Managed futures strategies are seeing increased interest from advisors and investors on the VettaFi sites who are looking to pivot their portfolios in a market environment of continued volatility. There are several funds available to investors that offer managed futures strategies, but the iMGP DBi Managed Futures Strategy ETF (DBMF) offers the opportunity to capture hedge fund managed futures strategies within an ETF while reaping alpha potential from the fee reductions, all while performing strongly during volatility.
Managed futures funds have stepped into the spotlight again not only for their ability to diversify a portfolio but also for their potential to generate alpha during volatility, dubbed crisis alpha. DBMF takes it a step further in capturing the performance of hedge fund managed futures strategies within the ETF wrapper.
“The past 15 years has really been about trying to address a single question, which is ‘you want the diversification benefits of hedge funds but you want it with daily liquidity in an ETF or mutual fund or similar kind of vehicle, you want it with low fees — how do you actually do that well,’” said Andrew Beer, co-portfolio manager of DBMF and managing member at Dynamic Beta investments, the subadvisor of the fund, in a recent webinar.
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).
“In the wealth management space, we think this idea of index-plus or benchmark-plus actually should be the default way that people think about investing in a space like managed futures,” Beer said.
In short, this means that the fund utilizes existing hedge fund strategies, pulled from 20 of the largest managed futures hedge funds through the performance data of the SocGen CTA Hedge Fund index, thereby eliminating bias and performance outliers that can happen when following just a single issuer strategy.
“Our view is that… index-like is a very, very good thing in model portfolio-land because… you’re always close to the benchmark, and the benchmark, we have an expression that ‘the benchmark can be your best friend or your worst enemy; that’s particularly true in a space like this where the communication with clients is critically important,” Beer explained.
The "Purest Form of Alpha"
Dynamic Beta investments believes that fee reduction “is the purest form of alpha” when it comes to hedge funds. Much of the alpha generated by hedge fund strategies is eaten up in fees, meaning that a large portion of the profits is never realized by investors. Through the mechanisms of the ETF vehicle, those fees can be drastically reduced and the profits preserved.
This is captured through the way that the performance of the hedge funds is tracked, which means that DBMF seeks to capture that hedge fund performance before fees and combine that with the reduced fees of the ETF structure, thereby providing “the purest form of alpha”.
The iMGP DBi Managed Futures Strategy ETF (DBMF) is a managed futures fund designed to capture performance no matter how equity markets are moving. 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).
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.