After a stellar year of outperformance in 2022, managed futures strategies have faced a number of challenges this year, including the abrupt reversal of the inflation trade in March on the heels of bank collapse and bank sector stress. Andrew Beer, co-founder of Dynamic Beta Investments and co-PM of the (DBMF ), discussed the three key questions investors currently have regarding managed futures in a recent video.
Has the Long-Term Thesis for Managed Futures Changed?
To answer this question, Beer looked back at the historical data from 2000 through March 2023 for the managed futures hedge fund space, measured by the SocGen CTA Index. Even with the extremely high fees that managed futures hedge funds charge, the index has yielded roughly 110% of the returns of bonds and 70% of stocks over the last 23 years.
Moreso, it has done so “with no correlation to either, a tendency to perform best during prolonged bear markets, and a max drawdown of only 14%,” Beer explained. “While we’re obviously not thrilled with being down this year, we do always try to position DBMF as a diversifier to 60/40 portfolios, and note that it is better to have some investments that are inversely correlated to other positions even during drawdowns.”
How Does the Recent Drawdown Compare to Historical Drawdowns?
In the wake of the stellar performance of managed futures last year, this year’s performance and the recent drawdown have many advisors and investors questioning if the strategy is still worth inclusion in portfolios. As of the beginning of April, most managed futures strategies were down roughly 10% YTD — but drawdowns of this magnitude have happened at least seven times since 2000, according to Beer, and continue to pale in comparison to the drawdowns experienced by equities, bonds, or both.
“What’s striking to me is that to get the S&P 500 return… — 6.5% per annum over 23 years — investors endured a 50% drawdown, a 40% drawdown and two drops of around 20%,” said Beer. “On the other hand, bond investors experienced minimal drawdowns during the great bond bull market, until the last year or so when they gave up a decade of returns.”
A 10% drawdown in comparison for managed futures strategies, while painful right now, is still a mitigated drawdown compared to those historically in other major asset classes, and managed futures strategies are already dropping out of the inflation trade positions of the last year that reversed painfully in March, derisking as they do so and searching for the new trends of the changing market and economy.
How has DBMF’s Replication Strategy Held up During Volatility?
The (DBMF ) is an actively managed fund that uses long and short positions within the futures market on several asset classes: domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary). The fund’s position within domestically managed futures and forward contracts is determined by the Dynamic Beta Engine, which analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged performance (not the positions).
DBMF seeks to replicate the performance but, with the fee savings that the ETF wrapper provides, can often outperform the SocGen CTA Index, as was the case last year. In fact, DBMF is expected to outperform the index roughly 90% of the time over any rolling one year basis due to significantly lower expenses while capturing the main drivers of the hedge fund performance.
“Part of this is due to incentive fees – when hedge funds rise 10%, they only report up 8% but we hope to be up all 10%,” Beer explained. “The flip side is that are likely to underperform on the way down after a high return period.”
What has happened this year, particularly in March, has been an enormous stress test for the replication strategy that DBMF employs.
“Even through this extraordinary period, with vicious market moves and unwinds, DBMF closely follows the daily returns of the index. Our answer to the question then is that, yes, DBMF is doing what it’s supposed to do,” said Beer.
DBMF has management fees of 0.85%.
For more news, information, and analysis, visit the Managed Futures Channel.