Andrew Beer, iMGP
How DBMF Replicates Top Hedge Fund Managers
Andrew Beer is the co-founder of Dynamic Beta Investments and the portfolio manager behind DBMF (iMGP DBi Managed Futures Strategy ETF), one of the most successful alternative ETF launches in recent years. Beer started his career at Harvard Management Company and later co-founded Belmont Capital, a hedge fund seeding firm that invested in hundreds of emerging managers over its lifecycle. That experience gave him a unique vantage point on what actually drives hedge fund and CTA returns at the aggregate level, which became the intellectual foundation for DBMF.
On this episode, Andrew talks with Brad about how DBMF replicates the top managed futures strategies using only a handful of positions, why he believes the managed futures industry is largely selling "closet beta" at alpha prices, and the 2022 breakout year that put the fund on the map.
The Replication Thesis
Beer's central insight came from his hedge fund seeding days at Belmont: when you invest in enough managed futures funds simultaneously, the returns start to look remarkably similar. Strip away the marketing language about proprietary signals and advanced algorithms, and most CTA strategies are making the same basic bets, just sizing them somewhat differently. The aggregate return of the managed futures industry can be explained by a small number of positions in liquid futures contracts across equities, bonds, currencies, and commodities.
DBMF formalizes that insight into a repeatable product. The fund uses a regression-based model that takes the daily returns of the SocGen CTA Index (which tracks the 20 largest managed futures funds) and reverse-engineers the positions that would explain those returns. The model outputs are simple: go long or short specific futures contracts in specific sizes. At any given time, DBMF holds roughly 8-12 positions. That's it. No complex options structures, no exotic instruments, no hundreds of markets. Just a handful of futures contracts sized to match the aggregate behavior of the biggest CTAs in the world.
2022: The Year Managed Futures Mattered
DBMF's breakout came in 2022, when the fund returned roughly 24% while the S&P 500 fell 19% and the Bloomberg Aggregate Bond Index dropped 13%. It was one of the worst years for a traditional 60/40 portfolio in decades, and DBMF was one of the few strategies that delivered substantial positive returns. Beer points out that the fund's performance wasn't from any brilliant tactical call. It was simply being short bonds and long commodities, which is exactly what the CTA industry was doing. The model captured those positions accurately, and the positions worked because macroeconomic trends were strong and persistent.
The 2022 experience dramatically accelerated asset gathering. DBMF went from roughly $200 million to over $1 billion in AUM during the calendar year as advisors scrambled for diversifiers that actually diversified when it mattered most. Beer notes that the fund attracted significant flows from advisors who had previously relied on bond allocations for portfolio protection and realized that strategy had failed catastrophically. DBMF offered a genuine non-correlated return stream with daily liquidity and full transparency into its positioning, which was exactly what the market needed at that moment.
Why Simple Beats Complex
Beer is candid about the fact that DBMF's approach is intentionally simple, and he sees that simplicity as a feature, not a bug. Most managed futures funds charge 2-and-20 or similar fee structures for what Beer argues is essentially systematic trend following with modest, if any, value-add from proprietary signals. The top 20 CTAs are all reading the same price data, using similar model architectures, and trading similar markets. Their returns converge at the aggregate level, which means an investor doesn't need to pick the right CTA. They just need efficient exposure to what the group is doing collectively.
He draws an analogy to passive equity indexing: you don't need to pick the best stock picker if you can own the market. Similarly, you don't need to pick the best CTA if you can own the aggregate CTA positioning at a fraction of the cost. The fee savings alone are significant. DBMF charges under 1%, while the underlying CTAs it replicates typically charge 2% management fees plus 20% performance fees. Over a decade, that fee differential compounds into a meaningful performance advantage for the lower-cost replication approach even before considering the liquidity and transparency benefits of the ETF wrapper.
Key Takeaways
- DBMF replicates the SocGen CTA Index (the 20 largest managed futures funds) using only 8-12 futures positions at any given time, charging under 1% vs. the industry's typical 2-and-20 fee structure.
- In 2022, DBMF returned roughly 24% while the S&P 500 fell 19% and the Agg Bond Index dropped 13%, demonstrating genuine non-correlation when the traditional 60/40 portfolio broke down.
- Beer's background seeding hundreds of emerging hedge fund managers at Belmont Capital revealed that most CTA returns converge at the aggregate level despite each fund's claims of proprietary differentiation.
- The fund grew from roughly $200 million to over $1 billion during 2022 as advisors searched for diversifiers that actually worked when both stocks and bonds declined simultaneously.
- DBMF holds only liquid futures contracts across equity indices, bonds, currencies, and commodities with full daily transparency, eliminating the lockups, K-1s, and opacity typical of managed futures allocations.
Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.
