hand it off to you Mr. Beer.
Andrew Beer:
Thanks, Mike.
September was an important month for DBMF – more reminiscent of 2022 than the first eight months of this year. We were up 4.6% net on a price basis and 4.6% net on an NAV basis, ahead of both the
SocGen CTA Index (hereinafter the “Hedge Fund Index”), which as you all know is an index of twenty leading managed futures hedge funds, and the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). More importantly, those gains were delivered in a month where pretty much everything else went down – but let’s come back to that in a minute.
On the macro front, last month we talked about how confused strategists have been by the economy. As the consensus has snapped back and forth from taper to “sticky inflation” to “recession by June” to “higher for longer,” markets have been whipsawing, which has not been great for the managed futures space. Today, there’s a dawning realization that inflation might be “higher forever” – that is, the structural tailwinds like globalization might simply have run out of steam. Fiscal rectitude seems like a quaint, old-fashioned concept. So, the new world order might have higher inflation for years and, with it, stocks and bonds moving in tandem. That is a huge problem for trillions of dollars of model portfolios: when stocks and bonds are positively correlated, the volatility of a typical balanced portfolio jumps by 25%. So clients expecting a smooth train ride might be strapped onto a scary rollercoaster — a rude awakening, to say the least.
On the positioning front, the core positions look similar to a month ago, in part because, well, most are working. We are short Treasury futures and a profitable position as rates keep pushing higher. We’re long crude, another important driver of profits last month as oil jumped 9%. We are long the Euro and short the Yen – essentially a bet that Europe will need to keep hiking while Japan will not – a trade that helped more in August than September. We’re modestly long equities, but these positions keep rotating around and have not been driving recent returns. Finally, we’re short gold, which is a great example of a traditional portfolio hedge that simply isn’t working these days.
On to the next slide.
If you’ve watched any of our webinars, you might remember a slide titled “Beacon of Green in a Sea of Red.” It’s a metaphor we coined about managed futures: that in a year like 2022, the strategy gained around 20% when pretty much everything was down. From a portfolio perspective, we think this is a wonderful quality: the potential for gains when other forms of diversification aren’t working.
So here’s that same chart but just zeroing on September. DBMF and the managed futures space posted strong gains, while stocks and bonds and TIPS and gold and REITs and liquid versions of hedge funds all declined. Clearly, one month does not a year make, but we do think this chart clearly underscores why we think managed futures should be a strategic allocation alongside stocks and bonds. We’ve talked a lot about how, in this brave new world, model portfolios need a third leg of the asset allocation stool, something that is not correlated to either stocks and bonds.
And with that set up, let’s jump to the next slide.
Here’s our usual slide on performance of DBMF since inception versus the S&P 500 and Bloomberg
Agg. Since launch in 2019, we’ve delivered more than 10% per annum of alpha relative to the S&P 500. And DBMF has returned 51% cumulatively when bonds have lost money – so virtually every dollar of returns generated adds value to a portfolio. From the perspective of a model allocator, it really shouldn’t be a question of whether a strategy like this goes into a diversified portfolio, but rather how much. Of course, as should be clear by now, alpha is a lumpy bugger – no one on Planet Earth has figured out how to consistently time managed futures any moreso than timing the equity markets, so our strong recommendation is to make the strategy a long-term, strategic allocation and let it do what it’s supposed to do.
Next slide, please.
Which leads us to our next chart: our performance versus the Hedge Fund Index and Morningstar Category. We are pleased to report that DBMF has outperformed both since inception with a correlation of around 0.9. As I think everyone listening to this will know by now, we are huge believers in the diversification benefits of the space overall, and are simply trying to find what we believe is the most straightforward and efficient way to get exposure to the space.
Last month, we talked briefly about a paper we just published in Institutional Investor. The title is, “Why Managed Futures Fund Are Ripe for Replication?” This created something of a stir in the industry because it sounds too simple – how could you possibly replicate something as complicated as this space with only four big, obvious, liquid futures contracts? I don’t want to rehash the discussion here, but rather would encourage you to google the article if you want to understand how and why replication can work as well as it does – and why the simplicity of replication and complexity of single manager funds can and should co-exist.
Next slide, please.
Finally, here’s our standard chart on volatility adjusted positioning. As a reminder, we show it this way since it can be confusing when looking a notional position sizes – what looks like a big position in something like the two year Treasury might be less risky than a small position in crude oil, so this helps to make the exposures more apples to apples. This month we’re also showing it relative to June 30 to underscore how dynamic the portfolio has been over the summer.
To start from the left, we flipped from short to long crude oil, and from long to short gold. We’ve maintained our long position in the Euro and shortened our position in the yen. We’re short across the Treasury curve, whereas after the SVB unwinds we had flipped for a period to long the 10 year. And lastly, we’re modestly long equities and have unwound a spread trade that the S&P 500 would outperform non-US developed stocks and EM.
With that, I’ll hand the baton back to Mike.
Mike Pacitto:
Thanks Andrew.
In closing let’s showcase the since inception performance of DBMF versus the index and the category.
Long-term outperformance, which is what we focus on as long-term allocators and investors, against the index has broadened since our last update – beating the SocGen CTA Index by over 230bps annualized since inception. Outperformance against the Morningstar average has also expanded, over 435 bps annualized since inception.
We believe these results are convincing and we hope you do too. The combination of index-plus replication with fee reduction being the purest form of alpha, are the key characteristics of what makes DBMF unique and compelling.
Closing here by saying thanks to all of our clients and to our prospective clients for your confidence and interest in DBMF. If you have more questions about the strategy, would like further information or a call with us please don’t hesitate to reach out – just send us an email at: [email protected]
Until next time – from DBi and from iMGP – thanks for spending time with us.
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