How to Successfully Capture Hedge Fund Performance
There’s no denying that alternatives have become much more popular among advisors and investors this year than they have been over the past decade. The environment of sustained volatility and correlated, broadly negative stock and bond performance in 2022 has advisors looking for volatility mitigation, uncorrelated return streams and diversification, all things that alternatives can offer and hedge funds offer at a premium.
Hedge funds have a unique structure that allows them to bridge the gap between public and private investments, with the ability to invest in illiquid assets that public funds are excluded from. Hedge funds can invest in traditional stocks and bonds, derivatives, currencies, commodities, real estate, and essentially anything that the fund manager believes will make a profit, and can short, leverage, or concentrate their portfolios at will to maximize returns maximize.
Private hedge fund managers such as Millennium Management, DE Shaw and Citadel are among the best performing hedge funds, according to Andrew Beer, co-portfolio manager of iMGP DBi Managed Futures Strategy ETF (DBMF ) and managing director of Dynamic Beta Investments in a recent interview by Barron’s. However, accessing this type of hedge fund is incredibly difficult, if not impossible, for the average investor.
Investing in hedge funds comes with significant hurdles and high fees. Investors must be considered accredited with net worth of at least $1 million or annual individual income of $200,000 or more. The amount of money required as an initial investment is usually just as high, and hedge funds charge a fee of 2% on an asset basis on top of 20% of earnings per year, and some hedge funds require a minimum holding period of several years.
Liquid alts offer better access, not always better performance
Liquid alternatives, known as liquid alts, were a response to the adoption of hedge fund strategies in more accessible vehicles like mutual funds and ETFs. Some strategies have been successful, but many have struggled and underperformed over the past decade.
Take, for example, the average liquid alternative mutual fund from the Wilshire Liquid Alternative Index over the past 10 years. They’ve averaged just 1.7% annualized returns. Beer believes that “per year these [liquid alt] The funds raised are likely to be less than the average fees paid to their managers.”
It’s important to understand that no two liquid alternative funds are the same. There are a number of strategies and the role of the manager’s individual bias in implementing the strategy. Other factors may affect returns. It’s where the iMGP DBi Managed Futures Strategy ETF (DBMF ) differentiates itself from the competition, especially in the area of managed futures ETF Place.
DBMF is a managed futures ETF designed to capture performance regardless of how stock markets are moving. The Fund aims to provide long-term capital growth by investing in some of the most liquid US futures contracts in a hedge fund strategy and has invested over $900 million AUM.
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Managed futures hedge fund strategies tracked in an ETF
Managed futures has performed strongly in the volatility of 2022, generating significant returns by investing along data trends rather than possible prospects, and has been one of the most popular alternative strategies sought by advisors and investors this year. It’s a strategy that focuses very heavily on today’s realities versus possible projections of future performance, which has proven nearly impossible as investors grapple with an aggressive Fed and persistent inflation and the uncertainty both created have, have to fight.
Managed futures is also a strategy that was historically exclusive to hedge funds until recent years, locking many investors out of the potential diversification and uncorrelated stream of returns they can offer portfolios. Managed futures are one of only a few strategies that have been successfully transferred from hedge funds to the US ETF Packaging.
DBMF is a ETF which aims to replicate the performance of the average of the 20 largest CTA Hedge funds eliminate individual manager risk and offer significantly reduced fees – a 0.95% management fee – allowing investors to benefit more from actual returns than if they were investing in a hedge fund. DBMF’s year-to-date returns are 32.72%.
The fund also has strong portfolio diversification qualities as it includes asset classes that are uncorrelated to traditional stocks or bonds. It is an actively managed fund that takes long and short positions within derivatives, primarily futures and futures contracts. These contracts include domestic equities, fixed income, currencies and commodities (through its Cayman Islands subsidiary).
Stay tuned to the Managed Futures Channel for more news, information and strategy.