Full Transcript
7,861 wordsMachine transcribed from Brad Roth's conversation with Andrew Beer, iMGP, with speakers identified automatically. Timestamps link to that moment on YouTube. Lightly cleaned, otherwise unedited.
Welcome to Behind the Ticker. I'm Brad Roth, Chief Investment Officer of Thor Financial Technologies and Portfolio Manager of THLV, the Thor Low Volatility ETF. Behind the Ticker uncovers the inner workings of the ETF industry. We will interview portfolio managers and ETF service providers to dive deep into their work lives and their businesses. We will learn the inner workings of their strategies and what drives them as they continue to grow their company. Many of these individuals are entrepreneurs and will have unique and compelling insights to share as much goes on behind the ticker. Please note, nothing in this show is investment advice and it is meant solely for educational and entertainment purposes only.
Welcome to Behind the Ticker. Today we have on Andrew Beer from DBI and we are talking about their managed futures ETF, DBMF, which seeks to replicate the managed futures hedge fund performance wrapped inside of an ETF and without the fees and the carry. We talk about managed futures as a whole, how they could be viewed and should be used inside of a diversified model portfolio. And Andrew does a great job talking about investor and advisor expectations for holding these types of funds. So without further ado, please welcome Mr. Andrew Beer. Hey, Andrew, welcome to the show.
Thank you so much. Great to be here.
Yeah. So before we get started, I always like to ask if you can give everybody a little bit about your background and the position you are in today.
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Sure. So I went to business school when after I was, as I was getting ready to look for jobs at business school, I got tapped to go talk to a very, very well-known hedge fund manager. And I sort of went into the hedge fund industry by accident. So about 30 years ago, believe it or not. And, and ended up working for this guy and then kind of going off and doing things on my own. I started a couple of different hedge funds. But really what my partner and I spent the past 15 years doing is, some of the stuff that hedge funds do is great. But it's inaccessible. It's expensive. sometimes you think you found the, the star player who ends up
Blowing up on you. So, could we find ways to make investing, getting the benefits of hedge funds without a lot of the headaches? Could we do that in a, in a comprehensive way? And so today we managed about two and a half billion dollars, which is entirely in ETFs and mutual funds in the U S as well as their equivalents in Europe. And we're really focused on most of the people that we talked to are, are wealth managers and people who build model portfolios who are, trying to figure out we're going from 60, 40 to 50, 30, 20 or something like that. What, what, what do we do? What are the tools that we can do to help manage that transition? And, and so,
That's what I spend my waking hours doing. That's great. And I want to talk about that, the kind of new model from 60, 40 here in a bit, but before we kind of get into all that, I also like to ask, uh, any hobbies outside of when you're not kind of behind the screens or if you were just talking, traveling around and seeing clients. So I have one all consuming hobby
Today who happens to be two and a half years old. Uh, so I, I was, uh, married for a long time. I have two daughters and they're mid to late twenties. And now to everyone's shock, I also have a two and a half year old boy. So, uh, my days, uh, I, I used to have hobbies. Um, now I'm in a, in a horse race with him to see who can learn farm animals and Russian faster. And, uh, uh, he's, uh, his, his mother's first language is Russian. So, um, so my days are working 12 hours, doing things like this and then playing with cars.
Yeah. Well, you and I are in the same boat. I have a two and a half year old as well. And it is like, it's like trying to, I stop water coming out of a fire hose. It seems at some
Point they're wild. They're, they're wild. And I, I'm absolutely adored, raising my, uh, my first daughters when they were young. And I've, I've always been very lucky. My work schedule has always been very flexible in terms of time. So, um, uh, but it's, it's, it's interesting having a son and being older, I'm, I'm, it's, it's sort of an everyday reminder of, um, sort of more seasoned and mature things that would have freaked me out, many years ago. Don't freak me out as much on the other hand, boy, it's tiring. So, well, I think you,
Uh, I think you slightly touched on this in your intro, but can you just kind of provide a high level of, of the firm itself? Like what all you guys do? Um, I know you have a handful of products and you do many different things. So it'd be helpful to kind of just get an overview on the
Firm as a whole before we jump into DBMF. Yeah. So, so, so what we do is really simple at its core, which is, we kind of look across the hedge fund world and say, A, what do hedge funds do that we like? And B, can we copy it cheaply? There are a lot of things that hedge funds do that we like that we cannot copy cheaply. Um, and so, if you, if you like that as well, then you have to go invest in real hedge funds and you have to have a lot of money and do all sorts of other things. Um, so, um, what we do is it's, it's technically called something called hedge fund replication. And, and it's one of these disruptive ideas
Because a lot of the people who, um, were there during the growth of the hedge fund industry promulgated all these myths about hedge funds, like, Oh my God, this guy's the best. He's the next Warren Buffett. Well, there were a lot of guys who looked like Warren Buffett 10 years ago who you don't even know about today. And so, um, so, uh, what we do only works in a few limited circumstances. Uh, and so we're very, very unusual in, uh, and, and by the way, what we do, the way we do it is it's quantitative, right? So we use these risk models to take these complicated portfolios and basically distill them down to something that's very simple and easy and
Investable. And if we can do that, then we can deliver to you in a low cost ETF or mutual fund, et cetera. Um, so the way that we're set up in general is we like managing portfolios. We like doing research. I like doing stuff like this. Um, and then in all of the products that we manage, we're managing it for another firm who's, who's in the business of building these products and, and, and, and running distribution teams, et cetera.
