Managed Futures as a Strategy Massively Outperforms in 2022

It’s the year for trend-following strategies, with managed futures outperforming in hedge funds, mutual funds, and exchange traded funds when broad equities and bonds have suffered.

The managed futures strategy is a quantitatively driven approach to investing that tracks and invests in how assets are actually moving and trending. These funds typically take long and short positions on a variety of asset classes (commodities, equities, fixed income, and currencies) based on data analysis of how those assets are trending, not based on what investors believe future performance will be.

It’s a strategy that generally performs strongly during times of market regime change and dislocation. To say they have performed strongly this year would be a vast understatement.

“What stands out this year is that there have been good trends in multiple asset classes,” Yao Hua Ooi, portfolio manager of the AQR Managed Futures mutual fund, told Barron’s. “The upward surprises in inflation and the monetary-policy responses have led to the most dramatic rise in yields across most developed markets since the 1980s.”

Managed futures got their start in hedge funds, which have performed strongly this year. The SG CTA Index that tracks the major commodity trading advisors (CTA) open to new investments is up 28.24% year-to-date as of 10/17/2022 according to BarclayHedge. For comparison, a year ago the index was up 10.37% YTD and two years ago it was down 2.02%. The SG Trend Index, a subset of the SG CTA Index that tracks traders of trend-following strategies, was up 37.62% YTD as of 10/17/2022 according to BarclayHedge.

Access to hedge funds remains limited, however, typically reserved for institutional investors, barring many investors from gaining exposure to the hedge fund’s outperformance, and hedge funds come with steep management fees — 2% manager fees in addition to a 20% performance fee when the fund does well.

Several managed futures mutual funds are demonstrating even greater outperformance on an individual basis: the AlphaSimplex Managed Futures Strategy fund (ASFYX) was up 47.7% as of 10/17/22, and the AQR Managed Futures Strategy (AQMNX) is up 40.7% YTD. Most managed futures mutual funds are up at least 20% YTD but can be equally prohibitive to invest in, often with $1 million minimum investments and time commitments.

Capturing Hedge Fund Managed Futures Performance in an ETF

Managed futures take positions on equities and fixed income but they remain negatively correlated to both because they invest in the futures market. They have been a strong diversification play for portfolios this year and ETFs that utilize the strategy have been enormously popular. One such ETF is the $1b iMGP DBi Managed Futures Strategy ETF (DBMF), 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 36.60% returns year-to-date as of 10/04/2022. It is a five-star rated fund with Morningstar and is the largest of the managed futures ETFs.

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 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 0.95%.

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