On the most recent episode of the Behind the Markets podcast on Wharton Business Radio, hosts Jeremy Schwartz, director of research at WisdomTree, and Wharton finance professor Jeremy Siegel were joined by Andrew Beer, founder and managing member of Dynamic Beta Investments. The discussion covered hedge fund strategies and relevance in changing markets and how managed futures can work to remove advisor and investor bias as market regimes change.
Hedge funds dropped off in popularity during the 2010s in an environment of historically low interest rates from the Fed, and most advisors and investors positioned their portfolios in a traditional 60/40 allocation to equities and bonds. 2021 brought a regime change that has only escalated in recent months as the Fed utilizes its full array of tools to actively fight inflation through interest rate increases and balance sheet reductions. Hedge funds are once more gaining in popularity, Beer explained.
“Some of the things that hedge funds do are not that mysterious; some of the things that hedge funds do are relatively mysterious,” Beer said, but their strategy can be puzzled out through analysis. “You can figure out what hedge funds are doing by looking at their recent performance.”
Utilizing a strategy that digs through hedge fund performance and utilizes models and algorithms to determine how hedge funds are investing really only works well within three areas: managed futures, equity long/short, diversified portfolios, and hedge funds on a broader scale according to Beer.
“I think we could be in for a long period of readjustment,” Beer said, speaking to the market imbalances that have been baking in over the last decade, “and regime shifts in particular… are just incredibly interesting times to invest because that’s when all of our behavioral biases come out and that influences pricing across markets and also opportunities.”
Why Managed Futures Should be in Every Portfolio
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).
This was seen during the Dotcom bear market in the early 2000s when managed futures funds made roughly 40% and in the Financial Crisis of 2008 managed futures made approximately 20%, Beer explained.
“From an asset allocator’s perspective, managed futures should be a meaningful allocation in every single portfolio out there,” Beer said.
Managed futures and the strategy that they utilize can be particularly strong in environments that are fraught with bias. Beer explained that sometimes price movements can be pushed further than they should in response to new information and news because advisors in particular can sometimes be locked into a position that requires an immense amount of information for them to change their perspective.
“These things that are kind of way outside of our range of expectations are very hard for us to think about because we’re so anchored to current numbers and that plays into it a lot,” Beer said. “We’ve seen that even in the trades that we’ve seen in our underlying strategies where the managed futures have made strategies because they’re emotionless quantitative models and have tended to do better than emotional market strategists.”
It’s this very seemingly at-odds approach with how advisors would instinctively invest and strategize that can provide valuable diversification opportunities for a portfolio.
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Investing in Managed Futures with DBMF
The discussion also covered the “index plus” opportunities provided by the iMGP DBi Managed Futures Strategy ETF (DBMF), an actively managed futures fund designed to capture performance no matter how equity markets are moving.
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 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.