There are all kinds of trend tools and trend-following strategies when it comes to tracking funds and market movement. Funds that play to this kind of quantitative analysis-driven approach have seen renewed interest this year as volatility remains in markets and advisors and investors look for a way to play the volatility to their advantage.
Andrew Beer, co-portfolio manager of the iMGP DBi Managed Futures Strategy ETF (DBMF), and managing member at Dynamic Beta investments, the sub-advisor of the fund, was recently asked about hedge fund performance this year. DBMF is a managed futures fund that has performed strongly this year and looks to replicate the performance of the average of the 20 largest managed futures hedge funds.
Beer was specifically asked why managed futures hedge funds haven’t been heavily impacted by the recent crude oil price reversal. Beer took to Twitter to explain his answer, which was essentially that although crude oil has experienced an extremely strong first half, that upward movement has been volatile, as demonstrated in this graph:
Image source: Andrew Beer’s Twitter
The way that trend models approach that kind of performance, or in the case of the managed futures hedge funds, was to take a long position to capture the gains but to limit the size of the position to be less impacted in case of abrupt reversals. What’s more, a smart trend model that looked back historically over a longer period, in this case, five years, would have seen the “trap door” that crude oil can be when it comes to investing, Beer explained. It can be great until the bottom suddenly drops out and then that fall can be significant.
Image source: Andrew Beer’s Twitter
In the case of managed futures hedge funds, diversification provides a host of benefits with an immense amount of flexibility in changing positions from short to long across many asset classes, capturing opportunities in completely different areas, such as the Japanese Yen this year, while smartly playing assets like crude oil.
Trend Following the Trends with DBMF
Investors looking for a fund that has performed well during volatility, as well as trend-followers who are considering funds performing above their moving day averages should consider the iMGP DBi Managed Futures Strategy ETF (DBMF).
DBMF is a managed futures fund designed to capture performance no matter how equity markets are moving. The fund seeks long-term capital appreciation by investing in some of the most liquid U.S.-based futures contracts in a strategy utilized by hedge funds.
As of July 27, the fund was selling for $31.77 per share and was above its 200-day simple moving average of $29.26 but is below its 50-day simple moving average of $32.19. The simple moving average is one of the easiest ways to calculate moving averages. The SMA adds all of the daily closing prices within the time frame and then divides by the number of days. Trend-followers who utilize technical analysis to invest generally seek to buy funds that are performing over their moving averages and sell when they fall below.
DBMF allows for the diversification of portfolios across asset classes that are uncorrelated to traditional equities or bonds. It is an actively managed fund that uses long and short positions within derivatives, mostly futures contracts, and forward contracts. These contracts span domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).
The position that the fund takes within domestic managed futures and forward contracts is determined by the Dynamic Beta Engine. This proprietary, quantitative model attempts to ascertain how the largest commodity-trading advisor hedge funds have their allocations. It does so by analyzing the trailing 60-day performance of CTA hedge funds and then determining a portfolio of liquid contracts that would mimic the hedge funds’ performance (not the positions).
DBMF takes long positions in derivatives with exposures to asset classes, sectors, or markets that are anticipated to grow in value and takes short positions in derivatives with exposures expected to fall in value. Under normal market conditions, the fund seeks to maintain volatility between 8%–10% annually.
DBMF has a management fee of 0.85% and an additional 10 bps for other expenses listed in the prospectus.
For more news, information, and strategy, visit the Managed Futures Channel.