Wealth managers and asset allocators who require daily liquidity and lower fees are increasingly accessing managed futures to gain broad exposure to hedge fund strategies.
From providing low correlation to tapping into the most important thematic trades, Andrew Beer, portfolio manager of the iMGP DBi Managed Futures Strategy ETF discusses four reasons why managed futures can provide a crucial stream of diversification during times of elevated volatility.
Low correlation with low fees
Managed futures hedge funds – also known as CTAs – have a low or zero correlation to other major asset classes, which means they can offer attractive diversification benefits over a market cycle. Furthermore, they have tended to deliver positive returns during periods of market stress. Using quantitative models, these funds seek to identify the key trends and trades in financial markets.
For example, the iMGP DBi Managed Futures fund provides exposure to this style of investing by replicating the major positions of a basket of leading CTAs through futures contracts in equities, bonds, commodities, and currencies. Traditionally, most hedge funds have taken a large portion of the returns in the form of high management and performance fees but managed futures enable wealth managers to access similar performance without the fee drag.
Advanced risk models
We are trying to solve the two biggest challenges of investing in the space: high fees and single-manager risk. In a sense, we are trying to provide easy and efficient access to the space for wealth managers and allocators.
To do this, we use advanced risk models to determine the most important trades across the space overall and implement them efficiently in the fund. By focusing on efficiency and charging reasonable fees, we hope to outperform actual hedge funds over time.
Diversified hedge fund exposure
We focus on the largest hedge funds in the space. We are not trying to pick any particular fund – all the largest funds have been extremely successful, but they do go through big ups and downs.
Rather, we want to know what they are invested in today, on average – to replicate a small allocation to each one. But since actually investing with them is prohibitively expensive to most investors and requires high minimums, we simply emulate their exposures and expect to deliver similar performance over time.
Performance port in a storm
Like any strategy, managed futures go through good times and bad times. We like to say that ‘20% of the time, managed futures will be your favourite strategy’. By this, we mean that in the worst market conditions – like 2008 or 2022 – the strategy has made big gains when almost everything else went down.
Managed futures have therefore become a beacon of green in a sea of red in times of acute market stress. The rest of the time, managed futures tend to generate modest returns with periodic drawdowns.
The challenge for allocators is to hold the strategy through a market cycle and not try to time it. For example, almost everyone who tried to time managed futures missed the big gains in 2022.
Overall, managed futures can provide many benefits to wealth managers and asset allocators including diversification, low correlation, advanced risk models, and performance during turbulent times.
