Alternative ETFs Finally Get Their Moment in the Sun

Episode Summary

Executive Summary: The episode examines how 60/40 portfolios failed in 2022 and why that’s reviving interest in alternatives, especially hedge-fund strategies packaged as ETFs. Guests Andrew Beer and Bob Elliott argue ETFs can democratize access to diversified, liquid, tax-efficient hedge-fund-like exposures—particularly managed futures and broader hedge-fund replication—while Kathy Burton adds perspective on industry reactions, fees, and the challenges of selling alts to advisors and institutions.

Main Topics: Why alternatives are back in focus (Priority: 5/5): The hosts frame 2022 as a rare year when stocks and bonds both fell, weakening the traditional 60/40 portfolio and increasing demand for non-correlated return streams and lower-volatility strategies. Managed futures as crisis diversification (Priority: 5/5): Andrew Beer explains DBMF and managed futures as a portfolio diversifier that can benefit from major dislocations, with futures-based exposure to trends in rates, commodities, and equities. Hedge-fund replication in an ETF wrapper (Priority: 5/5): Bob Elliott describes HFND as an attempt to replicate the gross-of-fees return profile of the hedge-fund industry using machine learning and an ETF structure, making hedge-fund-style returns more accessible. ETF democratization vs. hedge-fund exclusivity (Priority: 4/5): The discussion contrasts the openness, liquidity, and simplicity of ETFs with the traditional exclusivity, opacity, and lockups of hedge funds, while noting some institutions still prefer private structures. Fee compression and accessibility (Priority: 4/5): Speakers argue hedge funds can deliver strong returns, but fees and access barriers have historically left investors worse off; ETFs may improve investor outcomes through lower costs and easier access. Portfolio construction and role of alts (Priority: 4/5): The guests emphasize alternatives should complement, not replace, beta exposure; managed futures and hedge-fund strategies are positioned as modest allocations within broader portfolios. Industry outlook and product competition (Priority: 3/5): The conversation highlights the growth of hedge-fund ETFs, possible conversions of existing hedge funds into ETFs, and the likelihood of more sophisticated asset strategies entering the ETF market.

Key Arguments: The classic 60/40 portfolio is no longer reliably hedging risk when both stocks and bonds decline together, creating demand for alternative return streams. Managed futures are attractive because they historically performed well in major crises and can act like 'flood insurance' that pays off during market stress. ETFs are the best wrapper for many sophisticated strategies because they offer liquidity, transparency, tax efficiency, and easy advisor implementation. Many traditional hedge funds charge high fees and remain inaccessible, so ETF replication can improve investor outcomes by capturing returns net of lower costs. A good hedge-fund ETF should either replicate or infer the aggregate behavior of hedge funds without adding unnecessary proprietary overlays that dilute the strategy. Alternatives should be treated as a complement to beta, not a replacement; the goal is portfolio diversification and improved risk-adjusted returns. The hedge-fund ETF market is still small but could grow meaningfully as model portfolios and advisors seek access to alts in an implementable format.

Data Points: Hedge fund/alternatives market size cited: $5.1 billion - Eric says the alternatives category has grown sharply this year, though it is still small. Broad hedge fund industry assets: about $3 trillion - Kathy Burton says the hedge fund industry overall has stabilized around this level. DBMF performance this year: around 30% to 32% up - Andrew Beer and Eric describe strong performance in a tough year for stocks and bonds. Market drawdown referenced: about 20% down - Eric contrasts DBMF gains with the broad market decline during the year. DBMF assets: $1.1 billion - Eric notes the fund grew rapidly as performance improved. Managed futures ETF space size: around $1.7 billion - Andrew says his firm and competitors together total roughly this amount in the managed futures ETF niche. Potential hedge fund ETF market size: $50 billion to $200 billion - Andrew says some observers see large long-term growth potential for ETF-based hedge-fund products. Hedge fund portfolio volatility: about half of stock index volatility - Bob says gross-of-fees hedge fund returns can offer better returns than stocks with much lower volatility. Typical hedge fund fees: 2 and 20 - Bob references the traditional hedge fund fee model he worked in for 20 years. Competitor performance example: down 15% over 11 years - Andrew cites one hedge fund ETF competitor as evidence that some products have failed to replicate hedge fund returns. Another competitor performance example: about 2% per annum since 2007/2008 - Andrew criticizes another hedge-fund-like ETF for weak long-term returns. Historical criticism of fee capture: 89% of gains went to everyone but clients - Andrew cites a Bloomberg article about how fees historically captured most of the upside. Managed futures allocation range: 5% to 20% - Andrew says this is a typical bounded allocation range for the strategy. Sophisticated alts allocation range: 20% to 30% - Bob says top investors often allocate this share to alternatives/hedge fund strategies.

Pivotal Quotes: "“the 60 and the 40, the equities and bonds that most people have as a portfolio, is not really working like people thought this year.”" — Eric Baltunis: Opening framing for why alternatives are suddenly more relevant. "“it’s like flood insurance where you get paid to wait.”" — Andrew Beer: Simple explanation of managed futures as a crisis hedge and diversifier. "“The ETF is the best structure for the investor. Hands down, whether it's taxes, liquidity, transparency, it is the best structure.”" — Bob Elliott: Argument for using ETFs to package sophisticated hedge-fund-like strategies.

Implications: If 60/40 remains unreliable, advisors may increasingly use ETF-based alternatives—especially managed futures and hedge-fund replication—to add diversification, reduce fee drag, and simplify access for clients.