One way hedge funds make profits and hedge losses is by building models that predict the short-term direction of various asset classes and buying futures contracts on them. It’s called a managed futures strategy.
This is according to iM Global Partners, which owns the iMGP DBi Managed Futures Strategy ETF (DBMF), the largest exchange-traded fund that copies this strategy. The fund manages just under $1 billion of his assets.
Andrew Beer, founder of DBMF and former portfolio manager at Seth Claman’s famous hedge fund Beaupost, said: “What we’re doing at DBMF is working with the biggest hedge funds in the space.” “It’s about researching 20 companies and figuring out their big deals.”
Beer said he started the fund because he wanted more people to be able to use the strategy at a lower price than hedge funds were offering. DBMF charges an expense ratio of 0.85%, compared to the 3% fees charged by many hedge funds.
The goal of this strategy is to provide a true hedge against stocks and bonds that have recently moved in tandem.
Traditionally, bonds move in the opposite direction of stocks, which is one reason for the classic 60% stocks, 40% bonds portfolio construction. However, in 2022, the S&P 500 index fell 25% from the beginning of the year to October 14, and bonds also underperformed amid rising interest rates. The iShares U.S. Treasury ETF (GOVT) is down 15.8% during this period. In 2023, both asset classes outperformed.
Managed futures strategies, on the other hand, take a short-term approach across stocks, bonds, commodities, and currencies and are typically uncorrelated with long-term bond or stock market performance. For example, from January 2022 to October 14, Credit Suisse Managed Futures Strategy (CSAIX) rose about 26%. Morningstar lists this mutual fund as a benchmark for its strategy.
So far in 2024, many funds in this space are up, outperforming the S&P 500. DBMF is one of the leaders, returning 13% year-to-date (versus 4% for the S&P 500).
Beer said the outperformance was driven by exposure to several different asset classes, including futures on the MSCI EAFE Index, which tracks developed market stocks. Beer said these assets have outperformed as investors have started to expect central banks to cut interest rates. The fund also benefits from exposure to gold and oil futures in the commodity space, he said. And third, the firm is long the US dollar, which has outperformed as interest rates are expected to remain high for an extended period of time.
With so many risks facing the market, including war, inflation, tight monetary policy, the 2024 U.S. election and high stock valuations, now may be a good time to hedge against the downside, experts say.
In addition to managed futures, some ways to protect against the downside of the stock market are to buy the CBOE Volatility Index or buy put options. For those interested in managed futures strategies, here are some funds in this space and their year-to-date and period from January 1, 2022 to October 14, 2022, when the S&P 500 fell 25% from high to low. I have summarized the performance. VettaFi’s assets under management figures are also included.
iMGP DBi Managed Futures Strategy ETF (DBMF)
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Here are the results from January to October 14, 2022: 33.9%
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2024 year-to-date revenue: 13.1%
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Assets under management: $988 million
First Trust Managed Futures Strategy Fund (FMF)
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Here are the results from January to October 14, 2022: 15.7%
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2024 year-to-date revenue: 7.3%
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Assets under management: $144 million
KFA Mt Lucas Managed Futures Index Strategy ETF (KMLM)
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Here are the results from January to October 14, 2022: 50%
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2024 year-to-date revenue: 8.8%
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Assets under management: $284 million
Simple Managed Futures Strategy ETF (CTA)
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Here are the results from January to October 14, 2022: 13.1%
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2024 year-to-date revenue: Not applicable (Fund established in March 2022)
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Assets under management: $178 million
