Overview of At The Money: Diversifying with Managed Futures ETFs
This episode of Bloomberg’s At The Money features Andrew Beer, founder of Dynamic Beta Investments (DBI), discussing why traditional 60/40 portfolios are under strain as stocks and bonds move more in tandem, and how managed futures and hedge-fund‑replication ETFs can act as true diversifiers. Beer explains DBI’s approach—low-cost, liquid replication of hedge-fund strategies (primarily managed futures and broad hedge-fund exposures)—and gives practical guidance for advisors and investors on allocation size, risks, and how to present these products to clients.
Key takeaways
- Correlations between stocks and bonds have increased in the 2020s, undermining the classic 60/40 diversification playbook.
- Many marketed “liquid alternative” products fail to deliver true diversification: they often have high correlation to equities (~0.8) and poor net returns.
- Managed futures are DBI’s core diversifier: historically low correlation to stocks/bonds, tend to perform in stressed markets, and have lower blow-up risk because they trade highly liquid futures and actively scale risk.
- DBI’s business: hedge‑fund replication—identify the big trades/themes hedge funds make, then synthesize them cheaply and transparently in ETFs.
- Keep diversifiers as insurance allocations (small, incremental): Beer suggests around 3% of a portfolio; don’t overweight these strategies.
- Fees and transparency matter: cheaper, liquid vehicles make it more likely the diversifier will add value and keep clients patient.
Topics discussed
- Why bonds are no longer the “Superman” diversifier (historical context, inflation effects, bonds sometimes moving with equities).
- Failures in the liquid-alts industry: product design and sales incentives produce many ineffective funds.
- What managed futures are and why they can diversify portfolios.
- How hedge-fund replication works (strategy replication vs. copying individual stock picks).
- Blow-up risk: causes (leverage + illiquidity, fraud) and why managed futures have lower systemic blow-up risk.
- Advisor/client behavior: framing diversifiers as insurance and managing expectations.
How DBI’s strategies work (concise)
- Managed futures replication:
- Synthesizes hedge-fund-style managed-futures portfolios into low-cost ETFs.
- Trades liquid futures across asset classes; actively scales down positions during adverse moves.
- Historically low long-term correlation to equities and bonds; multi-decade max drawdown cited ~16%.
- Not a high Sharpe/high-return strategy, but valuable insurance during market stress.
- Broad hedge-fund replication (liquid alts):
- Captures major hedge‑fund themes (shifts in geographic equity exposure, hedges vs. inflation, event-driven tilts) rather than copying individual stock holdings.
- Focuses on the “big trades” that drive performance, implemented cheaply and transparently.
Risks, limitations, and industry pitfalls
- Many liquid-alternative products are marketed poorly and do not add diversification—check realized correlations and net returns.
- Managed futures are not immune to drawdowns and periods of underperformance; they are an insurance allocation, not a core growth engine.
- Blow-ups typically stem from excessive leverage + illiquid holdings or fraud—managed futures trade among the most liquid contracts, reducing that risk.
- Beware of product proliferation driven by sales incentives (“spaghetti cannon” effect): most new funds fail to deliver persistent, distinct alpha.
Practical advice for advisors and investors
- Treat diversifiers as insurance: small, steady allocations (Andrew Beer suggests around 3%).
- Prefer low-cost, liquid ETFs that transparently replicate robust strategies rather than opaque, high-fee funds.
- Set client expectations up front: emphasize the portfolio role (protection in stress), not short-term performance or “star” managers.
- Evaluate diversifiers by: correlation to equities/bonds, drawdown history, liquidity of underlying instruments, fee structure, and transparency.
- Don’t “back up the truck” on a single diversifier—use it as part of an allocation mix to reduce overall portfolio vulnerability to shocks.
Notable quotes
- “Diversification is a protection against bad luck.” — Andrew Beer
- Many liquid-alts “have correlations of often around 0.8 to equities… and have delivered 2–3% per annum over 15 years when equities returned 14–15%.”
Actionable checklist
- Check any diversifier’s 5–10 year realized correlation to equities and bonds.
- Confirm the fund’s underlying liquidity and whether it uses futures/derivatives that are exchange-traded.
- Compare fees—favor low-cost ETFs over expensive active products for replication strategies.
- Communicate to clients that the allocation is insurance; recommend modest starting allocations (≈3%) and review behavior during benign market periods.
- Avoid products with heavy marketing but little transparency—ask for strategy details and stress-test histories.
This episode argues that, given changing correlation dynamics and policy/geopolitical uncertainty, investors should consider small, liquid, low-cost allocations to well-constructed managed futures and hedge‑fund‑replication ETFs to improve portfolio resilience.