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At the Money: Seeking Uncorrelated Returns · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I gave a to
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  Speaker 1: the polls man blew it in his side. Lots of
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  Speaker 1: asset classes promise uncorrelated returns, put very few deliver. One
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  Speaker 1: that does is manage futures. Sure, they're expensive and the
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  Speaker 1: trading is somewhat spiky, but when all correlations go to one,
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  Speaker 1: meaning everything is trading and lockstep, like we saw during
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  Speaker 1: the Financial crisis or the first couple of months of COVID,
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  Speaker 1: managed futures seem to be the rare diversifier that works
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  Speaker 1: to help us unpack how to get additional diversification in
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  Speaker 1: your portfolio. Let's bring in Andrew Bier. He's a hedge
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  Speaker 1: fund veteran and founder of Dynamic Beta Investments, a firm
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  Speaker 1: focused on hitge fund replication strategies delivered through low cost
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  Speaker 1: liquid vehicles like atfs and mutual funds. His ETF DBI
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  Speaker 1: managed future strategy tries to replicate the price heer managed
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  Speaker 1: futures portfolio. So, so Andrew start us out with just
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  Speaker 1: the elevator pitch. What problem does DBI manage future strategy
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  Speaker 1: and that's ATF ticker DBMF. What does that solve for
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  Speaker 1: the traditional sixty forty investor.
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  Speaker 2: Sure. So, so, first of all, thank you very much
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  Speaker 2: for having me on so the so you know, so
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  Speaker 2: diversification has changed a lot this decade. In the twenty tens,
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  Speaker 2: you really didn't need anything other than stocks and bonds,
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  Speaker 2: and but things have changed, you know, since inflation started
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  Speaker 2: to come back, stocks have tended to move up down
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  Speaker 2: with bonds and did not protect in twenty twenty two.
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  Speaker 2: And so what you see across the wealth management space
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  Speaker 2: is basically saying sixty forty worked for a long time,
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  Speaker 2: but now we need something else. And what is that
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  Speaker 2: something else? It's generally something that is a low correlation
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  Speaker 2: to ideally to both stocks and bonds, and can also
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  Speaker 2: deliver positive performance when you need it the most. And
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  Speaker 2: so we looked, you know, we were looking around for
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  Speaker 2: something like that about ten years ago and we zeroed
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  Speaker 2: in on this space. It's a niche area of the
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  Speaker 2: overall hedge fund business, but it's been around for fifty years.
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  Speaker 2: It's battle tested through all sorts of market environments, and
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  Speaker 2: you find something that actually meets those criteria but did
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  Speaker 2: well during the dot Com crisis, did well during the GFC,
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  Speaker 2: and then after we'd invested it was up twenty percent
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  Speaker 2: during twenty twenty two. But from our perspective, it's like,
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  Speaker 2: that's great if you're an institutional allogator, But how do
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  Speaker 2: we get the great benefits of the strategy and package
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  Speaker 2: it for a way that you know, my sister or
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  Speaker 2: my cousin or something can put into their portfolios as well?
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  Speaker 1: Really interesting? So since twenty twenty two, the asset class
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  Speaker 1: we've all been probably hearing the most about has been
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  Speaker 1: private credit, private debt, private equity. Hey, it's a great diversifier.
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  Speaker 1: To be blunt, I get the sense that debt and
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  Speaker 1: credit are going to move if we have a recession,
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  Speaker 1: if markets sell off twenty thirty percent. Is there any
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  Speaker 1: reason to think that sort of diversifier is not going
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  Speaker 1: to do the same thing?
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  Speaker 2: So what's interesting about it? So there's been a lot
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  Speaker 2: of debate about how these guys happen to make money
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  Speaker 2: during these big moments in the markets where it feels
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  Speaker 2: like nothing is working. And it's funny because people talk
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  Speaker 2: about sometimes people use a term called trend following or
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  Speaker 2: momentum associated with the strategy. To me, it's totally wrong
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  Speaker 2: that when the strategy generates those kinds of returns. It's
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  Speaker 2: because they are early contrarian and right in a big way.
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  Speaker 2: And so you know, if you think about if somebody
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  Speaker 2: came to you and said, here's a strategy. Here was
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  Speaker 2: a person who had been buying gold below three thousand,
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  Speaker 2: who was you know, betting on rising interest rates as
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  Speaker 2: far back as twenty twenty September twenty twenty, you know
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  Speaker 2: that saw in advance the rise in the dollar relative
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  Speaker 2: to the Japanese end these kind of big trades out there.
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  Speaker 2: Because the world is changing in some way, that's what
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  Speaker 2: the strategy has historically been able to pick up on.
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  Speaker 2: And so I believe that structurally we are likely to
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  Speaker 2: see more of those things over the next several years.
