Federal Reserve Chair Jerome Powell spoke before lawmakers this week to convey the central bank’s perspective regarding interest rate hikes and inflation going forward. While Powell doubled down on the Fed’s willingness to stay the course until inflation is under control, even at the cost of the economy, concerns remain that many of the inflationary pressures are outside of the Fed’s reach.
Dynamic Beta Investments has been considering the impact of inflation on traditional 60/40 portfolios since February 2021, when they outlined why some of the traditional portfolio protections from inflation such as gold, TIPS, and real estate ultimately could prove problematic in an inflationary environment where both equities and bonds struggle.
Where the potential windfall for portfolios would instead be in areas of more flexibility, and it’s proven to be the case in the challenging economic and market environment of rising rates, soaring inflation, and quantitative tightening by the Fed.
“For more flexible investors, however, a return of inflation has the potential to create opportunities: short positions in Treasuries, tactically and strategically long positions in commodities, short positions in the US dollar, and rotation into inflation-sensitive areas of the equity markets,” the authors wrote.
Managed futures strategies provide exactly this kind of flexibility in the positions they can take within commodities, currencies, equities, and more. They offer the twin-fold benefits of low to zero correlation to equities and bonds, providing diversification opportunities for portfolios, while also generating “crisis alpha.”
Crisis alpha strategies are investment opportunities that can find the pockets of profit during times of severe market stress and dislocations, including within fixed income, currencies, equities, commodities, and more. The term was coined by Kathryn Kaminski, Ph.D., CAIA, current chief research strategist at AlphaSimplex Group, shortly after the financial crisis of 2008–2009.
The Added Benefits that DBMF Captures
The iMGP DBi Managed Futures Strategy ETF (DBMF) is a managed futures fund sub-advised by Dynamic Beta investments and is 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.
DBMF is particularly attractive in the current market environment because it seeks to offer the performance of the largest managed futures hedge funds while offering inherent savings of approximately 5% on fees alone, converting the savings into better return capture for investors. Additionally, DBMF reduces the individual bias that can happen by following a single managed futures mutual fund and instead seeks to track the performance of the average of the 20 largest mutual funds.
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).
“Rather than replace other inflation hedges, we believe managed futures can serve as another valuable complement to an existing equity or bond allocation. Faced with headwinds in traditional portfolios, we believe that diversification into strategies that potentially can benefit during an inflationary environment is prudent,” the authors wrote, words that ring true almost a year and a half later.
DBMF has a management fee of 0.85% and an additional 10 bps for other expenses listed in the prospectus and has $311 million in AUM, the largest managed futures ETF to date.
For more news, information, and strategy, visit the Managed Futures Channel.