Andrew Beer, managing member of DBI, discusses the need for fee reduction in hedge funds. He explores trend following strategies, the rise of the 'pod model' in multi-manager hedge funds, and the flaws in picking hedge fund managers. Beer also addresses the tech rally, the value factor, and China's appeal to the hedge fund community.
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Quick takeaways
Hedge funds charge excessive fees and investors should seek lower-cost alternatives like ETFs or mutual funds.
Managed futures (CTAs) provide diversification and non-correlation to stocks and bonds, performing well during market downturns.
DBI focuses on replicating hedge fund strategies that can be effectively executed with lower costs.
Investors should maintain a diversified portfolio with allocations in equities, bonds, and managed futures, and avoid chasing hot investment ideas without careful evaluation.
Deep dives
Dynamic Beta Investments: A Different Approach to Alpha and Beta
Dynamic Beta Investments (DBI), formerly known as Dynamic Beta Investments, focuses on understanding hedge funds' beta exposures to generate alpha. They recognize that alpha and beta are interconnected and that the right beta exposures can generate significant alpha. DBI's approach is to find the right betas at the right time and invest in them. They replicate hedge fund strategies with lower fees through liquid alternatives like ETFs and mutual funds.
Liquid Alternatives: Reimagining Hedge Fund Strategies
DBI offers liquid alternatives that replicate what hedge funds do, but at a lower cost. Their strategy is to identify what hedge funds are doing and replicate those strategies in a more cost-effective manner. They aim to deliver the same quality of results as hedge funds, but with a simpler and more accessible investment vehicle like ETFs or mutual funds. This approach is designed to provide investors with hedge fund returns without the high fees typically associated with the industry.
The Value of Managed Futures in Portfolio Diversification
Managed futures, also known as commodity trading advisors (CTAs), offer valuable diversification and non-correlation to traditional asset classes like stocks and bonds. These strategies use mathematical models to detect and capitalize on market trends, going long or short on various futures contracts. Managed futures have a track record of performing well during market downturns and crises, making them a suitable diversifier. DBI's managed futures ETF delivered strong performance, especially during periods like the global financial crisis and the inflationary pressures of recent years.
Challenges and Benefits of Hedge Fund Replication
DBI's approach to hedge fund replication has its challenges. Many hedge fund strategies are not suitable for replication in ETF form due to their illiquid or esoteric nature. However, DBI focuses on the strategies that can be effectively replicated with lower costs. By selecting the big trades or major trends, DBI aims to capture the core value of hedge fund strategies, providing investors with a cost-effective alternative. They recognize that selecting the right asset classes and timing the market are difficult tasks, making replication a sensible approach for investors.
The Importance of Diversified Portfolio
The speaker emphasizes the importance of having a diversified portfolio with meaningful allocations in equities, bonds, and managed futures. Each asset class offers unique opportunities and has its own dynamic nature that can contribute to overall portfolio growth and risk management. While equity allocations should be substantial, it is crucial to consider the changing dynamics of the market, such as the potential decrease in S&P 500 performance over the next 10 years. The speaker advises against trying to time the market and emphasizes the need for a long-term perspective when determining portfolio allocations.
The Pitfalls of Chasing Hot Investment Ideas
The podcast episode highlights the dangers of chasing hot investment ideas or products without thoroughly evaluating their long-term potential and suitability for the portfolio. Many investment firms create products that may seem attractive initially but fail to deliver lasting value. The speaker encourages investors to focus on a limited number of strategies that make sense and have a strong rationale behind them. It is important to avoid getting caught up in the hype of new products or trends and instead seek investment opportunities that align with a sound investment philosophy and offer long-term potential.
The Need for Skepticism and Asking Critical Questions
The episode underscores the importance of skepticism and critical thinking when evaluating investment strategies and products. The speaker encourages investors to ask tough questions and challenge the assumptions and claims made by investment professionals. It is important to dig deeper, understand the track record of investment strategies, and consider whether they truly align with long-term goals and expectations. By asking these questions and taking a skeptical approach, investors can make more informed decisions and avoid potential pitfalls in the ever-changing landscape of the investment industry.
Andrew Beer, managing member of DBI, joins Forward Guidance to discuss the need for drastic fee reduction in hedge-fund like return vehicles. Beer and Farley explore in depth the mysteries of trend following (also known as CTAs or managed futures) strategies, which provide investors with positive carrying uncorrelated return streams that can be very beneficial in years such as 2022, when stocks and bonds both suffered a severe drawdown. Filmed on September 6, 2023.
Timecodes:
(00:00) Introduction
(00:04) Alpha & Beta
(02:25) What Hedge Funds Do Well
(11:17) Paying High Hedge Fund Feeds Is Like "Shooting Yourself In The Foot"
(14:31) The Strategy of Managed Futures (or Commodity Trading Advisors)
(29:40) The Rise of the "Pod Model" In Multi-Manager Hedge Funds
(39:00) Picking Hedge Fund Managers Is A Largely Hopeless Task
(44:29) Many Hedge Funds Have Missed The 2023 Tech Rally
(50:24) Optimal Rebalancing Between Strategies
(57:53) History Of Bad Ideas In Creation of New Investment Products: "Alternative Risk Premia"
(59:42) A Lof Of Academic Finance Is Insane
(01:01:20) The "Value Factor" As We Once Knew It No Longer Exists
(01:16:36) Ark & Cathie Wood
(01:25:51) China Was "Adored" By Hedge Fund Community
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