On the heels of another Fed rate hike, regional bank shares have plummeted as more regional banks flash warning signals. Markets, previously buoyed by a better-than-expected earnings season, have been dragged down once more as volatility and uncertainty continue to be primary drivers this year, an environment that managed futures strategies historically have done well in longer-term.
PacWest is the latest regional bank to spark fear of contagion after news broke on Wednesday that the bank was looking into strategic options that included possibly selling. Shares for the bank on Thursday have fallen 54% and were stopped multiple times for volatility.
The bank is the latest in a string of regional bank failures in the U.S., as well as the collapse of Credit Suisse abroad, and fears of bank contagion have been a frequent drag on markets in the last month.
“Watching Credit Suisse and First Republic go down was like watching a controlled demolition of an office building. One minute there, the next nope,” Andrew Beer, co-founder of Dynamic Beta Investments and co-PM of the iMGP DBi Managed Futures Strategy ETF (DBMF ), said in a communication to VettaFi.
Fear of banking contagion and overall banking sector stress continue to weigh heavily on investors’ minds, particularly as more regional banks are showing symptoms of the tension caused by rapid rate hikes in the last 12 months. First Horizon, a bank in Tennessee, dropped 36% in trading today on the announcement that its merger with TD Bank had been cancelled, though the termination was due to uncertainty regarding the timing of regulatory approval, reported CNBC.
Western Alliance, a regional bank out of Phoenix, was also down 38% in trading midday Thursday. All of the media attention on banks is likely to weigh heavily in the minds of investors, despite Federal Chair Powell’s statement post-FOMC meeting yesterday regarding the regulatory body’s belief that banking failures had likely concluded for now.
Media attention has also had another unintended consequence, according to Beer: “The publicity around SVB had an unexpected effect: the media told depositors across the country that they could get triple the yield by handing the money to Uncle Sam. So much for bank profitability.”
Invest for Bank Contagion Fear Volatility With DBMF
Lending tightening is inevitable for banks going forward, but how much that impacts economic drawdown remains to be seen. Adding in the uncertainty regarding banking sector stress and contagion, the likelihood of volatility remains high, particularly as recession looms large.
“The big question today: do regional banks stop lending? This could cause a measured slowdown of the economy through rate hikes to morph into an economic faceplant,” Beer mused.
Prolonged volatility is an environment that managed futures strategies have historically thrived in. This year, the abrupt reversal of the inflation trade in March has exacerbated some of the underperformance of some managed futures strategies, but as new trends emerge in light of bank tightening, these strategies are positioned to capture the changing tides.
The iMGP DBi Managed Futures Strategy ETF (DBMF ) allows for the diversification of portfolios across asset classes uncorrelated to traditional equities or bonds. It 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). DBMF is currently down 8.3% YTD as of May 3, 2023, presenting a buying opportunity for advisors and investors seeking long-term diversification for their portfolios.
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 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.
DBMF has management fees of 0.85%.
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