The strong yet brief bear rally, borne on hopes of easing inflation from October inflation data, has come to an abrupt end heading into the short Thanksgiving week for U.S. markets. Volatility remains a persistent component of markets this year, something that managed futures strategies can capitalize on alongside the numerous benefits they can offer portfolios.
Managed futures strategies, sometimes referred to as CTAs after the commodity trading advisors that run them, transact in the futures market where they take long and short positions on several asset classes based on how they are trending currently. They’re essentially the ultimate trend-following strategy that distills out the emotional side of investing and is purely based on data instead of investor sentiment and have historically been locked behind hedge funds but have moved into cost-saving ETFs in the last few years.
Trend-following strategies historically perform well during market changes and managed futures have been dubbed the “crisis alpha” generators of market dislocations and regime changes. In this year of continued uncertainty and market volatility, they have risen to the top, often some of the only ETFs to offer positive performance when equities and bonds have fallen.
Managed futures take long, or bullish, positions on asset classes that are trending positively — a big win this year was long crude oil positions in the first half of the year — and take short, or bearish, positions on asset classes that are trending negatively. This year that’s been just about everything else, including equities and bonds, but particularly foreign currencies that have felt the squeeze from a strong U.S. dollar.
These kinds of strategies are “a natural candidate for inflation protection without sacrificing long-term returns,” explained David Berns, CIO and co-founder of Simplify, in an interview with Wealth Solutions Report. “And if inflation is accompanied by rising rates, trend following on bonds will also contribute nicely to the return profile during inflationary periods.”
Because of their dynamic nature in the futures market, they can respond to the changing market landscape while providing uncorrelated returns and diversification for equity and bond portfolios. When equity stocks in a portfolio (inherently expressed in long positions) are falling, managed futures can take short positions, offering diversification. The same is true for bonds in a rising rate environment, with managed futures able to short bonds while portfolios hold traditional long positions in bonds.
“These alternative investments have historically been less correlated to long stocks or bonds, performing better in down markets,” said Todd Rosenbluth, head of research at VettaFi, in the same interview. “Advisors who are looking to provide enhanced diversification to a client’s portfolio should consider up to a 5% slice into managed futures.”
The iMGP DBi Managed Futures Strategy ETF (DBMF ) has been a strong performer and immensely popular choice for advisors and investors alike in the challenging environment of 2022.
The fund seeks long-term capital appreciation by investing in some of the most liquid U.S.-based futures contracts in a strategy utilized by hedge funds and has 25.77% returns as of 11/18/2022. It has over $1 billion in AUM and is the largest of any managed futures ETF.
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 the futures market on several asset classes; domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).
The position that the fund takes 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 has an expense ratio of 0.95%.
For more news, information, and analysis, visit the Managed Futures Channel.
