Alternatives continue to garner interest and portfolio allocations as investors look beyond stocks and bonds in ongoing volatility. Managed futures, once relegated to a somewhat niche corner of the options and liquid alts market, now enjoy greater investor uptake through ETFs like the iMGP DBi Managed Futures Strategy ETF (DBMF ).
The Rise of Managed Futures
Managed futures strategies were once available to only a small percentage of investors. These strategies are run by hedge fund managers known as commodity trading advisors, or CTAs. They take both long and short positions via futures contracts on a variety of asset classes. These include fixed income, equities, commodities, and currencies. They invest based on how an asset is currently trading instead of based on forecasted outlooks or future-looking sentiments.
This technical approach creates the ultimate trend-following strategy. However, it remains locked behind significant entry requirements and even more significant management fees. These fees generally entailed paying 2% up front for the management fee and then another 20% on any profits earned above a particular threshold.
The first managed futures mutual fund under the 1940 Act was launched in 2007. However, managed futures as a whole struggled in the long decade of the 2010s. The Federal Reserve’s artificial suppression of volatility — via the “Fed put” in markets — caused equities to rise in a seemingly inexorable climb ever higher. With little toehold to be made in an environment where betting against anything other than equities was rewarded largely with failure, managed futures remained sidelined.
See also: Managed Futures: The Rapid Responders in Crisis and Beyond
DBMF Launches, Brings Managed Futures to the Masses
The iMGP DBi Managed Futures Strategy ETF (DBMF ) launched in May 2019 and is currently the largest managed futures ETF. The fund brought managed futures to the investing masses using a replication approach while also saving significantly on fees via the ETF wrapper.
Less than a year after its launch, DBMF proved its value in the COVID-19 pandemic crash. Since then, the strategy has had its ups and downs. However, the fund continues to prove the value it brings in diversification and low correlations to stocks and bonds.
2022 proved to be a slam dunk year for the fund. DBMF was one of just a rare handful of ETFs to remain positive in a year when stocks and bonds both plummeted. The fund soared to over $1 billion in AUM and helped bring managed futures into the spotlight for mainstream investors.
The following year brought challenges for managed futures as a whole. While stocks recovered, heightened investor uncertainty kept market reactivity high in 2023. With no clear direction regarding recession risk, interest rates, and inflation, trends remained short-lived.
So far, the fund is up 6.95% on a price return basis YTD as of 08/14/2024. While DMBF slid precipitously on the abrupt unwinding of the yen carry trade — a trade the strategy capitalized on for a significant period — the rapid responsiveness of the strategy and market recovery curtailed losses. The fund crossed above $1 billion in AUM again last month and garnered a 5-star rating from Morningstar 5 years after its launch.
Under the Hood of DBMF’s Strategy
“The real reason people invest in DBMF is for diversification,” explained Andrew Beer, co-founder of DBi and co-PM of DBMF, in a video this month. “Since inception, DBMF has returned around 9% (on a price basis) per annum with a negative correlation to both stocks and bonds and nearly 1000 basis points of annualized alpha to equities.”
DBMF shines for its relative simplicity in capturing an incredibly complex space. The fund utilizes a proprietary, quantitative model — the Dynamic Beta Engine — to determine positions within managed futures and forward contracts. The model analyzes the most recent 60-day performance of the 20 largest CTA hedge funds and then determines a portfolio that replicates their average performance.
While it doesn’t seek to replicate exact positions, the strategy stays highly correlated to the SocGen CTA Index. The Index tracks the largest managed futures hedge funds. Since inception through the end of July 2024, DBMF generated a 0.88 correlation to the Index. It’s a strategy that results in outperformance amongst peers.
“Replication has moved from this controversial idea to simply becoming another tool,” Beer explained in a recent conversation. “We started our strategy eight years ago and we’ve never changed it. We’ve shown that you can have a strategy that doesn’t change over time and does better than hedge funds.”
By seeking to replicate the performance of the top 20 hedge funds in the space, DBMF eliminates single-manager risk. DBMF also capitalizes on what Beer calls “fee alpha”, or the savings it offers with significantly lower fees. By eliminating the hedge fund fee structure, the strategy can harness a greater percentage of returns generated.
It makes for a strategy that delivers consistently non-correlated returns to stocks and bonds at an affordable entry point for any investor. DMBF is actively managed with an expense ratio of 0.85%.
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