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  Speaker 2: And this is one of those strategies that has proven
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  Speaker 2: its ability to reposition to take advantage of those big
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  Speaker 2: changes in the world.
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  Speaker 1: Really really interesting. So you mentioned trend or momentum define
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  Speaker 1: managed futures without Wall Street jargon. What does dBm actually
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  Speaker 1: mean by exposure to trends?
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  Speaker 2: Okay, So I'll start with the definition of the strategy overall,
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  Speaker 2: which is basically, you know, what I mentioned is that
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  Speaker 2: they're trying to detect big changes in the world. The
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  Speaker 2: way I think about that as a hedge fund person
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  Speaker 2: is that somebody knows something that the world is changing
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  Speaker 2: and they're acting on it with you know, buying or
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  Speaker 2: selling different asset classes. Like if you know the world
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  Speaker 2: is changing in a big way, people tend to act
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  Speaker 2: on it with their portfolios, and so managers is a
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  Speaker 2: strategy will often look at lots and lots and lots
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  Speaker 2: of the price moves across lots and lots of different
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  Speaker 2: markets to pick up these kernels of information that's something
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  Speaker 2: big is changing. So if you take last year where
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  Speaker 2: our course strategy was up fourteen percent, it was in
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  Speaker 2: part by being early in the fact that you know,
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  Speaker 2: the run at hot Tratee was it was continuing to
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  Speaker 2: have a long position in gold when gold went through
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  Speaker 2: its melt up, and so you know, outside of I
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  Speaker 2: think a lot of people in the space like to
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  Speaker 2: talk about how the sausage is made. Our view is
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  Speaker 2: actually what's much more interesting for the end investor and
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  Speaker 2: for allocators is what is how does this actually help you?
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  Speaker 2: And why should somebody looking at this in their portfolio
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  Speaker 2: be glad that it's there.
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  Speaker 1: It makes makes a lot of sense. I guess one
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  Speaker 1: of the things that make this space so interesting is yeah,
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  Speaker 1: it's a good diversifier, but most traditional investors don't really
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  Speaker 1: pay attention to it. You've called managed futures the best
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  Speaker 1: diversifier no one buys. Explain why that is.
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  Speaker 2: Well, I'm convincing people. I'm changing hearts and minds one
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  Speaker 2: at a time. So a lot of the people in
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  Speaker 2: this space love to talk about the technical aspects. So
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  Speaker 2: this underlying strategies are very very technical. They're quantitative models
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  Speaker 2: looking at derivative contracts on Sunday's hundreds of underlying instruments,
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  Speaker 2: and so it's a little bit like they love to
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  Speaker 2: talk shop with each other about what they're doing. Part
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  Speaker 2: of our success as a business is I don't come
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  Speaker 2: at it from that direction. I come at it from
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  Speaker 2: the perspective of why will this make my portfolio better?
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  Speaker 2: By which I mean help to grow assets and help
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  Speaker 2: me sleep at night. And so if you look at it,
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  Speaker 2: I'm making progress. So when I got into the DP,
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  Speaker 2: when I got into the ETF space, there was only
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  Speaker 2: about three hundred million. This is in twenty nineteen. There's
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  Speaker 2: maybe close to five billion today. And in part and
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  Speaker 2: we've been really driving that that this is something that
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  Speaker 2: and I think if you look five years out from
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  Speaker 2: now and you sit down with an advisor and they'll say, hey,
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  Speaker 2: what's that three or five percent position there, and they'll
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  Speaker 2: say it's Manu futures. It's one of these strategies. And
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  Speaker 2: you'll say, well, what's it there for? And they'll say, well, look,
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  Speaker 2: every now and then, the world changes a lot, and
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  Speaker 2: we want a nimble, flexible strategy that can take advantage
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  Speaker 2: of it in the way that the other ninety seven
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  Speaker 2: percent if your portfolio is not likely to.
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  Speaker 1: So so let me re revisit that information in a
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  Speaker 1: slightly different question. Whenever I'm speaking to clients or potential clients,
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  Speaker 1: the question is always we have this problem? How do
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  Speaker 1: we solve for this? So really the question I want
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  Speaker 1: to ask you is what problem in the traditional managed
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  Speaker 1: future space convinced you that a replication based ETF like
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  Speaker 1: DBMF really needed to exist. What's the problem you're solving
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  Speaker 1: for for the average ETF investor?
