At the Money: Seeking Uncorrelated Returns

Episode Summary

Executive Summary: The episode centers on managed futures as a rare diversifier that can help 60/40 portfolios when stocks and bonds become highly correlated. Andrew Beer argues DBI’s ETF, DBMF, repackages a historically expensive hedge fund strategy into a low-cost, liquid, transparent vehicle by using a simplified futures basket to capture major macro trends. The discussion emphasizes inflation, regime shifts, and portfolio construction.

Main Topics: Why managed futures matter now (Priority: 5/5): Beer argues diversification changed in the 2020s because stocks and bonds no longer reliably offset each other, especially after inflation returned and 60/40 failed in 2022. What DBMF is designed to solve (Priority: 5/5): DBMF aims to deliver managed-futures-like exposure in an ETF format, lowering fees and complexity so average investors can access a strategy once mostly reserved for institutions. How managed futures generate returns (Priority: 4/5): The strategy seeks to detect large market regime changes through price trends across futures markets, positioning early in moves like rising rates, dollar strength, and gold rallies. Why the strategy is underowned (Priority: 3/5): Beer says the space is too jargon-heavy and technically opaque, so marketing it as a portfolio solution rather than a trading system helps broader adoption. Portfolio behavior in stress periods (Priority: 5/5): Managed futures can preserve capital or post gains during crises like the GFC, dot-com bust, COVID, and especially 2022 when both stocks and bonds fell. DBMF’s simplified implementation (Priority: 4/5): DBMF uses only 10 highly liquid instruments across equities, rates, commodities, and currencies, aiming to replicate larger hedge fund trends with less cost and slippage. Capacity and efficiency advantages (Priority: 4/5): Beer claims the ETF can scale because it trades deep, liquid U.S. futures markets and avoids the complexity and high cost typical of traditional managed futures funds.

Key Arguments: Diversification in the 2010s could rely mostly on stocks and bonds, but inflation’s return changed the regime and reduced the reliability of the classic 60/40 portfolio. Managed futures are valuable because they can profit from major macro shifts and tend to work when correlations between major asset classes move toward one. The strategy is not just trend following in a simplistic sense; it reflects early recognition of big changes in the world and trading accordingly. Traditional managed futures is expensive due to hedge fund fee structures and high-turnover, complex implementation; an ETF can preserve more of the economic value for investors. DBMF’s simplified basket of 10 instruments captures the largest and most meaningful macro trends without needing to trade dozens or hundreds of niche contracts. The ETF structure makes the strategy transparent, liquid, and accessible for ordinary investors, not just institutions. Beer believes future portfolio models will likely include a small managed futures allocation, especially as investors seek protection against regime shifts and U.S. asset concentration risk.

Data Points: Managed futures ETF assets (2019): about $300 million - Beer says the ETF space was very small when he entered it in 2019. Managed futures ETF assets (today): close to $5 billion - Beer cites strong growth in the category and DBMF’s role in driving adoption. DBMF core strategy return in 2022: up 20% - Used as an example of performance during a year when stocks and bonds both fell. DBMF core strategy return last year: up 14% - Beer says gains came from being early on higher rates and staying long gold. Positions used in the strategy: 10 instruments - DBMF seeks broad managed futures exposure using a small, liquid set of futures markets. Equity markets traded: S&P 500, non-US developed markets, emerging markets - The ETF uses futures on these major equity benchmarks. Fixed income markets traded: 2-year, 10-year, and 30-year Treasuries - These are the rates instruments used for bond exposure. Commodity markets traded: gold and oil - Beer says gold and oil are sufficient to capture major commodity trends. Currency markets traded: euro and yen - Currency exposure is implemented relative to the U.S. dollar. Traditional hedge fund fee structure: 2 and 20 - Beer contrasts this with the lower-cost ETF wrapper. Expected efficiency advantage: 300 to 400 basis points per year - Beer claims DBMF can outperform many sophisticated hedge funds by avoiding implementation drag. Time frame for inflation shift: early 2021 onward - Beer says he wrote about inflation returning in early 2021. Market context for diversification stress: 2022 - Stocks and bonds both declined roughly 15% to 20%, highlighting the need for alternatives.

Pivotal Quotes: "Diversification has changed a lot this decade." — Andrew Beer: He explains why the classic stock-bond mix is less reliable than it used to be. "It's a great strategy. It's just too damn expensive the way people run it." — Andrew Beer: He summarizes the case for building a cheaper, ETF-based managed futures product. "it's the big trade, stupid" — Andrew Beer: He describes the strategy’s focus on major macro moves rather than minor market noise.

Implications: For investors, a modest managed futures allocation may improve resilience when stocks and bonds fall together. For the industry, lower-cost ETF wrappers could make a once-niche hedge fund strategy mainstream.