‘Collision protection mode’ helps managed futures ETFs crush rivals


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While stocks, bonds and real estate are underwater this year, most exchange-traded fund investors are taking heavy losses.

A small corner of the ETF world provided decent returns, despite – or perhaps because of – red ink elsewhere.

Managed futures funds take both long and short positions in futures contracts related to stocks, bonds, commodities and currencies, potentially allowing them to make money even when markets fall – as long as there is a clear trend to follow.

And this year there has certainly been some with the iMGP DBi Managed Futures Strategy ETF (DBMF), by far the largest such fund with assets of $925 million, currently having short exposure to virtually every asset it tracks.

“Managed futures funds are in collision protection mode – as well positioned on the downside as they have been at any time in the past decade and a half. They are betting the chaos continues,” said Andrew Beer, co-manager of the fund.

So far this year, the DBMF has risen 30.3%, broadly matching the 24% gain of the Societe Generale CTA Index, which tracks the performance of trend-following “quantitative” hedge funds, known as Commodity Trading Advisors.

In such a difficult year for the markets – only 6% of the 2,754 ETFs listed in the United States have generated positive returns so far this year according to Aniket Ullal, head of ETF data and analysis at CFRA Research – these gains fueled entries. Lots of inflows: DBMF started the year with just $60 million to its name.

“[Managed futures ETFs] are crushing it this year,” said Todd Rosenbluth, head of research at VettaFi. “They are doing what they intended to do, which is to behave differently from the broader market and provide an alternative to traditional stock and bond ETFs.”

The strategy has been particularly hot this year as bonds, the traditional counterweight to equities in a diversified portfolio, have also plunged.

“There is a case where you need to diversify your diversifier,” said Bryan Armour, director of passive strategies research, North America, at Morningstar.

“A lot of people use bonds to go up when stocks are down, but that won’t always work, as 2022 has shown. The more uncorrelated assets you can hold, the better.”

DBMF is typical of ETFs in the industry in that it attempts to replicate the average return of 20 CTAs managed by houses such as Man Group’s AHL unit, AQR Capital Management and CFM – but with a lower minimum investment,” lower fees [85 basis points]better liquidity and maybe better downside risk,” Beer said.

Column chart of SG CTA Index, annual return (%) showing Off Chart

“We surpassed the 20 [underlying CTAs] on a net of fee basis,” he added. “We outperform in the smartest, oldest way: we’re cheaper.”

Beer analyzes the daily performance data of the 20 funds. This is compared to the performance of a portfolio of 10 major futures contracts that Beer says “make a difference”, such as gold, crude oil, yen, euro, two-way treasury bills. and 10 years and the S&P 500.

DBMF’s algorithm then attempts to determine the CTA positioning in the 10 key contracts and replicate it, rebalancing weekly.

“It’s style analysis based on returns,” he said. “We capture their big changes in the portfolio. Managed futures are a shockingly simple strategy,” while being a little behind isn’t too important because “nobody runs the 10-year Treasury.” [contract]it’s so runny.

Managed futures funds were out of favor for much of the post-global financial crisis period as stocks and bonds rose largely in unison, obviating the need for a more complex and diverse.

Despite this, the approach still has its supporters.

Armor analyzed the period from 2000 to August of this year. He found that a 60/20/10/10 portfolio of stocks, bonds, managed futures and gold beat a traditional 60/40 stock/bond portfolio by 52 basis points per year. annualized, while outperforming on a risk-adjusted basis, even taking into account the higher fees charged by managed futures vehicles. The maximum drawdown was also lower.

“Portfolios that diversify beyond bonds don’t fully protect investors from bear markets, but they can turn into winning long-term strategies,” Armor said. “Droughts should be shorter and shallower when diversifying diversifiers, which should pay off in the long run.”

Rosenbluth largely agreed, but with a caveat. “There is a role for these products in a portfolio during volatile markets, but this should be a slice of a satellite portion. If we get a rally in traditional markets, this strategy may fall behind,” a- he declared.

For now, DBMF is positioned at extremely bearish levels, close to the depths of the global financial crisis.

Earlier in the year, crude oil was a source of income, but the fund now has a solitary long position in S&P 500 futures, which is just 1.5% of the portfolio. It is swimming in a sea of ​​short selling, particularly in US Treasuries and bonds, the euro, the yen and stocks in developed markets outside the United States.

Unlike a more evangelical investor such as Ark Invest’s Cathie Wood, Beer said the quantitative funds he tried to emulate were, however, not tied to their positions and could change them in a flash.

“They believe we are in the midst of a colossal regime change [the rising dollar], but when it stops working, they will come out,” he said. “It’s not Cathie Wood. They are cold and imperturbable.

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