The strong but brief bearish rally buoyed by hopes of easing inflation from October’s inflation data has come to an abrupt end ahead of the short Thanksgiving week for US markets. Volatility remains a consistent component of markets this year, something managed futures strategies can benefit from, alongside the numerous benefits they can bring to portfolios.
Managed futures strategies, sometimes referred to as CTAs after the commodity trading advisors that operate them, trade in the futures market, taking long and short positions in multiple asset classes based on how they are currently performing. They are essentially the ultimate trend-following strategy, distilling out the emotional side of investing and based purely on data rather than investor sentiment, and have historically been locked behind hedge funds but have moved to cost-saving ETFs in recent years.
Trend-following strategies have historically performed well in market shifts, and managed futures have been described as “crisis alpha” generators of market dislocation and regime shifts. In this year of ongoing uncertainty and market volatility, they have risen to the top, often some of the only ETFs to offer positive performance when stocks and bonds have fallen.
Managed futures take long or bullish positions in positive trending asset classes – a big win this year was long crude oil positions in the first half of the year – and short or bearish positions in negative trending asset classes. It’s been pretty much everything else this year, including stocks and bonds, but especially foreign currencies, which have been squeezed by a strong US dollar.
These types 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 interest rates, trend following in bonds will contribute well to the yield profile even in times of inflation.”
Because of their dynamic nature in the futures market, they can respond to the changing market landscape while providing uncorrelated returns and diversification for stock and bond portfolios. When equity values in a portfolio (inherently long positions) are falling, managed futures can provide short positions and provide diversification. The same is true for bonds in a rising interest rate environment, with managed futures being able to short bonds while portfolios are traditionally long bonds.
“These alternative investments have historically been less correlated to long stocks or bonds and have performed better in down markets,” said Todd Rosenbluth, research director at VettaFi, in the same interview. “Advisors looking to better diversify a client’s portfolio should consider holding up to a 5% stake in managed futures.”
Invest in managed futures with DBMF
That iMGP DBi Managed Futures Strategy ETF (DBMF) has proven to be a strong performer and a hugely popular choice for advisors and investors in the challenging environment of 2022.
The fund seeks long-term capital growth by investing in some of the most liquid US futures contracts in a strategy employed by hedge funds and has returned 25.77% year-to-date as of 11/18/2022. It has over $1 billion in assets under management and is the largest of any managed futures ETF.
DBMF enables portfolio diversification across asset classes uncorrelated to traditional stocks or bonds. It is an actively managed fund that takes long and short positions in the futures market across multiple asset classes; domestic equities, fixed income, currencies and commodities (through its Cayman Islands subsidiary).
The fund’s position within domestically managed futures and futures 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 represents the average performance of the would mimic hedge funds (not the positions).
DBMF has an expense ratio of 0.95%.
For more news, information and analysis, visit the Managed Futures Channel.