2022 was the year when markets downshifted from the rip-roaring outperformance of equities of the last two decades to fall into bear territory on multiple occasions while bond yields soared. Amidst the chaos, managed futures strategies churned away, using quantitative models to determine how asset classes were actually trending and investing accordingly, capturing major moves in oil, currencies, and more ahead of their human investing counterparts.
Most managed futures funds offered strong performance when little else did in 2022. They are a strategy that takes long and short positions on a range of asset classes within the futures market, shorting the underperforming areas (like foreign currencies in 2022) and going long asset classes that are trending upwards (like oil in the first half of the year).
“Managed futures do really, really well in a regime shift,” Andrew Beer, co-portfolio manager of the iMGP DBi Managed Futures Strategy ETF (DBMF ) and managing member of Dynamic Beta investments, told recently. “Regime shifts seem obvious in hindsight, but they’re very hard to manage.”
The SG CTA Index which tracks the 20 largest managed futures hedge funds, is up 18% this year and is having its best year since its inception in 2000. As markets have looked to stabilize late in the year, the index has fallen 6.3% since the end of October alongside many of the stronger plays this year, such as funds focused on the strength of the U.S. dollar. Still, with much uncertainty still on the immediate horizon, the strategy could continue to perform well going into next year.
What About Managed Futures in 2023 and Beyond?
The biggest question now that advisors and investors are wondering is will the trend last? These strategies got a notoriously bad name in the pre-pandemic era of record-low rates and the equity bull market, but that was in large part to an accommodative Fed policy that worked to aggressively stamp out volatility when possible according to Yung-Shin Kung, head and CIO of Credit Suisse Asset Management’s Quantitative Investment Strategies.
“It was very much the [Fed’s] intention to reduce the amount of volatility in markets — not just via very low interest rates, but also highly unconventional monetary policy,” Kung told WSJ.
Managed futures are likely to continue to perform strongly while market volatility persists, which looks increasingly likely in the early part of the year. Recession risk also continues to grow, and the Fed has signaled that it intends to raise interest rates to at least 5% next year, with three potential rate hikes in the front half of the year. Managed futures offer their strongest performance in market downturns and while the gains may not be as outsized next year, there is still plenty of potential volatility to capitalize on.
Beyond that, it falls back to the core appeal of having a managed futures strategy within a portfolio: the diversification opportunity and hedge it provides against inflation and market regime changes, and the great unknown of what the new market normal will be on the other side of an economic downturn.
“In 2022, many advisors learned the benefits of managed futures ETFs as they experienced losses in their equity and fixed income allocations at the same time. Funds like DBMF have been a rare bright spot this year and are likely to have staying power,” said Todd Rosenbluth, head of research at VettaFi.
Something that managed futures ETFs like DBMF will have going for them as volatility slows and equities rise once more is the cost-saving potential they offer investors. DBMF has an expense ratio of 0.95% compared to capturing the strategy within a hedge fund with 2% management fees and 20% performance fees.
DBMF is actively managed and uses the Dynamic Beta Engine to analyze the trailing 60-day performance of the top 20 CTA hedge funds and then determine a portfolio of liquid contracts that mimics the hedge funds’ average performance, not their positions. It’s part of a new age of ETFs that offer hedge fund replication strategies with the transparency, convenience, and affordability of the ETF wrapper, and the future could be very bright for these strategies as we head into a new era for markets.