Yeah. That seems to be the hardest part about this is the distribution teams, but speaking about research, I read a really compelling piece on your website about 60, 40 portfolios. I know we want to touch on this. I think advisors who listened to this show would appreciate kind of learning about how that 60, 40 portfolio kind of coming out of the great financial crisis with interest rates at lows at all time lows, how that was, and also volatility being lower, how that was kind of an abnormality for really good performance in 60, 40. And I kind of wanted to pick your brain about what you think, asset allocation is going to look like now in a, in a, an environment with, rates being a little bit higher,
Maybe volatility being a little higher bonds doing what they did in 2022. So, um, you kind of hinted at it, uh, but kind of, what do you think asset allocation should look like kind of going forward?
Sure. Well, so, so in very simplistic terms, I've thought of the U S wealth management industry as being divided into kind of two camps. Um, one camp is the Vanguard robo advisor, academics who look at it and basically say, do the simplest, cheapest thing that you can don't touch it. Don't look at it and go away. Um, and then there's everybody else who says, we think we can do better. we can bring, because, and again, going back to the core principles, every asset manager has the same goal. Every wealth manager has the same goal, which is you want your clients to be happy now, and clients can look at us and the fund selector can say, Oh, we're happy because you guys have done better than this or the other things.
But I think when, when you're talking about the wealth management space, clients are happy when they feel like their money is going to grow. It's safe. They can sleep at night. the decisions, this impacts their lives. This isn't, the spare billion on of Elon Musk's portfolio that if things go down 20%, it has real world consequences for them. And, um, so, um, so, the irony was a lot of the most sophisticated guys in the space were out there building these more complicated portfolios for a long time. And the simple stuff was just beating the pants off people for a long time. And, but that was unusual because when you take a step back, Warren Buffett has this great expression where they say, if, if you, if you didn't have
Berkshire Hathaway, what would you do with your money? And he said, well, I'd put 95% into the S&P 500. I'm not going to try to imitate his voice. Although I'm really tempted to, um, be 95% into the S&P 500, put 5% in cash and, and basically then implicitly don't look at it. Right. And, and, but when money matters to you and your lifestyle, having a 40 or 50% drawdown, is not something you don't, aren't going to look at. So, um, so all asset allocation is really designed around how do we bring down the risk without bringing down our returns as much. And that's where you get into diversification. Now on our website, to me, what's fascinating is you can do, you can have a dividing line between 2000 through 2020,
Uh, which is where most people in the wealth management business grew up. this is where, this is the data that we look at, post, this is when data starts to get good and you Bloomberg and other things and you can access all sorts of different kinds of data. And, and during that period of time, starting with stocks as a diversified, starting with stocks and saying, what do I want to add next to stocks? Bonds were the Superman of diversifiers. They, they, they, when stocks went up, um, they might, they were just kind of beating the, so, so they, they were not correlated to stocks. They, they never really went down the maximum drawdown, during a period where the S&P 500 dropped 50%, then 50%, then 20%, then 25%.
