The S&P 500 is up about 5% to start 2023, but another notable thing is the lack of volatility to start the new year. That, however, could be the calm before the storm, which makes a managed futures strategy worth considering for the rest of 2023.
In the past year full of stock market fluctuations, the CBOE Volatility Index (VIX) was past the 60% mark on four separate occasions. So far to start the new year, the index is down 13%, but a lot of market questions have yet to be answered.
The expectation is that the U.S. Federal Reserve will slow down the pace of interest rate hikes, restoring confidence in the economy and likewise, the stock market. Unfortunately, nobody owns a crystal ball when it comes to market movements, and thus, it only makes sense to avoid an overabundance of optimism and protect the downside.
With inflation still relatively high and the threat of a recession still looming as the Fed adjusts its monetary policy, hedging against another managed downturn can be had in a variety of ways. As an option, investors can protect the downside and also add a touch of diversification to their portfolios by utilizing a managed futures strategy—it exposed investors to a portfolio of futures contracts under the watchful eye of experienced market professionals.
A Convenient Managed Futures Strategy
A managed futures strategy is easily encapsulated in the iMGP DBi Managed Futures Strategy ETF (DBMF). Per its fund description, it seeks to replicate the pre-fee performance of leading managed futures hedge funds and to outperform through fee/expense disintermediation.
Additionally, the fund allows for the diversification of portfolios by allocating capital to a variety of asset classes that are uncorrelated to typical capital market assets like stocks and bonds. As mentioned, it adds the watchful eye of professional managers, meaning it’s an actively managed fund that uses long and short positions within the futures market.
Having active management allows for dynamic market exposure where portfolio managers can easily flex with changing market conditions by adding to or subtracting from the fund’s holdings when conditions warrant a change. Active management essentially acts as a downside protection feature baked into the fund.
The fund’s positions within domestically managed futures and forward contracts are determined by the Dynamic Beta Engine. This strategy analyzes the trailing 60-day performance of Commodity Trading Advisor (CTA) hedge funds and then determines a portfolio of liquid contracts that would best mimic the hedge funds’ averaged performance.
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. This allows investors to capture the upside while also protecting the downside, and as 2022 taught investors, having that level of flexibility is crucial in 2023 where, as mentioned, market unknowns still exist.
For more news, information, and analysis, visit the Managed Futures Channel.