Hedge funds thrive off volatility, but for the average investor, it can be a daunting task to manage market fluctuations without the assistance of hedging strategies that these funds employ. Thankfully, there’s an easier way via exchange-traded funds (ETFs) that mimic the strategies of hedge funds.
Rising interest rates are certainly causing a volatile environment for the stock market, with economists and analysts warning of a potential recession should the U.S. Federal Reserve continue tightening monetary policy to the detriment of economic growth. Hedge funds look at the market uncertainty ahead and see opportunity.
“Hedge funds’ total gross trading flow, including both long and short bets, rose for five weeks in a row and had the largest notional increase since 2017 last week heading into the Federal Reserve’s rate decision, according to Goldman Sachs’ prime brokerage data,” a CNBC report noted. “In other words, they are putting money to work in a big way to capitalize on this market volatility for clients, likely mostly from the short side.”
For the retail investor, this could mean implementing various dizzying strategies to hedge against volatility. That uncertainty could continue for some time until the Fed feels they have inflation under control.
“Uncertainty over inflation and tightening policy may spur more volatility. This speaks to hedge fund strategies,” said Mark Haefele, global wealth management CIO at UBS. “Hedge funds have been a rare bright spot this year, with some strategies, like macro, performing particularly well.”
One ETF That Hedges like a Hedge Fund
With inflation rising, several default plays hedge against market risk. Whether it’s commodities exposure, dollar exposure, or an array of other options, it’s too much for the average investor to handle.
However, there’s an easier alternative: the iMGP DBi Hedge Strategy ETF (DBEH ), which is an actively managed fund that seeks long-term capital appreciation by employing long and short positions in derivatives, primarily futures contracts and forward contracts, across the broad asset classes of equities, fixed income, and currencies.
DBEH seeks to potentially match or exceed the performance of a portfolio of 40 leading equity long/short hedge funds using a factor replication strategy, according to the fund’s fact sheet. The strategy employs a statistical model to identify the key drivers of recent pre-fee performance of such hedge funds across major equity and other markets.
The fund then invests directly in an optimized, dynamically adjusted portfolio of liquid futures contracts to efficiently obtain similar exposures.
For more news, information, and strategy, visit the Managed Futures Channel.