They never went down more than 4%. Uh, they were returning much better than cash, right? Because if you just say, I'm taking money out of stocks and putting it to cash after inflation, that's a really bad plan, um, under most circumstances. So they were unbeatable for about 20 years. And what happens is as this goes on and on, it reinforces the idea that, Hey, we were right, right? We didn't add these other things to our portfolios and look, 2018 goes by and we're better off for 2019, 2020. And then the world changed. And once inflation started to come back, um, it was like, it's like this earthquake across the, the, the wealth management space, because you're, Superman has been basically buried in a pile of
Kryptonite. And, now your, your max drawdown is no longer 3.8%. It's 17% plus. So it's not safe anymore. they use these things used to never move, right? They have like a statistical terms, they'd have like a 4% volatility. And, and all of a sudden the volatility's doubled from there. Uh, the, um, uh, and, and the returns have gone down, right? You've had almost like a decade of lost returns in the space. So, so we say it's like these bubbles do make people look like geniuses, but then when the bubble ends, uh, which clearly has been the case in the 2020s, you need a different set, a different toolkit. So, so the, the, the presentation it's on our website, which is
Dbi.co, which we don't have an M there because if you go to dbi.com, then you end up with David's bridle and you can go wedding dress shopping. And, and even though they've gone bankrupt a couple of times, they were the, what they wanted for dbi.com was out of our price point. Um, but, um, but dbi.co and it's called the great 60, 40 head fake. And it just kind of shows you how, how, this combination 60, 40 worked, worked perfectly. And I published it maybe a little less than a year ago. And now again, you're seeing kind of the same thing happening. last month stocks and bonds both go down at the same time. So, so the evolution is that people now
Need to look for different things. There's pressure on people to find things. The simplest portfolios aren't working well anymore. And like, I didn't do the research myself, but you can go to great firms like AQR. There's a guy named Dan Rasmussen at a firm called Verdad, who, um, like me is penalized by being a Harvard grad. Um, but he has done some great research on, uh, on, what happens when inflation remains higher. And one of the conclusions is if inflation is above two and a half percent, stocks and bonds are moving together. So, so your core diversifier, it's not going away. It just, it's just not your perfect solution anymore.
And so that's, so it's, that's on the supply on the, on sort of the demand side is people are saying, I need something else. What can I get on the supply side? Particularly if you're an ETF investor, um, it's been a veritable wasteland of good products outside of, that bring kind of hedge fund hedge fund strategies. So, our very self-interested commercial view of the world is that 60, 40 moves to 50, 30, 20. And within that 20, people are going to be looking for straightforward ways of getting exposure to different asset classes. They can put in their models and, and, and hold for, not two years, but a decade or two decades as part of their strategic asset allocation. Um, and, uh, and, and we think
It's, sort of a greenfield opportunity. Yeah, no, I would, I would agree. I actually will walk into DBMF right now, which is your managed future strategy. Um, I've used, I use it in our model portfolios, um, and it is a great diversifier. And so can you really explain at a high level, what the fund itself is trying to accomplish? And then we'll kind of go into the impact that, a truly well-run managed future strategy can have
On overall volatility and return. Sure. So let's start with what managed futures as a space is and, and managed futures in a sense is interesting. It's a strategy that's been around 50 for 50 years with a marketing pitch that's 30 years old. Um, because like, back in my day, right at business school, I almost went into the private equity industry. These were, leveraged buyouts, barbarians at the gate, that is not becoming an institutional asset class. Now there are captains of industry running private equity firms. Right. That's, that feels better for a pension plan. Uh, asset-based lending was like this knuckle dragging, like, brass knuckle business of, of, kind of beating up people and taking their assets and stuff. Now it's called private
Credit. And, and so, um, managed futures is, is, is peculiar in that as I'll describe it, it has these incredible diversification benefits, but, but people are still talking like they're talking in, in, in the engine room to somebody else who's, who's at that level of detail. And I think that, I think when you get into the broader RA world, um, that doesn't make people feel like they're going to sleep better at night when you talk about the way. So, but, but what is it that they do? So it's a hedge fund category that's been around for 20, sorry, 50 years, basically. And in its infancy, there were guys who would build these computer models back when, not everybody had computers and, and certainly you couldn't find price data on something like crude
Oil or gold. And, and they would analyze the historical data and say, do we think gold is going to keep going up or down based upon that? And so this, one of the people talk about is trend following. Um, now it's, it's proven to be a great diversifier over time because it marches to the beat of its own drum, et cetera. And there are lots of, there's $300 billion of guys who run hedge funds who do this and they charge hedge fund fees. It's, one in 20, sometimes a little bit more than that. So you're like 2022, you add up all those fees. These guys are making five or 600 basis points and everyone's thrilled because they're still up 20%, but it's, it's a lot of money
And they're hard to get into. So, um, so, but when you take a step back and say, how do I describe this to my sister? My sister is always the, the prototype because I was 25 minutes into describing what we do. And she, she paused me and she said, what's an ETF. And I was like, Oh, whoops. Sorry. Um, so, uh, it's, it's basically like, we all read the paper, we see what's going on and we hear about something like, uh, we're in the middle East going to drive our crude oil prices and that's going to affect people's driving in, in over Memorial day. Well, people who do something called macro trading, those are opportunities for them. if inflation
Is going to go up from here, if the fed's not going to cut rates, if, if, if the dollar is going to be strong, it's not about whether it's cheaper or better to go on a vacation in Europe or, or, or Japan, it's about, can we make money for our clients in that? So that's what these guys do. And they just do with computer models. And so, um, so what we really, we got into the space, we were not managed futures guys. We were not insiders on the space, but we looked at it sitting from your side of the table and said, what do we really want? And what we really wanted was the returns of the overall space, but without a lot of the issues associated with it. So what are the
Issues? High fees. Okay. Well, if we can copy what they do and not charge a lot, it's like going from an a share class to an I share class. You're just going to do better over time. Now it's, it's not as straightforward as that, but, um, can we package it in the vehicle like an ETF? That means that, somebody can buy $25 with it or they can, or they buy a hundred million dollars. Um, and so, our, our research basically showed that actually this is one of those strategies where using these sophisticated risk models, we can boil down what these very, very complicated portfolios are down to a handful of what, we sort of called big trades or big opportunities. Um, and, and, and it's, it's, it's, it's not
Perfect what we do. It's just the best way that we found of getting broad-based exposure to the space.
