Bloomberg Audio Studios, podcasts, radio news. I gave a to the polls man blew it in his side. Lots of asset classes promise uncorrelated returns, put very few deliver. One
that does is manage futures. Sure, they're expensive and the trading is somewhat spiky, but when all correlations go to one, meaning everything is trading and lockstep, like we saw during the Financial crisis or the first couple of months of COVID, managed futures seem to be the rare diversifier that works to help us unpack how to get additional diversification in
your portfolio. Let's bring in Andrew Bier. He's a hedge fund veteran and founder of Dynamic Beta Investments, a firm focused on hitge fund replication strategies delivered through low cost liquid vehicles like atfs and mutual funds. His ETF DBI managed future strategy tries to replicate the price heer managed futures portfolio. So, so Andrew start us out with just the elevator pitch. What problem does DBI manage future strategy
and that's ATF ticker DBMF. What does that solve for the traditional sixty forty investor.
Sure. So, so, first of all, thank you very much for having me on so the so you know, so diversification has changed a lot this decade. In the twenty tens, you really didn't need anything other than stocks and bonds, and but things have changed, you know, since inflation started to come back, stocks have tended to move up down with bonds and did not protect in twenty twenty two. And so what you see across the wealth management space is basically saying sixty forty worked for a long time,
but now we need something else. And what is that something else? It's generally something that is a low correlation to ideally to both stocks and bonds, and can also deliver positive performance when you need it the most. And so we looked, you know, we were looking around for something like that about ten years ago and we zeroed in on this space. It's a niche area of the overall hedge fund business, but it's been around for fifty years.
It's battle tested through all sorts of market environments, and you find something that actually meets those criteria but did well during the dot Com crisis, did well during the GFC, and then after we'd invested it was up twenty percent
during twenty twenty two. But from our perspective, it's like, that's great if you're an institutional allogator, But how do we get the great benefits of the strategy and package it for a way that you know, my sister or my cousin or something can put into their portfolios as well?
Really interesting? So since twenty twenty two, the asset class we've all been probably hearing the most about has been private credit, private debt, private equity. Hey, it's a great diversifier. To be blunt, I get the sense that debt and credit are going to move if we have a recession, if markets sell off twenty thirty percent. Is there any reason to think that sort of diversifier is not going to do the same thing?
So what's interesting about it? So there's been a lot of debate about how these guys happen to make money during these big moments in the markets where it feels like nothing is working. And it's funny because people talk about sometimes people use a term called trend following or momentum associated with the strategy. To me, it's totally wrong that when the strategy generates those kinds of returns. It's because they are early contrarian and right in a big way.
And so you know, if you think about if somebody came to you and said, here's a strategy. Here was a person who had been buying gold below three thousand, who was you know, betting on rising interest rates as far back as twenty twenty September twenty twenty, you know that saw in advance the rise in the dollar relative to the Japanese end these kind of big trades out there. Because the world is changing in some way, that's what the strategy has historically been able to pick up on.
And so I believe that structurally we are likely to see more of those things over the next several years. And this is one of those strategies that has proven its ability to reposition to take advantage of those big changes in the world.
Really really interesting. So you mentioned trend or momentum define managed futures without Wall Street jargon. What does dBm actually mean by exposure to trends?
Okay, So I'll start with the definition of the strategy overall, which is basically, you know, what I mentioned is that they're trying to detect big changes in the world. The way I think about that as a hedge fund person is that somebody knows something that the world is changing and they're acting on it with you know, buying or
selling different asset classes. Like if you know the world is changing in a big way, people tend to act on it with their portfolios, and so managers is a strategy will often look at lots and lots and lots of the price moves across lots and lots of different markets to pick up these kernels of information that's something
big is changing. So if you take last year where our course strategy was up fourteen percent, it was in part by being early in the fact that you know, the run at hot Tratee was it was continuing to have a long position in gold when gold went through its melt up, and so you know, outside of I think a lot of people in the space like to
talk about how the sausage is made. Our view is actually what's much more interesting for the end investor and for allocators is what is how does this actually help you? And why should somebody looking at this in their portfolio be glad that it's there.
