At The Money: Diversifying with Managed Futures ETFs

Episode Summary

Executive Summary: The conversation centers on how rising inflation and market shocks have weakened the classic 60/40 portfolio, making low-correlation diversifiers more important. Andrew Beer argues that most liquid alts fail, while managed futures and hedge-fund replication can provide true diversification through low-cost, liquid ETFs with limited blow-up risk. He also emphasizes that advisors should frame these products as insurance, not star investments.

Main Topics: Why stocks and bonds no longer diversify as reliably (Priority: 5/5): Beer explains that inflation has pushed stock-bond correlations higher, undermining the traditional 60/40 portfolio and making equity-risk diversification harder. Managed futures as the most effective diversifier (Priority: 5/5): He argues managed futures have the strongest diversification benefit because they have little correlation to stocks and bonds and tend to perform best in difficult market regimes. Critique of the liquid alternatives industry (Priority: 5/5): Beer says many liquid alt products are marketed as diversifiers but usually correlate closely with equities and deliver poor returns after fees. Hedge fund replication through ETFs (Priority: 4/5): DBI’s strategy is to identify the major themes and trades hedge funds pursue, then replicate them cheaply and transparently in liquid vehicles. Low blow-up risk and risk management (Priority: 4/5): Beer distinguishes managed futures from leveraged products that can fail due to illiquidity or borrowing pressure, arguing futures strategies are more liquid and actively managed. Diversification as protection against bad luck (Priority: 4/5): He frames diversification as a defense against inflation shocks, policy surprises, and geopolitical stress that can hit many assets at once. Advisor communication and client behavior (Priority: 3/5): Beer stresses that diversifiers should be presented as boring, insurance-like allocations rather than star performers, so clients stay patient through normal underperformance.

Key Arguments: Stocks and bonds have become more correlated because inflation is back above the level where they historically moved together, weakening the 60/40 model. Most liquid alternative products are poor diversifiers, with average correlations around 0.8 to equities and weak long-term performance after fees. Managed futures offer the best diversification 'bang for the buck' because they are liquid, adaptive, and historically uncorrelated to traditional assets. Managed futures are not high-Sharpe, magical strategies, but they can improve portfolio resilience and have relatively limited drawdown risk. True blow-ups usually come from leverage plus illiquidity or fraud; managed futures trade deep, liquid futures contracts and can reduce risk as trends reverse. Hedge-fund replication works better when it captures broad themes and major portfolio shifts rather than trying to copy individual stock picks. Diversification should be treated as insurance against systemic shocks, not as a stand-alone performance engine. Advisors should sell these products as low-cost portfolio fillers, not as superstar investments, to avoid client impatience and disappointment.

Data Points: Bond maximum drawdown in the 2000s/2010s: 4% - Beer cites this as part of bonds’ historical role as a strong diversifier before the 2020s. Bonds versus cash over the past 10 years: Less than cash - He says bonds have underperformed cash over the last decade. Liquid alt correlation to equities: Around 0.8 - Beer says many supposed diversifiers in the liquid alternatives industry are highly correlated with equities. Liquid alt annual return: 2% to 3% per annum - He contrasts this with equities’ much stronger performance over a 15-year period. Equity annual return over same period: 14% to 15% per year - Used to show how poorly many liquid alts performed relative to stocks. Managed futures maximum drawdown over 25 years: 16% - Beer cites this as evidence of managed futures’ resilience. Equity drawdowns over same period: 40%, 50%, and several 20%+ drawdowns - He compares equity volatility to managed futures and bonds. Largest ETF performance last year: Up 14% - Beer notes DBI’s largest ETF performed well even in a year with many macro shocks. Suggested allocation to diversifiers: 3% - He says diversifiers should be treated like insurance rather than a large portfolio bet.

Pivotal Quotes: "diversification is a protection against bad luck" — Andrew Beer: He defines the purpose of diversification in a world of inflation shocks, policy mistakes, and geopolitical surprises. "95% of things that people will pitch you are supposed to work just don't and don't add value." — Andrew Beer: His critique of the liquid alternatives industry and its marketing-driven product proliferation. "They're just like that. People generally don't panic because GLD is down 5% in a day." — Andrew Beer: He explains how advisors should position diversifiers as boring portfolio components rather than performance stars.

Implications: Investors may need to rethink portfolio construction beyond the 60/40 model, prioritizing truly uncorrelated, low-cost diversifiers. Advisors should set expectations that these holdings are insurance, not return engines, to improve client discipline during normal drawdowns.