So can you talk about overall, um, the benefits of adding a managed future strategy to an allocation? We talked about the 50, 30, 20 model instead of 60, 40, but really if you're an investment advisor, putting this in a model inside their model portfolio or you're like, what is, what is the reasoning for that? What is it accomplishing for the overall risk and return metrics of a portfolio?
Sure. There's the, there's the statistical math side of it, right? Which is a Nobel laureate, Paul Samuelson, great economist said diversification is the one true free launch in finance, uh, which basically means that if you can find things that do not look like stocks and bonds and other things over time, and you add it to your portfolio in general, if you're looking at the next 20 years, your clients will have a smoother ride. And if you pick a decent asset that does that, they should make as much or more money over time. So in statistical jargon, jargon, you would say it will raise the sharp ratio of a portfolio. Now the, when you look at, so for instance, if you look at since 2000 and you said, would I rather have had a 40% allocation to bonds or managed futures,
The kind of stunning conclusion is you'd rather have an allocation of managed futures over that period of time, you would have been unhappy with it for 20 years and deliriously happy with it for four years. Um, so I'm a little bit of a rogue in this space in that I think the appropriate allocation for people is much lower than that, because I think people are dealing with the very human considerations of talking to, to clients in most circumstances. if you have a model portfolio and clients never look at the line items, then you're very lucky. And, um, but for clients who, who, who have, for advisors of clients who stare at line items, I think the value of managed futures is like any diversifying asset class is that there are times when it's going to do really
Disproportionately well. And it just kind of evidence that you're doing something that's more sophisticated. That's that, that is more flexible, more nimble than the robo advisor down the street. Who's telling you everything should be for free basically. Um, and so, when I talk to people about including this in their portfolios, part of it is about, yes, you can make a pitch. So if you had a, an allocation to this in 2022, the, the overall space is up 20. I don't think I'm allowed to talk about the performance of the ETF, but you can, obviously we didn't have a bad 22, 22, or we wouldn't be having this conversation. The, um, uh, part of it is basically, I think a lot of people from the statistical side will say,
Look, instead of having, if you had a 10% allocation to it, you would have done, instead of going at 18%, you were down 16%. I don't think that's a warm and fuzzy client conversation with clients that you're down 200 basis points less than everything else. I think people are panicked about everything in the news at that point is we're going to have gas rationing in Germany. the lines are falling in Ukraine. Um, uh, the, uh, we thought the world was going to explode basically like, and so, um, but what it does do is it shows that this was one of those periods of time where everything's going down at the same time
And you have something that's different. And so, so there will be periods of time when these assets are your favorite investment, the thing that you want to point to. And there are also times when it's not going to be right. If the S&P goes up like it does last year and managed futures as a whole went down, um, then, then clients don't have to be fair. It's their money. They don't have to say, well, thank you. you did well and they can sit and say, well, great. I loved owning in 22. Why didn't you switch into the S&P last year when the S&P went up? And so, so I thought like, I think, I think for any allocators looking at the space, there are two parts of this. One is
It's, from a statistical perspective, I think it's a no brainer to have this in your portfolio. But, um, as they say in the family office world, uh, you don't need sharp ratios. So you've got to have a strategy for how you talk about this with clients in a way that fits into your ethos of asset allocation, what you're trying to help them to achieve, why, in, in a year when it underperforms, why they should still be okay with that. And that usually is, is a sizing issue, you know? Yeah. is that, I'm sure you run into this question.
