Inflation Fight Could Spill Into 2024: Navigate with Managed Futures

New York Federal Reserve Bank president John Williams believes that inflation will come down in 2023 but that it likely won’t be enough to meet the Fed’s target of 2% by the end of next year. This means that the Fed’s active fight against inflation and sustained interest rates could last into 2024, potentially prolonging market uncertainty and volatility, an environment in which managed futures historically have outperformed in.

Williams, vice chair and permanent member of the FOMC that sets monetary policy, anticipates that inflation will drop substantially from where it is now, as measured by the personal consumption expenditures price index, an index that captures price changes in services and goods for consumers. PCE in September was 6.2% (released on a quarterly basis) and Williams believes that number will fall to between 5.0%-5.5% by the end of next month, and will likely end next year between 3.0%-3.5%.

“There is still more work to do,” said Williams in a speech on Monday.

The Fed’s target of 2% would mean that  the Fed will need to keep pressure on throughout next year and into 2024, and most of the declines are likely to come from external inflationary pressures easing such as decreases in global demand and supply chain issue resolutions. It remains unknown how the inflationary pressures from wage growth will respond to the monetary tightening policy currently in place but thus far they have proven resilient.

Navigating Prolonged Inflation with DBMF

Managed futures have been a popular strategy in a year of prolonged market volatility, riding high on their ability to take long and short positions on a number of asset classes via the futures market. These strategies rely on trend-following that only invests based on how stocks are currently moving, not where they could be headed, an approach that could be a boon in an environment of prolonged Fed tightening.

The iMGP DBi Managed Futures Strategy ETF (DBMF) has been a strong performer and immensely popular choice for advisors and investors alike in the challenging environment of 2022.

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 24.06% returns year-to-date as of 11/25/2022. It has over $1 billion in AUM and is the largest of any managed futures ETF.

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 the futures market on several asset classes; domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).

The position that the fund takes within domestically managed futures and forward contracts is determined by the Dynamic Beta Engine which analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged 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.

DBMF has a management fee of 0.95%.

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