With stocks and bonds down sharply this year, investors discouraged by a standard 60/40 portfolio are starting to cram into a three-year ETF that served as an effective hedge for this year’s bear market.
New York-based Dynamic Beta Investments’ managed futures strategy ETF has gained 22% this year, far outperforming the S&P 500 Index’s 10% drop and the 10% drop in the Bloomberg US Aggregate Bond Index. Managed futures funds are actively managed portfolios of futures contracts for assets ranging from stock indices to commodities such as oil and gold. Dynamic Beta’s fund aims to replicate the managed futures strategies of 20 other hedge funds and investment firms and charges just 0.85% management fees. Dynamic Beta founder and co-manager Andrew Beer, who runs the firm with Paris-based partner Mathias Mamou-Mani, boasts that a podcast recently dubbed him the “Jack Bogle of hedge funds.”
“No one has figured out how to pick which hedge fund is going to do well, just like they haven’t figured out how to pick which stock is going to do well,” Beer says. “The most reliable way to outperform is to reduce fees.” Most managed term hedge funds charge limited partners 20% profit-based performance fees and 2% administration fees per annum.
Managed futures funds have largely fallen out of favor over the past decade, lagging equities during the bull market that followed the Great Recession. Societe Generale’s CTA index, which tracks the 20 largest such funds in companies like Clifford Asness’ AQR and Systematica Investments, has gained more than 7% in a year just once since 2010. But when the stock market plunged in years like 2002 and 2008, the index returned double-digit figures.
Many of these hedge funds are beyond the reach of retail investors, with high account minimums and management and performance fees that eat away at returns. Beer argues that Dynamic Beta’s ETF, which trades under the symbol DBMF, can come close to replicating their portfolios for a fraction of the cost.
Dynamic Beta’s model analyzes daily data on the returns of the 20 funds in the Managed Futures Index and maps it to daily market movements to roughly determine the long or short position of hedge funds in futures contracts for various stock indices, bonds, currencies and commodities. The ETF rebalances itself every Monday based exclusively on this algorithm. It has grown from $65 million to $418 million in assets this year, with strong inflows in June and July.
The main driver of DBMF’s gains this year has been its strong short position in the Japanese yen, which is down 14% against the dollar in 2022. The fund is also short the euro, short the US Treasuries and short on the S&P 500 and international stocks. Its only long position is in crude oil. DBMF’s portfolio is simple, with just 10 futures contracts included, but this macro image can replicate 90% or more of the pre-fee returns of major hedge funds, Beer says.
“We’re not trying to say these guys have X amount of pork belly and copy that. We’re basically saying, what are the big trades? says the beer. “You don’t have to pay someone 4% or 5% to make the big trades. We will do it and we will do it efficiently.
Beer began his career at Harvard Business School in 1994 in the traditional hedge fund world, landing a job with Seth Klarman’s Baupost Group. In the early 2000s, he tried his hand at co-founding two small hedge funds: commodities trading firm Pinnacle Asset Management and China-focused Apex Capital Management.
After a few years, he launched the company that would become Dynamic Beta in 2007 under the name Belenos Capital Management. His initial fund performed well during the recession, but growth was slow for the first decade as his assets were housed in managed accounts with higher minimums. That didn’t help marketing, which had been dealing with futures for several years.
In 2018, the French company iM Global Partner bought a 50% stake in Dynamic Beta. IMGP scours the world for unique asset managers to partner with and was looking for a footprint in the “liquid alternatives” space. With their help, Beer and his team launched the managed futures ETF in May 2019, and a long-short equity ETF came next in December of that year, aiming to replicate the raw returns of 40 hedge funds from around the world. actions. This fund hasn’t generated as much traction, with just $16 million in assets, and it’s down 1.6% this year. With three UCITS products – effectively European Union-based mutual funds – as well, Dynamic Beta now manages $1.2 billion in total.
There are no other managed futures ETFs close to the size of DBMF, although the firm has competition in the broader hedge fund replication industry. Index IQ, a subsidiary of New York Life, offers a multi-strategy hedging (QAI) ETF, down 7% this year, that seeks to replicate a variety of tactics. It has management fees of 0.75% and assets of $730 million. Beer hopes that all of Dynamic Beta’s products can scale into multi-billion dollar funds as the investment advisers move beyond traditional stock and bond allocations.
“We think there are thousands or tens of thousands of RIAs now watching the collapse of the 60/40 portfolios and saying, I need something to add to this,” Beer says. “The next step is to get a large following in the wire houses and the Morgan Stanleys and Merrill Lynches of the world.”