Barry Ritholtz (2:53)

Lots of asset classes promise uncorrelated returns, but 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 in 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 a div additional diversification in your portfolio. Let's bring in Andrew Beer. He's a hedge fund veteran and founder of Dynamic Beta Investments, a firm focused on hedge fund replication strategies delivered through low cost liquid vehicles like ETFs and mutual funds. His ETF DBI Managed Futures strategy tries to replicate the pricier managed futures portfolio. So, so Andrew, start us out with just the elevator pitch. What problem does DBI manage? Futures strategy and that's ETF ticker DBMF. What does that solve for the traditional 60:40 investor?

Andrew Beer (4:10)

Sure. So. So first of all, thank you very much for having me on. So the. So you know. So. So diversification has changed a lot this decade. In the 2000s and 2000s, you really didn't need anything other than stocks and bonds. But things have changed since inflation started to come back. Stocks have tended to move up and down with bonds and did not protect in 2022. What you see across the wealth management space is basically saying 6040 worked for a long time, but now we need something else. And what is that something else? It's generally something that has a low correlation to ideally to both stocks and bonds and can also deliver positive performance when you need it the most. We were looking around for something like that about 10 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 50 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 20% during 2022. But from our perspective it's like that's great if you're an institutional allocator. But how do we get the great benefits of this strategy and package it for a way that my sister or my cousin or something can put into their portfolios as well?

Barry Ritholtz (5:37)

Really interesting. So since 2022, the asset class we've all been probably hearing the most about has been private credit, private debt, private equity, hey, it's the best. 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 20, 30%. Is there any reason to think that sort of diversifier is not going to do the same thing.

Andrew Beer (6:08)

So, 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 a strategy. To me it's totally wrong that, that when the strategy generates those kinds of returns, it's because they are early, contrarian and right in a big way. And so 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 3,000, who was betting on rising interest rates as far back as September 2020 that saw in advance the rise in the dollar relative to the Japanese yen. 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. 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.

Barry Ritholtz (7:18)

Really, really interesting. So you mentioned trend or momentum. Define managed futures without Wall street jargon. What does DBMF actually mean by exposure to trend?

Andrew Beer (7:34)

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 as 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 something big is changing. So if you take last year where our core Strategy was up 14%, it was in part by being early in the fact that, you know, the, the run at hot trade, it was, it was continuing to have a long position in gold when gold went through its melt up. And so, 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, for, 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

Barry Ritholtz (8:46)

there 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.

Andrew Beer (9:10)

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 aspect. So this underlying strategies are very, very technical. They're quantitative models looking at derivative contracts on Sundays, 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, 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 300 million. This is in 2019, there's maybe close to 5 billion today in part. And we've been really driving 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 3 or 5% position there? And they'll say it's managed 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 97% of your portfolio is not likely to.

Barry Ritholtz (10:32)

So, so let me re revisit that information in a slightly different question. When, when we, 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 futures 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?

Andrew Beer (11:09)

So, 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, and, and the modern wealth management business, just like the institutional investment business, just like 60, 40 portfolios, is based upon two fundamental ideas. One is diversification is a net 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 head faked 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 80% of the time.

Barry Ritholtz (11:57)

80% isn't bad by the way.

Andrew Beer (11:58)

80% isn't bad, which is why that should be 95% of your portfolio. 20% of the time. The world changes and by design they will be slow to adapt. So where are we right now? The US dollar is getting debased in some fashion. There is this potential loss of confidence in US assets at a time where everyone is massively overexposed to U.S. 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. 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 Rube 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 cost and take more of the value and pass it back to clients.

Barry Ritholtz (13:20)

Let's talk about that a little bit and use some real life examples. How does either DBMF or funds like it in the period before DBMF was trading? How does it behave in periods like the dot com implosion or the GFC or. Or Covid?

Andrew Beer (13:41)

Well, I would say so Covid was. So when the strategy does the best is 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 things were getting hammered. The where it thrives in its period like 2022. Inflation's coming back. And I'll tell you a great story is that I was, I would, I wrote a paper on inflation coming back in early 2021 and I was talking about it 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. And, but I get to, 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 rebalancing your portfolio? And I said I'm selling my stocks and buying bonds. Because he was benchmarked to 60, 40 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, and here's a strategy. So the Overall strategy in 2022 when stocks and bonds were both down 15 to 20%, the strategy went up 20 overall. And by being a bit more efficient, we went up a bit more than that.

