• January 26, 2023

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With both stocks and bonds falling sharply this year, investors becoming discouraged by a standard 60/40 portfolio are beginning to pile into one three-year-old ETF that has 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% decline and the Bloomberg U.S. Aggregate Bond Index’s 10% drop. Managed futures funds are actively managed portfolios of futures contracts for assets ranging from stock indexes to commodities like oil and gold. Dynamic Beta’s fund aims to replicate managed futures strategies at 20 other hedge funds and investment firms and charges a mere 0.85% in management fees. Dynamic Beta’s founder and co-managing member Andrew Beer, who runs the firm with a 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’s 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 by cutting fees.” Most managed futures hedge funds charge limited partners 20% in performance fees based on profits and 2% administration fees per year.

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Managed futures funds have largely fallen out of favor in the last decade, lagging behind stocks during the bull market following the Great Recession. Societe Generale’s CTA index tracking the 20 largest such funds at firms like Clifford Asness’ AQR and Systematica Investments has gained more than 7% in a year only once since 2010. But when the stock market plunged in years like 2002 and 2008, the index returned double digits.

Many of these hedge funds are out of reach for retail investors, with high account minimums and management and performance fees that eat away at returns. Beer contends that Dynamic Beta’s ETF, trading under the ticker DBMF, can come close to replicating their portfolios for a fraction of the cost.

Dynamic Beta’s model analyzes daily data on returns for the 20 funds in the managed futures index and maps it to the market’s daily fluctuations to approximate how long or short the hedge funds are in futures contracts for various stock indexes, bonds, currencies and commodities. The ETF rebalances every Monday based exclusively on this algorithm. It’s grown from $65 million to $418 million in assets this year, with heavy inflows through June and July.

The biggest driver of DBMF’s gains this year has been its heavy short position on the Japanese yen, which has declined 14% against the dollar in 2022. The fund is also short the euro, short U.S. Treasuries and short 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 that macro picture can replicate 90% or more of the pre-fee returns of leading hedge funds, Beer says.

“We’re not trying to say these guys have X amount in pork bellies and copy that. We’re basically saying, what are the big trades?” Beer says. “You don’t need to pay somebody 4% or 5% to do the big trades. We’ll do it and we’ll do it efficiently.”

Beer started his career out of Harvard Business School in 1994 in the traditional hedge fund world, landing a job working for Seth Klarman’s Baupost Group. In the early 2000s, he tried his hand at branching out on his own, cofounding two small hedge funds: commodity trading firm Pinnacle Asset Management and China-focused Apex Capital Management.

After a few years, he started the venture that would become Dynamic Beta in 2007 as Belenos Capital Management. Its initial fund did well in the recession, but growth was slow for the first decade while its assets were housed in managed accounts with higher minimums. It didn’t help marketing that managed futures flopped for the next several years.

In 2018, French firm 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 staff launched the managed futures ETF in May 2019, and an equity long-short ETF came next in December of that year, aiming to replicate the gross returns of 40 equity hedge funds. That 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 mutual funds which are based in the European Union–as well, Dynamic Beta now manages $1.2 billion altogether.

There are no other managed-futures ETFs close to the size of DBMF, though the firm does have competition in the broader hedge-fund-replication sector. New York Life subsidiary Index IQ offers a hedge multi-strategy tracker ETF (QAI), down 7% this year, which seeks to replicate a variety of tactics. It has 0.75% management fees and $730 million in assets. Beer is hopeful that any of Dynamic Beta’s products could scale to become multi-billion dollar funds as investment advisors look beyond traditional stock-and-bond allocations.

“We believe that there are thousands or tens of thousands of RIAs who are now looking at the collapse in 60/40 portfolios and saying, I need something to add to this,” Beer says. “The next step is to get a big following in the wirehouses and the Morgan Stanleys and Merrill Lynches of the world.”

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