Oh yeah. Yeah. No, I, I totally agree. it's, it's also bringing down variability of return and a lot of those different things, but it's funny, people tend to flood to managed futures, uh, after the fact and then get disappointed, uh, in the return because when they should be buying it, um, and, and adding to it is when things are really good because the, the likelihood of the managed futures outperforming during periods of, volatility and bad markets is there. And then the event happens, managed futures has their year and then everybody floods in. Um, that just seems to be, uh, what I see is like investment advisor, um, strategy switching and,
And then the case to be good. Well, no, see, I don't see that really with our clients, right? Cause I'm, I'm very, I'm very careful on, on, on, on how I talk about this. One is, and I will tell people up front, if you, if you think you can time this, right, there are a million better ways to time. If you think that you're basically saying, I think I can time when the S&P is going to go up or down, then for God's sakes, just do that. Right. Right. like, it's, like just do the S&P you don't have to go in and out of managed futures. If you can, if you can predict the future. Um, I think, I think what's going to happen with
This as a strategy, I think, and I think that was a missed marketing issue. even there was an expression people use about, it delivers crisis alpha, right? But that implies that you want to, Oh, there's a crisis around the corner and now I want to own it for today. Right. This is not like, this is, there's no crisis this year and it's having the strategy overall. It's having a staggeringly good year. It's this, it's, it's, it's, it, the ethos and the description of it, this has to be a strategic allocation because you can't get the timing right. Now you can do rebalancings like at the end of 2022, when this is gone up a lot and everything else has gone down.
Of course you can rebalance it back to some sort of a level. It's, it's as, as people do with their portfolios, with every asset class. But, um, but I think, I think, if you tell your clients, this is a short-term play on some expected move in the markets, they're going to be impatient. Right. And I, and so I think, I think is look, remember when we added REITs, you still have them, right? They go through good and bad periods. we added, remember junk bonds were called high yield. We added those as well. we've got, muni money markets, whatever it is, these big decisions that go into adding different, putting different arrows in, in the portfolio quiver over time are by definition, they're, they're, they're long-term in nature. And so what's
Interesting for us is actually, we haven't had, we've had a relatively flu. Yeah. And we obviously have had punctuated periods of a very good and bad performance. Most of our allocators are, are, are, are RIAs who have this mentality. And that's why, that's why most of my conversations are with people where I like the conversations I like to have with people who build model portfolios, because, cause I want to be people's allocation today, but in 10 years.
Right. Yeah. I agree with, with everything you, you just said there. And I think it's, I guess the, what I, the point I was trying to make is that the, the RIA needs to be having the front end conversation with the client about the expectation of the managed futures holding, right. Meaning it's, it, it could, it could underperform during good periods. It could, right. And then they want to unload it and, and, and strategy chase something that might be tilted more towards just growth, like we've saw over the last two years. And then they limit their managed futures allocation when they might need it the most. Um, you talked about kind of,
Can I, sorry, can I add one thing to that? Cause every, every other asset class, right. Has a narrative for why you should hold it long-term. Right. And, and it's, it's usually tied to some fundamental metric. Don't get out of equities at the bottom stocks for the long run. like it's, I'm going to get my money back at par as long as I hold it. I don't. So every other asset class has this narrative around it. Managed futures doesn't fit that model well, because when these guys lose money, they'll get out of the positions. They don't hold on. They're not Kathy wood holding on with a white knuckle grip, hoping it comes back. They are there, they're, they're out. Right. And so, and they're looking for the new
Opportunities. Think about this year, the performance this year, uh, the very good performance of the space this year was new opportunities that they weren't invested in four or five months ago. And as the markets got rocky in April, they're actually taking profits on some of those positions already. And so, so the underlying dynamism of the strategy, the problem is though, that, that advisors often want a simple story. Like, the average PE has never been lower for this portfolio. We don't want to be the guys who get out of the bottom. And that's why I think the, the messaging, as you say, on the front end is literally just has to be explicit. Like this is going to be a dynamic portfolio. We think it's going to be additive to your portfolio today, 10 years and in 20 years.
And so you should expect to see this every quarter that goes by, we may not have it in exactly the same allocation, exactly the same size, your needs are going to change, et cetera, but it's just, it's just one more leg of the asset allocation stool. And that's where I think though, also sizing of the strategy ends up being important because you're going to have, as the world evolves, maybe you'll have some Bitcoin exposure, you'll have some direct gold exposure, direct commodity exposure. You may have all these different, different things that you can add into that portfolio. And this should just be one of one, one of those, one element. Yeah. So let's,
Let's talk about the strategy as a whole. Can you talk about, you touched on it briefly, you're kind of using quantitative risk models, but can you talk about the drivers of how you're kind of making investment decisions? And is that driver kind of fully systematic in nature?
Yeah. So it is, it's a hundred percent systematic. And, and what we do when we talk about the diversification benefits of the space, it's, it's a little bit like saying, like if you say the S&P 500, right, it consists of 500 stocks, you can look at each of the 500 stocks, the, but, but you're always looking at the category. The category here is an index called the SOC gen CTA hedge fund index. And, and that goes back to 2000 with good data. And it's basically the average returns after all fees and expenses of the 20 largest guys each year. And so that's kind of the best way that you can say as a representation of it, it's not the magnificent seven, it's the magnificent 20 in the space.