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  Speaker 2: So I would start with the Actually, I would first
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  Speaker 2: ask the broader questions, what's problem are we solving for
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  Speaker 2: people in their portfolios? Right? And the modern wealth management business,
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  Speaker 2: just like the institutional investment business, just like sixty forty portfolios,
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  Speaker 2: is based upon two fundamental ideas. One is diversification is
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  Speaker 2: a positive and two is have long term views for
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  Speaker 2: your asset allocation models and don't change them often. It's
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  Speaker 2: the latter part and the latter part, and that has
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  Speaker 2: a generation of investors has not gotten headfaked by Liberation
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  Speaker 2: Day and all these moves in the market because they've
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  Speaker 2: been trained don't panic and don't overreact, and that works
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  Speaker 2: eighty percent of the time. Bad By the way, eighty
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  Speaker 2: percent isn't bad, right, and which is why that should
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  Speaker 2: be ninety five percent of your portfolio twenty percent of
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  Speaker 2: the time. The world changes and by design, they will
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  Speaker 2: be slow to adapt. So where are we right now? Right?
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  Speaker 2: The US dollar is getting debased in some fashion, right,
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  Speaker 2: there is this potential loss of confidence in US assets
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  Speaker 2: at a time where everyone is massively overexposed to US assets.
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  Speaker 2: That could play out over five or seven years, but
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  Speaker 2: most allocators will not change until the horses have left
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  Speaker 2: the barn, so to speak. And so that's what it's
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  Speaker 2: trying to solve. From a portfolio perspective, what we were
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  Speaker 2: trying to solve is it's a great strategy. It's just
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  Speaker 2: too damn expensive the way people run it. And it's
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  Speaker 2: not just what are their management fees and incentive fees,
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  Speaker 2: it's also they run these Rupe Goldberg like portfolios that
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  Speaker 2: trade every day, hundreds of times a day. And when
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  Speaker 2: we looked at it, we said, look, we love the
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  Speaker 2: signal that they're picking up on. But if we can
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  Speaker 2: do that in a simple portfolio that is much more liquid,
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  Speaker 2: we can save hundreds of basis points of implementation costs
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  Speaker 2: and take more of the value and pass it back
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  Speaker 2: to clients.
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  Speaker 1: So let's talk about that a little bit and use
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  Speaker 1: some real life examples. How does either DBMF or FUN
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  Speaker 1: like it in the period before DBMF was trading, How
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  Speaker 1: does it behave in periods like the dot com implosion
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  Speaker 1: or the GFC or COVID.
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  Speaker 2: Well, well, COVID, well, I would say so COVID. COVID was.
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  Speaker 2: So when the strategy does the best is when when
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  Speaker 2: I say the world is changing, and COVID was a
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  Speaker 2: very strange thing, and that the world changed in three
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  Speaker 2: weeks basically, and then so it's not really designed for
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  Speaker 2: that kind of a flash move, but still it preserved
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  Speaker 2: capital as a strategy during March when when things were
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  Speaker 2: getting getting hammered, the where it thrives in its period
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  Speaker 2: like twenty twenty two, Inflation's coming back. And I'll tell
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  Speaker 2: you a great stories that I was. I wrote a
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  Speaker 2: paper on inflation coming back in early twenty twenty one,
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  Speaker 2: and I was talking about to people all year long,
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  Speaker 2: and I said, if if inflation comes back, and Powell
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  Speaker 2: came out and said, it's, you know, probably not coming back.
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  Speaker 2: It's transitory or something. But I get to December and
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  Speaker 2: I'm sitting down with a guy who says, I totally
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  Speaker 2: agree with you. I think inflation is coming back. And
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  Speaker 2: I said, how are you rebouncing your portfolio? And I said,
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  Speaker 2: I'm selling my stocks and buying bonds because he was
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  Speaker 2: benchmarked to sixty forty and stocks had gone up more
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  Speaker 2: than bonds. So I think it's important as allocators to
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  Speaker 2: recognize that there are going to be times like this
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  Speaker 2: when the standard playbook that we have from an asset
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  Speaker 2: allocation perspective is not designed to pick up on that.
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  Speaker 2: And here's a strategy. So the overall strategy in twenty
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  Speaker 2: twenty two, when stocks and bonds were both down fifteen
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  Speaker 2: to twenty percent, of the strategy went up twenty percent overall,
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  Speaker 2: and by being a bit more efficient, we went up
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  Speaker 2: a bit more than that.
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  Speaker 1: Huh. Really really kind of interesting. So let's talk about
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  Speaker 1: the managed futurey TF. What markets does it trade, what
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  Speaker 1: positions does it hold? Like I typically think when I
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  Speaker 1: hear trend following, I think Michael Kovil's trend following book,
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  Speaker 1: and I think primarily of Kamadalies if you watching gold
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  Speaker 1: or silver these days. But it's a little more broad
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  Speaker 1: than that. Tell us the assets DBMF actually trades.
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  Speaker 2: Yeah, So what is extraordinarily irritating to people in the
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  Speaker 2: industry is that we do much better than them with
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  Speaker 2: only ten instruments, and the ten instruments that we trade
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  Speaker 2: are the biggest obvious instruments. So S and P. Five hundred.
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  Speaker 2: This is all futures contracts, by the way, right.
