Actively managed exchange-traded funds (ETFs) have been long crude oil this year, and some have seen their managed futures funds rise in a market that has seen extreme volatility across almost every asset class. The big shift from years of low inflation and low interest rates to inflation at a 40-year high and aggressive rate hikes by the Fed have led to declines in many major asset classes. But not for the managed futures ETFs, which aim to emulate the trades of quantitative hedge funds that follow the market trend.
There is a big shift happening in the market right now due to high inflation and high interest rates and Commodity Trading Advisors (CTAs) or Managed Futures are one of the few winners.
CTAs don’t just invest in commodities.
“The modern term is managed futures. And that’s because they invest in futures contracts,” Andrew Beer, co-manager of the iMGP DBi Managed Futures Strategy ETF (NYSEARCA:DBMF), said CNBC’s ETF Edge program earlier this month.
“In the regulatory arena, futures contracts are often treated as commodities, but we call them managed futures,” Beer said.
“Huge regime change” in the markets
Managed futures funds seek to replicate the trades of the largest managed futures hedge funds, going long or short futures contracts on commodities, equities, fixed income and currencies.
“CTA hedge funds try to take advantage of large market shifts. And right now we’re in the middle of a huge regime change,” DBMF’s Beer told CNBC. “We have moved from this low-inflation world to a high-inflation world.”
The iMGP DBi Managed Futures Strategy ETF is up over 23% year-to-date through Nov. 14. The active ETF is currently long crude oil and short almost everything else, noted CNBC host Bob Pisani.
DBMF’s strategy of playing uncorrelated games in a highly volatile market this year has helped its hedge fund advisory and asset manager achieve Dynamic Beta Investments (DBi). 2 billion dollars in assets under management (AUM) in October.
“Our products provide investors with accessible, diversified, uncorrelated and low-fee exposure to hedge fund replication strategies, and we are optimistic that more investors and advisors will recognize the value of this exposure,” said Beer, DBi’s managing member, in a statement most recently Month.
Since the Russian invasion of Ukraine rocked markets and the energy crisis and supply chain issues fueled global inflation, uncorrelated strategies across managed futures funds have outperformed the S&P 500 index this year collapsed by 17.5% Year to date through November 14th.
As a result, investors are increasingly looking for uncorrelated and diversifying strategies, and in a world of high inflation, it looks like managed futures funds are winning.
For DBMF, one of the biggest plays this year has been long crude oil.
Oil and oil stocks rise
Although crude oil prices have fallen from their highs earlier this year, they are still up year-to-date and analysts are not ruling out a return to over $100 a barrel barring severe recessions that cripple oil demand.
The Energy Select Sector SPDR Fund (NYSEARCA:XLE), which tracks the energy sector of the S&P 500, is up a massive 63% year to date as crude oil and oil stocks rallied.
In fact, the energy sector is the only major sector with gains in the S&P 500 this year, and massive gains at that 68.5% year-to-date to November 14, according to market data compiled by Yardeni Research. Within the energy sector, Integrated Oil & Gas is up 77.1%, Oil & Gas Equipment & Services is up 62.5%, Oil & Gas Exploration & Production is up 68.8% and Oil & Gas Refining & Marketing is up 74.4% % over the previous year date.
Despite global economic headwinds and China’s still uncertain recovery from Beijing’s Covid management strategy, near-term risks to oil are skewed to the upside, according to many analysts to say.
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“A pick-up in Chinese demand is likely to result in further tightening of the market, despite current headwinds from rising virus cases as the EU prepares sanctions on Russian oil and OPEC+ cuts production,” said Saxo Bank’s strategy team said on Monday.
Brent Crude could soar to $125 a barrel next year if China eases its Covid policy, Goldman Sachs said in a note carried by last week Business Insider. Goldman’s current forecast for Brent for 2023 is $110 a barrel, but there is major upside risk due to potential supply disruptions in Russia, Libya, Iraq and Iran.
“Risk allocations around our current oil forecasts are significantly higher as spot demand continues to be resilient,” Goldman Sachs said.
Immediately following OPEC+’s decision to cut supply, another bank, Morgan Stanley, said in early October that oil prices would do so rise back up to $100 per barrel faster than previously estimated and raised its price forecast for the first quarter of 2023 to USD 100 from USD 95 per barrel.
By Tsvetana Paraskova for Oilprice.com
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