The Benefits of Replication and DBMF’s Outperformance YTD

Managed futures have been a popular investment this year as part of a bigger pivot to liquid alternatives in an environment that has challenged traditional 60/40 portfolios. Managed futures strategies can be wildly varied, as they take long and short positions on a whole range of asset classes (commodities, currencies, equities, etc.), but one fund is offering managed futures hedge fund strategies within the ETF wrapper, with great success.

Inflows have been pouring into the iMGP DBi Managed Futures Strategy ETF (DBMF), the most popular managed futures ETF on the market, and for good reason: year-to-date, the fund has a 25.04% return when equities and bonds have struggled.

DBMF is a managed futures fund designed to capture performance no matter how equity markets are moving. DBMF allows for the diversification of portfolios across asset classes that are uncorrelated to traditional equities or bonds and seeks to replicate the performance of the largest managed futures hedge funds while offering the savings that an ETF wrapper provides.

Athanasios Psarofagis, ETF analyst at Bloomberg, dug into liquid alternatives and the inflows and increased interest the space is seeing this year, given inflation and a rising interest rate environment that has been challenging for equities and bonds alike. He found that DBMF isn’t just outperforming this year, it’s outperforming the S&P 500 over the last three-year time period, measured through the SPDR S&P 500 ETF Trust (SPY).

Image source: Athanasios Psarofagis’s Twitter

Hedge Fund Performance at ETF Prices

The underlying thesis of DBMF is a simple one: “We think hedge funds are smart, we think they generate alpha. They take too much in fees, and if we can copy it cheaply, we’ll do as well or better than they do,” said Andrew Beer, co-portfolio manager of DBMF and managing member at Dynamic Beta investments, the sub-advisor of the fund, on a recent podcast.

Dynamic Beta investments believes that fee reduction “is the purest form of alpha” when it comes to hedge funds. Much of the alpha generated by hedge fund strategies is eaten up in fees, meaning that a large portion of the profits is never realized by investors. Through the mechanisms of the ETF vehicle, those fees can be drastically reduced and the profits preserved.

Beer discussed the challenges and value of replication, the history behind DBMF and the liquid alternatives industry as a whole, and dove into alpha generation on the “Flirting with Models” podcast hosted by Corey Hoffstein, CIO and co-founder of Newfound Research.

“The alpha generation there is factor tilts, but it’s short-term factor tilts,” Beer explained of the managed futures strategy that hedge funds utilize. “It’s shorter-term, it’s rotations, it’s things that are moving in the market.”

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).

In short, this means that the fund utilizes existing hedge fund strategies, pulled from 20 of the largest managed futures hedge funds through the performance data of the SocGen CTA Hedge Fund index, thereby eliminating bias and performance outliers that can happen when following just a single-issuer strategy.

“If you’re going to do replication right, you’ve kind of got to try to get yourself, as the allocator, out of the way as much as possible,” explained Beer.

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.