A tried-and-true trend-following strategy can work wonders for an investor — until it actually stops working wonders. Adding a managed futures component strategy to the mix, however, can add a layer of portfolio protection.
Trend following involves scanning the markets for possible signs of upside and aptly taking advantage of the momentum. This can occur across a wide variety of asset classes given the current macroeconomic environment. It can work in bull or bear markets. Academic studies in finance have also documented the success of such trend-following strategies over an extended time period.
“A well-studied anomaly in academic literature, beginning with Jegadeesh and Titman, 1993, momentum is a recognized phenomenon across global asset classes,” global asset management firm Pimco noted. It was referencing “Returns To Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” by Narasimhan Jegadeesh and Sheridan Titman. The work was published in The Journal of Finance in March 1993. “And in practice, it has worked remarkably well over long periods of time, generating positive returns with low correlations to stocks and bonds, and especially strong positive returns during equity bear markets.”
A trend-following technique like a managed futures strategy steeped in momentum sounds appealing. But he question now is, how can investors get this exposure conveniently? Hedge funds can be one option. But for the typical retail investor, there’s another way.
Managed Futures Exposure the Easy Way
Because of their complexity, implementing a managed futures strategy can seem like a daunting proposal for most investors. However, there’s an easier way to get exposure. That’s via the iMGP DBi Managed Futures Strategy ETF (DBMF). It seeks to replicate the pre-fee performance of leading managed futures hedge funds. It also aims to outperform through fee/expense disintermediation via active management.
Having that active management feature means investors can leave the complexities of the managed futures strategy in the hands of seasoned portfolio managers. As such, active management provides dynamic market exposure. This is because said portfolio managers can easily flex with changing market conditions by adding to or subtracting from the fund’s holdings when conditions warrant a change. This is especially helpful in the current market where portfolios are sensitive to financial news, namely the direction of interest rates.
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 hedge funds and then determines a portfolio of liquid contracts that would best mimic the hedge funds’ averaged performance.
Furthermore, DBMF allows for the diversification of portfolios by allocating capital to a variety of asset classes that are uncorrelated to typical capital market assets. 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 in heavy volatility.
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