It makes makes a lot of sense. I guess one of the things that make this space so interesting is yeah, it's a good diversifier, but most traditional investors don't really pay attention to it. You've called managed futures the best diversifier no one buys. Explain why that is.
Well, I'm convincing people. I'm changing hearts and minds one at a time. So a lot of the people in this space love to talk about the technical aspects. So this underlying strategies are very very technical. They're quantitative models looking at derivative contracts on Sunday's hundreds of underlying instruments, and so it's a little bit like they love to talk shop with each other about what they're doing. Part of our success as a business is I don't come
at it from that direction. I come at it from the perspective of why will this make my portfolio better? By which I mean help to grow assets and help me sleep at night. And so if you look at it, I'm making progress. So when I got into the DP, when I got into the ETF space, there was only about three hundred million. This is in twenty nineteen. There's
maybe close to five billion today. And in part and we've been really driving that that this is something that and I think if you look five years out from now and you sit down with an advisor and they'll say, hey, what's that three or five percent position there, and they'll say it's Manu futures. It's one of these strategies. And
you'll say, well, what's it there for? And they'll say, well, look, every now and then, the world changes a lot, and we want a nimble, flexible strategy that can take advantage of it in the way that the other ninety seven percent if your portfolio is not likely to.
So so let me re revisit that information in a slightly different question. Whenever I'm speaking to clients or potential clients, the question is always we have this problem? How do we solve for this? So really the question I want to ask you is what problem in the traditional managed future space convinced you that a replication based ETF like DBMF really needed to exist. What's the problem you're solving for for the average ETF investor?
So I would start with the Actually, I would first ask the broader questions, what's problem are we solving for people in their portfolios? Right? And the modern wealth management business, just like the institutional investment business, just like sixty forty portfolios, is based upon two fundamental ideas. One is diversification is a positive and two is have long term views for
your asset allocation models and don't change them often. It's the latter part and the latter part, and that has a generation of investors has not gotten headfaked by Liberation Day and all these moves in the market because they've been trained don't panic and don't overreact, and that works eighty percent of the time. Bad By the way, eighty percent isn't bad, right, and which is why that should be ninety five percent of your portfolio twenty percent of
the time. The world changes and by design, they will be slow to adapt. So where are we right now? Right? The US dollar is getting debased in some fashion, right, there is this potential loss of confidence in US assets at a time where everyone is massively overexposed to US assets. That could play out over five or seven years, but most allocators will not change until the horses have left the barn, so to speak. And so that's what it's trying to solve. From a portfolio perspective, what we were
trying to solve is it's a great strategy. It's just too damn expensive the way people run it. And it's not just what are their management fees and incentive fees, it's also they run these Rupe Goldberg like portfolios that trade every day, hundreds of times a day. And when we looked at it, we said, look, we love the
signal that they're picking up on. But if we can do that in a simple portfolio that is much more liquid, we can save hundreds of basis points of implementation costs and take more of the value and pass it back to clients.
So let's talk about that a little bit and use some real life examples. How does either DBMF or FUN like it in the period before DBMF was trading, How does it behave in periods like the dot com implosion or the GFC or COVID.
Well, well, COVID, well, I would say so COVID. COVID was. So when the strategy does the best is when when I say the world is changing, and COVID was a very strange thing, and that the world changed in three weeks basically, and then so it's not really designed for that kind of a flash move, but still it preserved capital as a strategy during March when when things were getting getting hammered, the where it thrives in its period like twenty twenty two, Inflation's coming back. And I'll tell
you a great stories that I was. I wrote a paper on inflation coming back in early twenty twenty one, and I was talking about to people all year long, and I said, if if inflation comes back, and Powell came out and said, it's, you know, probably not coming back. It's transitory or something. But I get to December and I'm sitting down with a guy who says, I totally agree with you. I think inflation is coming back. And
I said, how are you rebouncing your portfolio? And I said, I'm selling my stocks and buying bonds because he was benchmarked to sixty forty and stocks had gone up more than bonds. So I think it's important as allocators to recognize that there are going to be times like this when the standard playbook that we have from an asset allocation perspective is not designed to pick up on that.
