How to Successfully Capture Hedge Fund Performance in an ETF: DBMF

There’s no denying that alternatives have become much more popular with advisors and investors this year than they have been over the last decade. The environment of sustained volatility and correlated, largely negative performance of stocks and bonds in 2022 have advisors hunting for volatility mitigation, uncorrelated return streams, and diversification, all things that alternatives can provide and hedge funds offer in spades, for a cost. Hence why DBMF has seen such popularity in 2022.

Hedge funds have a unique structure that lets them straddle the divide between public and private investment, with the ability to invest in illiquid assets that public funds are barred from. Hedge funds can invest in traditional stocks and bonds, derivatives, currencies, commodities, real estate, and essentially anything that the fund manager believes will turn a profit, and can short-sell, leverage, or concentrate their portfolios at will to maximize returns.

Private hedge fund managers such as Millennium Management, D.E. Shaw, and Citadel are some of the strongest performing hedge funds according to Andrew Beer, co-portfolio manager of the iMGP DBi Managed Futures Strategy ETF (DBMF) and managing member of Dynamic Beta investments in a recent Barron’s interview. Accessing these kinds of hedge funds is incredibly difficult, if not impossible for the average investor, however.

Investing in hedge funds comes with significant hurdles as well as steep fees. Investors must be considered accredited, with a net worth of $1 million minimum, or an annual individual income of $200,000 or more. The amount of money required as an initial investment is usually equally significant, and hedge funds charge a 2% fee based on assets in addition to 20% of profits each year, and some hedge funds require a minimum holding time of several years.

Liquid Alts Offer Better Access, Not Always Better Performance

Liquid alternatives, known as liquid alts, have been an answer to capturing hedge fund strategies within more accessible vehicles such as mutual funds and ETFs. Some strategies have been successful but many have struggled and underperformed in the last decade.

Take, for example, the average liquid alt mutual fund from the Wilshire Liquid Alternative Index in the last 10 years. They have on average offered up only 1.7% annualized returns. Beer believes that the “per annum that these [liquid alt] funds have earned are probably less than the fees on average that were paid to their managers.”

It’s important to understand that no two liquid alts funds are the same. There is a range of strategies and the role of individual manager bias in executing strategy. More factors at play can affect returns. It’s where the iMGP DBi Managed Futures Strategy ETF (DBMF) is different from the competition, particularly within the managed futures ETF space.

DBMF is a managed futures ETF 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 and has over $900 million in AUM.

Managed Futures Hedge Fund Strategies Captured in an ETF

Managed futures have been a strong performer in the volatility of 2022, creating significant returns by investing along data trends instead of possible outlooks, and have been one of the most popular alternative strategies sought out by advisors and investors this year. It’s a strategy very much focused on the realities of now compared to possible forecasts of future performance, something that’s proven all but impossible as investors contend with an aggressive Fed and persistent inflation and the uncertainty both have created.

Managed futures are also a strategy that has historically been relegated solely to hedge funds until recent years, locking many investors out of the potential diversification and non-correlated return stream that they can provide portfolios. Managed futures are one of only a handful of strategies that have been successfully translated from hedge funds to the ETF wrapper.

DBMF is an ETF that seeks to replicate the performance of the average of the 20 largest CTA hedge funds, eliminating individual manager risk as well as offering significantly reduced fees — a 0.95% management fee — that allows investors to capture more of the actual return stream than they would if invested in a hedge fund. Year-to-date DBMF’s returns are 32.72%.

The fund also has strong diversification qualities for portfolios because it spans 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).

For more news, information, and strategy, visit the Managed Futures Channel.