At The Money: Diversifying with Managed Futures ETFs

What It Covers

Andrew Beer, founder of Dynamic Beta Investments, explains why the traditional 60/40 stock-bond portfolio has broken down as correlations rise above 2% inflation, and how managed futures ETFs serve as low-cost, liquid alternatives that replicate hedge fund strategies to provide genuine portfolio diversification during market stress.

Key Questions Answered

• •Bond correlation failure: Bonds historically had a maximum drawdown of only 4% and reliably offset equity losses, but that relationship breaks down when inflation exceeds 2%. Over the past decade, bonds have returned less than cash. Investors relying on 60/40 portfolios are exposed to simultaneous stock-bond drawdowns, as demonstrated clearly in 2022.
• •Managed futures drawdown profile: Over a 25-year period, managed futures strategies show a maximum drawdown of only 16%, comparable to bonds but with near-zero long-term correlation to both stocks and bonds. Unlike equities, which have suffered 40-50% drawdowns multiple times, managed futures scale out of losing positions rather than holding with conviction.
• •Hedge fund replication efficiency: DBI's approach identifies the largest macro themes driving hedge fund returns — such as shifts from US to international equities or inflation hedges — rather than copying individual stock positions. This synthesis into simple, liquid ETF portfolios has historically outperformed the underlying hedge funds after fees, with DBI's largest ETF returning 14% in 2024.
• •Liquid alts failure rate: Approximately 95% of liquid alternative products pitched as diversifiers carry equity correlations around 0.8 and have delivered only 2-3% annually over 15 years while equities returned 14-15% annually. Investors should demand correlation data, not just return history, and avoid products launched via "spaghetti cannon" marketing — launching six funds and promoting whichever one performed.
• •Optimal allocation sizing: Managed futures and hedge fund replication ETFs should be framed to clients as portfolio insurance, not standalone alpha generators. A 3% allocation is suggested as a starting point. Advisors should present these as incremental gap-fillers priced at low cost, avoiding star-power narratives that create unrealistic performance expectations and premature client exits.