And here's a strategy. So the overall strategy in twenty twenty two, when stocks and bonds were both down fifteen to twenty percent, of the strategy went up twenty percent overall, and by being a bit more efficient, we went up a bit more than that.
Huh. Really really kind of interesting. So let's talk about the managed futurey TF. What markets does it trade, what positions does it hold? Like I typically think when I hear trend following, I think Michael Kovil's trend following book, and I think primarily of Kamadalies if you watching gold or silver these days. But it's a little more broad than that. Tell us the assets DBMF actually trades.
Yeah, So what is extraordinarily irritating to people in the industry is that we do much better than them with only ten instruments, and the ten instruments that we trade are the biggest obvious instruments. So S and P. Five hundred. This is all futures contracts, by the way, right.
So the index not not individual stocks exactly.
So S and P five hundred, non US developed markets, emerging markets for equities, that's it. In fixed income, so the second asset class is fixed income two years, ten years, thirty year treasuries. In commodities, we only trade gold and oil, and.
Gold and oil. The assumption is other precious metals will track gold, and oil is its own thing. No agricultural products.
We don't because the markets are we don't think. In other words, one I would say, just the last categories. In currencies, it's the zero in the end. So it's four ascid classes and we can go uroo yen, but not the dollar, well against the dollar against gotcha, all.
Right, So always relative with currency.
Yeah, and so look what we our research showed early on is that it's it's like, what's the political expression. It's the economy stupid, it's the big trade stupid that in twenty twenty two to be up twenty percent, you want to be long crude oil in February. You want to be short the end when it goes from one hundred and ten to one hundred and sixty. And you want to be short treasuries when interest rates go up.
And a lot of the narrative in the space, as you say, is exactly that, you know, look look at look at copper moves, you know, look at look at look at the spike and copper, the palladium or the other things. It sounds good if you're an institutional investor who cares about this stuff, but it doesn't. It doesn't it's not big enough to make it, make it make an impact on the P and L and so so our research is very powerful, and it basically showed that if these guys make ten in theory as a hedge
fund investor, you're luckly to get five. I can give you ten with a simpler and much more efficient portfolio and give you eight or nine and put it into an ETF where you can see every single position every single day. Yeah, so, I mean so the basic idea is I wanted to show that we could beat hedge funds at their own game in but do it within an ETF, which no one had ever done before.
So you don't have the drag of two and twenty. The cost structure is a little less or or a whole lot less. Maybe it's about what the typical ETF is. So this has turned out to be a very successful product. It's now DBMF is now the largest managed futures ETF. A couple of questions, at what point do you begin to run into capacity constraints for the strategy? Do you have any issues with liquidity or slippage or even market impact? Like how big can this get?
It was designed to as big as we needed to get. So because of the instruments that we're trading, these are the deepest and most liquid instruments that are traded globally, and we trade everything in the US, and so our market impact is essentially zero. I came from I started a commodity business, and one of the things that I think people have overlooked is is complexity often has a
real cost. It sounds great to say I'm trading some esoteric market someplace when things go bad, like in the week after Liberation Day, the people who are trading those markets are waiting to see your order come in. Okay, you are making their year on the days. And so I come from a school that it's got to be that simple, straightforward, efficient is going to win most of
the time. And what we've shown is we can beat some of the most sophisticated hedge funds in the world with this by three or four hundred basis points a year through efficiency. But then I can also deliver in something that my sister can onn So.
To wrap up, people who are concerned about correlations just becoming one in any sort of crisis and want diversification should consider manage future's exposure, and the most efficient, least costly way to do that is through an ETF like DBMF by Andrew Bieren DBI. I'm Barry Rudults. You're listening to Bloomberg's At the Money. I'm sorry, but my letter keeps coming