Um, and the, um, uh, and so what we do is we basically take recent data, but I mean the past three, four weeks of data on that, on that index, just the reported returns. Cause if this index happens to be reported every day. And the first thing we do is we bump up the returns for what we estimate are the fees and expenses, you know? So through January, I'm sorry, through, through March, I think the, the, the index was up between nine and 10%, but it was really up 13 or 12 or 13 before those fees and expenses. So, so anyway, we're aiming for the 12 or 13, not the 10. Um, and then what we do is we have risk models and our risk models don't try to copy what these guys do say like, you know,
Do we think these guys are going to be owning more or less gold today than they were a week ago? Rather we, what the risk model does is says, okay, these guys have lots and lots of different, 20 different funds, each of which has lots and lots of different positions. What are the really big drivers of performance? And, and the reason, so what the model does is basically, um, we have 10 big liquid instruments that we use. So gold, oil, dollar, euro, dollar, yen, which has been in the news a lot recently. Um, uh, two year, 10 year, 30 year treasuries, three equity markets. And again, like them, it's all in futures contracts, but basically, um, but basically what the model does is say what, what portfolio of these is, is, is our best
Approximation of how those guys are positioned on Monday afternoon. And, and we see changes. So, if they've been dialing back their gold position, we'll usually see a dialing or, dialing back their metals or whatever position we'll see dial back in our position. We'll rebalance accordingly. So all we do is once a month, we look at this index data, we try to use a model, totally systematic to figure out the most accurate portfolio, invest in it, wait a week and do it again. And, and the reason, um, uh, and what we end up with is around a 90% correlation to it. So it's not perfect. Uh, we do go through, periods of outperformance and underperformance. We don't, we don't usually stray that far from it. And, um, and again, because we're aiming for their
Preview returns, we're doing more efficiently. We historically, would expect it or have outperformed by 200, 250 basis points over time. And, but it's a simple portfolio and we can put into an ETF. So with, with daily position level transparency and, and attractive fees.
Yeah. And, and, and liquidity. And so you kind of touched on my next few questions, but what is, is there a kind of, is there guardrails or I'm sure there's guardrails on kind of max long and short, uh, positioning position sizes? Um, I, I, I kind of briefly looked at the holdings, your, your long, some stuff, your short, some stuff, right? So are there guardrails on that or can you kind of go wherever the index is telling you to go? Or, um, mostly we, we put in two,
I don't want to say semi arbitrary guardrails in the beginning. So by the way, what's, what's unusual, we started doing this strategy. ETF has been around since 2000, May, 2019. So May 9th. So if this comes out after May 9th, you'll probably be sick of me already talking about it. But, um, but we started the strategy in mid 2016. We haven't changed a thing since we started, right? It's, it's the same 10 instruments, it's the same, which is very unusual in quant land. But again, our view is if you come up with a model that's working and continues to work, um, don't change it. You're, you kind of risk screwing up. Usually when people are like, Oh, I made all these great changes to my model. It's because something went wrong. Um, so, um, so
Most of the things that you would worry about, like, are we too concentrated in this asset class versus that asset class, et cetera, um, is kind of taken care of by the fact that you're looking at the average returns of these 20 guys, because each one of them has a million different guardrails in it. So the two relatively, I don't say arbitrary, but, but, but guardrails we put in, we didn't want to go more than 20% long or short, either crude oil or gold. Um, and so those are just, written in stone and the other, the other positions we have, we have caps on them, but they're not something that we, we end up hitting. Um, and so the, um, so basically one
Of the things that, that was important to us when we were doing it is often when you're taking a hedge fund strategy, which has a zillion different bells and whistles and lots of complicated instruments, imagine in a normal hedge fund strategy, if you've got swaps and options and illiquid assets and other things, you try to do that in an ETF, forget about it. Yeah. Right. So, so there's a, so part of our, our, our ethos of keeping it as simple and straightforward is also geared around the fact that we want to be able to offer this in an ETF. Now, what it means is when you look at our holdings and you can see our holdings every day on the website, um, you're looking
At 10 futures contracts. And so you want to know how much, we are long non-US developed stocks through an EFA futures contract. It's there. You can look at it in the morning, what you're going to do with that information. I'm not entirely sure, but, but you, you can certainly stare at it. our competitors who run managed futures mutual funds and you get, you first of all, you can't see what they're invested in every day. And then you look at their holdings in the end of the quarter. It's like a 1200 positions, right? It's 4,000 positions, 6,000 positions. this is a business that just goes insane over complexity. And, and part of it is that, there's a, there is a buyer base for complexity. it, a lot of it
Sounds really, really cool when you hear about it. I, for me, having been in the hedge fund industry for a long time, like the best trades are not, it's like what Charlie Munger used to say, like, if you have to do it to two decimal places, don't do it. Right. It should be, the best stock should be obvious, right? I think, I think Buffett said the same thing, but usually, usually Munger says it first and then, and then, uh, Buffett, Buffett said it more, more eloquently, but the, um, but so, um, so for us, it was, it was, we, we really, if we can get to the right answer in the simplest and most straightforward way, that's what we're
Going to do. Because if we want this to become a mainstream asset class, people have to be comfortable with it. You can't, you can't be selling them black boxes and trying to impress them with, how smart you are and all the complex things. It's got to be something that they feel is, is, is, is, is more understandable and therefore will infer that it's more, at least predictable in terms of the outcome of trying to do what it's supposed to do, which is give you exposure to this, this strategy or asset class in an efficient way.