Barry Ritholtz (15:09)

Huh. Really, really kind of interesting. So let, let's talk about the managed future etf. What markets does it trade? What positions does it hold? Like I typically think when I hear trend following, I think Michael Covel's trend following book and I think primarily of commodities, if you're watching gold or silver these days, but it's a little more broad than that. Tell us the assets DBMF actually trades.

Andrew Beer (15:40)

Yeah, so. So what. What is extraordinarily irritating people in the industry is that we do much better than them with only 10 instruments and the 10 instruments that we trade are the biggest obvious people instruments. So S&P 500. This is all futures contracts by the way.

Barry Ritholtz (15:55)

Right. So the index, not, not individual stocks.

Andrew Beer (15:58)

Exactly. SO S&P 500 non US developed markets, emerging markets for equities. That's it. In, in fixed income. So the second asset class is fixed income. 2 years, 10 year, 30 year treasuries. In commodities we only trade gold and oil.

Barry Ritholtz (16:13)

And gold and oil, the assumption is other precious metals will track gold.

Andrew Beer (16:18)

Right.

Barry Ritholtz (16:18)

And oil is its own thing. No, agricult, we don't.

Andrew Beer (16:24)

Because the markets are. We don't think. In other words, when I would say just the last category is in currencies it's the euro and the yen. So it's four asset classes and we

Barry Ritholtz (16:32)

can go euro, yen, but not the dollar.

Andrew Beer (16:35)

Well against the dollar.

Barry Ritholtz (16:36)

Gotcha.

Andrew Beer (16:37)

All right.

Barry Ritholtz (16:38)

Always relative with currency.

Andrew Beer (16:40)

Yeah. And so look what our research showed early on is that it's like what's the political expression? It's the economy, stupid. It's the big trade, stupid. That, that in, in 2022, to be up 20%, you want to be long crude oil in February, you want to be short the yen when it goes from 110 to 160, 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, like, look at, look at copper moves. You know, look at, look at, look at the spike in copper, the palladium or other things. Sounds good if you're an institutional investor who cares about this stuff, but it's not big enough to make an impact on the P and L. Our research is very powerful, and it basically showed that if These guys make 10, in theory, as a hedge fund investor, you're likely to get 5. I can give you 10 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, so, I mean, so the basic idea is I wanted to show that we could beat hedge funds at their own game, but do it within an etf, which no one had ever done before.

Barry Ritholtz (17:55)

So you don't have the drag of 2 and 20. The cost structure is a little less 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. 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?

Andrew Beer (18:30)

It was designed to get as big as we needed to get, really. 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 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. That's right. You are making their year on the days. And so, so I, look, I, I'm, I come from a school that it's gotta be that simple, straightforward, efficient, is gonna 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 3 or 400 basis points a year through efficiency. But then I can also deliver it in something that my sister can own.

Barry Ritholtz (19:34)

So to wrap up, people who are concerned about correlations just becoming one in any sort of crisis and want diversification should consider manage futures exposure. And the most efficient, least costly way to do that is through an ETF like dbmf. By Andrew Beer and DBI I'm Barry Ritholtz. You're listening to Bloomberg's at the Money.

Andrew Beer (20:07)

I write I'm sorry, but my letter keeps coming back.

Michelle Hussain (20:14)

Hello, I'm Michelle Hussain and For more than 20 years I was at the BBC military withdrawal from Afghanistan. But all the time I was delivering the headlines. I wanted to go further than the news of the day to spend more time with the people shaping our world. And that's what I'm doing here on this podcast, speaking to people from Nigel Farage.

Andrew Beer (20:36)

Listen love, you trying.

Michelle Hussain (20:37)

Russia needs to be taught us.

Andrew Beer (20:38)

Listen love, you're trying ever so hard

Michelle Hussain (20:39)

to tech journalist Kara Swisher and the

Andrew Beer (20:41)

tech industry is running wild.

Barry Ritholtz (20:43)

You know, they've gotten what they wanted

Andrew Beer (20:45)

and they've seen a huge run up in their stock prices.

Michelle Hussain (20:48)

This will be a place where every weekend you can count on one essential, essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michael Hussein show from Bloomberg Weekend. Wherever you get your podcasts, you certainly ask interesting questions.