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  Speaker 1: So the index not not individual stocks exactly.
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  Speaker 2: So S and P five hundred, non US developed markets,
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  Speaker 2: emerging markets for equities, that's it. In fixed income, so
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  Speaker 2: the second asset class is fixed income two years, ten years,
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  Speaker 2: thirty year treasuries. In commodities, we only trade gold and oil, and.
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  Speaker 1: Gold and oil. The assumption is other precious metals will
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  Speaker 1: track gold, and oil is its own thing. No agricultural products.
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  Speaker 2: We don't because the markets are we don't think. In
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  Speaker 2: other words, one I would say, just the last categories.
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  Speaker 2: In currencies, it's the zero in the end. So it's
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  Speaker 2: four ascid classes and we can go uroo yen, but
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  Speaker 2: not the dollar, well against the dollar against gotcha, all.
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  Speaker 1: Right, So always relative with currency.
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  Speaker 2: Yeah, and so look what we our research showed early
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  Speaker 2: on is that it's it's like, what's the political expression.
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  Speaker 2: It's the economy stupid, it's the big trade stupid that
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  Speaker 2: in twenty twenty two to be up twenty percent, you
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  Speaker 2: want to be long crude oil in February. You want
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  Speaker 2: to be short the end when it goes from one
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  Speaker 2: hundred and ten to one hundred and sixty. And you
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  Speaker 2: want to be short treasuries when interest rates go up.
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  Speaker 2: And a lot of the narrative in the space, as
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  Speaker 2: you say, is exactly that, you know, look look at
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  Speaker 2: look at copper moves, you know, look at look at
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  Speaker 2: look at the spike and copper, the palladium or the
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  Speaker 2: other things. It sounds good if you're an institutional investor
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  Speaker 2: who cares about this stuff, but it doesn't. It doesn't
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  Speaker 2: it's not big enough to make it, make it make
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  Speaker 2: an impact on the P and L and so so
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  Speaker 2: our research is very powerful, and it basically showed that
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  Speaker 2: if these guys make ten in theory as a hedge
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  Speaker 2: fund investor, you're luckly to get five. I can give
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  Speaker 2: you ten with a simpler and much more efficient portfolio
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  Speaker 2: and give you eight or nine and put it into
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  Speaker 2: an ETF where you can see every single position every
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  Speaker 2: single day. Yeah, so, I mean so the basic idea
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  Speaker 2: is I wanted to show that we could beat hedge
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  Speaker 2: funds at their own game in but do it within
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  Speaker 2: an ETF, which no one had ever done before.
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  Speaker 1: So you don't have the drag of two and twenty.
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  Speaker 1: The cost structure is a little less or or a
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  Speaker 1: whole lot less. Maybe it's about what the typical ETF is.
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  Speaker 1: So this has turned out to be a very successful product.
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  Speaker 1: It's now DBMF is now the largest managed futures ETF.
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  Speaker 1: A couple of questions, at what point do you begin
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  Speaker 1: to run into capacity constraints for the strategy? Do you
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  Speaker 1: have any issues with liquidity or slippage or even market impact?
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  Speaker 1: Like how big can this get?
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  Speaker 2: It was designed to as big as we needed to get.
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  Speaker 2: So because of the instruments that we're trading, these are
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  Speaker 2: the deepest and most liquid instruments that are traded globally,
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  Speaker 2: and we trade everything in the US, and so our
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  Speaker 2: market impact is essentially zero. I came from I started
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  Speaker 2: a commodity business, and one of the things that I
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  Speaker 2: think people have overlooked is is complexity often has a
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  Speaker 2: real cost. It sounds great to say I'm trading some
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  Speaker 2: esoteric market someplace when things go bad, like in the
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  Speaker 2: week after Liberation Day, the people who are trading those
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  Speaker 2: markets are waiting to see your order come in. Okay,
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  Speaker 2: you are making their year on the days. And so
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  Speaker 2: I come from a school that it's got to be
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  Speaker 2: that simple, straightforward, efficient is going to win most of
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  Speaker 2: the time. And what we've shown is we can beat
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  Speaker 2: some of the most sophisticated hedge funds in the world
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  Speaker 2: with this by three or four hundred basis points a
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  Speaker 2: year through efficiency. But then I can also deliver in
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  Speaker 2: something that my sister can onn So.
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  Speaker 1: To wrap up, people who are concerned about correlations just
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  Speaker 1: becoming one in any sort of crisis and want diversification
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  Speaker 1: should consider manage future's exposure, and the most efficient, least
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  Speaker 1: costly way to do that is through an ETF like
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  Speaker 1: DBMF by Andrew Bieren DBI. I'm Barry Rudults. You're listening
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  Speaker 1: to Bloomberg's At the Money. I'm sorry, but my letter
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  Speaker 1: keeps coming