Are Managed Futures the Ultimate Portfolio Diversifier?

Over 350 asset owners and asset managers were polled, according to the press release, and predictions for the economic outlook were: 26% believe there is an impending overheating of the economy on the horizon, 24% believe the economy is headed for stagflation, and 22% believe there will be a hard landing (recession) for the economy.

Perhaps of even greater significance, a full 58% of attendees to the forum believe that equity allocations in portfolios should be “meaningfully different” from the current market-cap weights of equities. In a challenging environment for the traditional 60/40 equity and bond portfolio, diversification can play a crucial role, both in offering hedging opportunities as well as potentially providing uncorrelated performance to some of the biggest pain points currently in portfolios.

“Asset owners are revisiting their strategic asset allocations to consider the resilience of their portfolios against increasing inflationary pressures, volatility, and potential disruptions to economic growth. Many are responding to the current environment by seeking to maximize their portfolio diversification within the context of their investment mandate,” said Rich Nuzum, president of investments and retirement at Mercer, in the press release.

Managed futures tend to perform strongly during periods of volatility and drawdown and typically are popular during those times, partially for the diversification opportunities they present (very low to no correlation to equities and bonds) and partially for the income opportunities they present when everything else is struggling (crisis alpha). Because they invest in futures contracts, they can carry low, and sometimes negative, correlations to equities and bonds, something that many advisors and investors are looking for in these challenging market times.

Image source: Dynamic Beta Investments

Whether advisors are seeking a portfolio diversifier, a hedge during market volatility, or performance potential during market dislocations, the iMGP DBi Managed Futures Strategy ETF (DBMF B+) can be a possible solution for all of the above. The year-to-date return for the fund is currently 27.05% according to the DBMF website.

DBMF is a managed futures fund designed to capture performance no matter how equity markets are moving. The fund seeks long-term capital appreciation by investing in some of the most liquid U.S.-based futures contracts in a strategy utilized by hedge funds.

DBMF allows for the diversification of portfolios across asset classes that are uncorrelated to traditional equities or bonds. It is an actively managed fund that uses long and short positions within derivatives, mostly futures contracts, and forward contracts. These contracts span domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).

The position that the fund takes within domestic managed futures and forward contracts is determined by the Dynamic Beta Engine. This proprietary, quantitative model attempts to ascertain how the largest commodity-trading advisor hedge funds have their allocations. It does so by analyzing the trailing 60-day performance of CTA hedge funds and then determining a portfolio of liquid contracts that would mimic the hedge funds’ performance (not the positions).

DBMF takes long positions in derivatives with exposures to asset classes, sectors, or markets that are anticipated to grow in value and takes short positions in derivatives with exposures expected to fall in value. Under normal market conditions, the fund seeks to maintain volatility between 8%–10% annually.

DBMF has a management fee of 0.85% and an additional 10 bps for other expenses listed in the prospectus.

For more news, information, and strategy, visit the Managed Futures Channel.