One of the ways hedge funds drive returns and hedge against losses is by building models to predict the near-term direction of different asset classes and buying futures contracts on them. It's called a managed futures strategy.
That's according to iM Global Partner, which has the largest exchange-traded fund — iMGP DBi Managed Futures Strategy ETF (DBMF) — that copies the strategy. The fund manages just under $1 billion in assets.
"What we do in DBMF is we look at the 20 largest hedge funds in the space and we figure out their big trades," said Andrew Beer, the founder of DBMF and former portfolio manager at Seth Klarman's famed hedge fund Baupost.
Beer said he started the replication strategy at DBi and launched the fund in conjunction with iM Global Partner to make the strategy available to a wider audience at a cheaper price than hedge funds offer. DBMF charges a 0.85% expense ratio versus the 3% fees many hedge funds take.
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The goal of the strategy is to provide a true hedge to stocks and bonds, which have recently been moving in lockstep.
Traditionally, bonds have moved in the opposite direction of stocks, which is part of the reason for the classic 60% stocks and 40% bonds portfolio construction. But in 2022, when the S&P 500 fell 25% between the start of the year and October 14, bonds also underperformed amid rising interest rates. The iShares US Treasury Bond ETF (GOVT) was down 15.8% over that time. In 2023, both asset classes outperformed.
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Meanwhile, a managed futures strategy, with its short-term approach across stocks, bonds, commodities, and currencies, is generally uncorrelated to longer-term bond and stock market performance. From January to October 14, 2022, for example, the Credit Suisse Managed Futures Strategy (CSAIX) was up around 26%. Morningstar lists the mutual fund as the strategy's benchmark.
So far in 2024, many funds in the space are up, even beating the S&P 500. DBMF is among the leaders, delivering 13% returns year-to-date versus the S&P 500's 4%.
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Beer said the outperformance has been driven by exposure to a few different asset classes, including futures on the MSCI EAFE Index, which tracks developed-market equities. Those assets have outperformed as investors have started to anticipate central bank rate cuts, Beer said. The fund has also benefited from exposure to futures on gold and oil in the commodities space, he said. And third, the firm is long the US dollar, which has outperformed as rates are expected to stay elevated for longer.
With a laundry list of risks facing markets — wars, inflation, tight monetary policy, the 2024 US election, high stock valuations, and more — now may be a good time to hedge the downside, experts say.
In addition to managed futures, some ways to protect against stock market downside are buying the CBOE volatility index or buying put options. For those interested in a managed futures strategy, we've compiled some funds in the space, their performances year-to-date and between January 1 and October 14, 2022, when the S&P 500 fell 25% peak-to-trough. Assets-under-management figures are also included from VettaFi.
iMGP DBi Managed Futures Strategy ETF (DBMF)
January-October 14, 2022 returns: 33.9%
2024 year-to-date returns: 13.1%
Assets under management: $988 million
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First Trust Managed Futures Strategy Fund (FMF)
January-October 14, 2022 returns: 15.7%
2024 year-to-date returns: 7.3%
Assets under management: $144 million
KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM)
January-October 14, 2022 returns: 50%
2024 year-to-date returns: 8.8%
Assets under management: $284 million
Simplify Managed Futures Strategy ETF (CTA)
January-October 14, 2022 returns: N/A (fund was launched in March 2022)
2024 year-to-date returns: 13.1%
Assets under management: $178 million
