After the underperformance of stocks and bonds last year, it’s no surprise that diversification strategies are a significant focus this year. Alternatives continue to garner advisor and investor interest as market dispersion grows, including managed futures and long/short strategies.
Andrew Beer of DBi and Marc Regenbaum of Neuberger Berman discussed the benefits of these strategies in a recent Alternatives Symposium session hosted by Tom Lydon, vice chairman of VettaFi.
When polled, 39% of responding advisors reported the use of managed futures or long/short strategies in their portfolios previously. However, those advisors carried no current allocations. 10% reported a current investment in both strategies, while 33% relayed they were learning about one or both.
Managed Futures a “Beacon of Green in a Sea of Red”
Andrew Beer, co-founder of DBi and co-PM of the iMGP DBi Managed Futures Strategy ETF (DBMF), chalks up the slow broad-based adoption of managed futures to the difficulty historically of implementing the strategy.
“Managed futures is a tactical investment strategy that tends to perform the best during the worst market conditions,” explained Beer. In the decade-long run-up of equity outperformance and suppressed market volatility, it’s a strategy that yielded muted returns.
Managed futures entail taking long and short positions across several asset classes. These can include commodities, rates, equities, and currencies. Positions are obtained through the futures market, therefore providing a low correlation to both stocks and bonds.
The strategy tracks and invests in how asset classes are actually trending and trading currently. Often, divergences occur between the future outlook for an asset class and how it’s currently trading. These divergences create opportunities for trend strategies like managed futures to capitalize on. They also capitalize on what Beer calls “waves”, or asset classes that trend together for a period of time.
“In a year like last year when it [managed futures] goes up 20 percent and stocks, and bonds, and REITs, and everything else is down, it becomes… this beacon of green in a sea of red,” Beer explained.
DBMF is a fund that eliminates single-manager risk through its replication strategy. The fund is actively managed and seeks to replicate the performance (not positions) of the 20 largest managed futures hedge funds that comprise the SG CTA Index. It does so by employing its proprietary, quantitative model that analyzes the trailing 60-day performance of the SG CTA and then uses liquid futures contracts to mimic the performance.
“If you want to be the smart allocator in 2030… what are the decisions you could have made in 2023 to help your clients have a smoother ride?” Beer asked. “That means finding things that have structurally low correlation to stocks and bonds.”
Market Dispersion Creates Opportunity for Long/Short Strategies
Marc Regenbaum, managing director at Neuberger Berman explained the benefits of long/short strategies. These strategies seek to buy underpriced stocks that are forecast to increase in value (long). Meanwhile, they also sell stocks forecast to diminish in price (short).
“Specifically, on the laddered short-seller, we sell borrowed shares in the hope and expectation of buying them back at a cheaper price,” said Regenbaum.
Long/short strategies can provide some different benefits, depending on the individual strategy and structure. Some strategies utilize the shorts to generate absolute returns, while others deploy them for risk management.
The market environment of the last few years creates potential opportunity for long/short strategies.
“What’s exciting about these types of strategies now is you’re starting to see a little bit more dispersion,” Regenbaum explained. “We’ve been playing with one hand tied behind our back on the short side for quite some time. To have that unleashed is really powerful.”