Yeah. And I also saw on your, on your website as well, the, you kind of do, do this presentation where you show kind of how you can get the exposure of the 200 or 300 different futures by just owning a handful and how they're all fairly correlated to when certain, when certain instances happen, a handful of different things are going to move in a certain direction. So you don't need all of them. You just kind of need one.
And a lot of, a lot of instruments are also, combinations of other instruments. And, and so, yeah, it's a, it's a cool chart. My partner did it. Um, I, I had this, I was trying to come up with a metaphor of this and I came up with planets and, and, and moons and stuff like that. And he's like, no, no, no, sit down, son, let me take care of this. And he, and he did this great, like correlation matrix. And what I chose you is, a lot of the things that we think of is I, the way that I simplistically thought about it is that when, when we're looking at the recent history of these hundred instruments,
They're either going up, down or, or flat, right? They're not going in a hundred different, in a hundred different directions. But if you want to do it in a little bit more statistically subtle way, which is what he did is you can look at each of those hundred instruments and say, are they combinations of the 10 big things that we trade? And when you look at it, it's about 90% over time. Right. Um, and so it was just, it was really designed to kind of break this, this, um, this argument that complexity is necessarily good, necessarily results in better returns necessarily gives you different sources of returns. A lot of that is just, it just,
Marketing nonsense. Yeah. Well, Andrew, I really appreciate your time today. This was very insightful. Um, like I said, I use managed futures and particularly your fund in a lot of our model portfolios. Um, and this was very insightful and I appreciate your time, but before I let you go, uh, can you please let everybody know where they can find some more information about your firm and also get information on the ETFs themselves? Sure. Well, so by the way, I think just
Before I say that, I think you are at the Vanguard. Um, cause I think, I think, more and more people are just going to be looking at managed futures. It's not a, I guess it's expression. It's like it's managed futures was, was, was optional for many, many years. Um, as the world changes, JP Morgan had this expression that when, sometimes an asset class goes from optional to essential, I think people, I think it'll just be essential. So I think, I think obviously I agree with what you're saying. I'm self-interested to say that. Um, yeah, so we have, we have a website, um, which is, uh, DBI.co. As I mentioned, um, I am very available and accessible on LinkedIn. So you can track me down, uh, on LinkedIn, uh, connect with me there and you'll see this. I put
Out this stuff periodically. So when we do new research, you'll see it there. I'm less active on Twitter. Um, I actually don't think I know my Twitter handle off off hand, but if you hang around the people who are more popular, like the Corey Hofsteins and the Bob Elliott, you'll see me pop up occasionally. I think I have a picture of me and my dog on stage someplace. Um, on the ETF side, uh, uh, our partners, strategic partners launched DBMF. It's on their website. The easiest way to get to it is, is, is DBMF.com. Uh, we'll direct you to it. And, I think one of the things to get a feel for what we do is every month we put out these short, not just a series of slides
On performance, but also I do voiceovers of it. And, and the idea is really, this is a, it's a, it's a quantitative strategy. And if I send you a long description of what every position is doing, which sends it doesn't, it doesn't give you a feel for what it's like to own it and, and how to talk about it. And so I've been doing now for over a year and I very surprisingly high percentage of our clients listen to them every month because it's really designed to be your coach for the next 10 years as to you get on the phone with a client on a Friday afternoon, or you're, about to, about to swing a golf club and he says, Hey, what happened to that fund over there?
You've got to be equipped to handle those questions. And so if I, I'd rather you get that information to you in the first week of the month and talk you through it so you can listen to it in the car, uh, or on, on the exercise bike, then have it show up in a PDF two weeks too late.
So, right. Well, again, Andrew, thank you so much. Uh, congratulations on all the success. And, uh, I hope to, have the opportunity to run into you in the future. I'm sure you're doing the conferences and running around at certain events. So maybe I'll have the opportunity to meet
You in person. In, in, in between playing with cars. Yeah. Thank you so much. Wonderful to be,
To be here. And again, very much appreciate it. All right. Thanks, Andrew. Bye. Bye.
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