Managed futures hedge fund ETF launches in Europe

Europe’s only exchange traded fund that aims to replicate the performance of the managed futures hedge fund industry, but for a fraction of the cost, starts trading today.

The move comes amid growing interest in the strategy. BlackRock launched a managed futures ETF in the US last week, becoming the biggest-name player in the “liquid alternatives” sector, while fellow industry heavyweights Invesco and Fidelity have also filed to launch “trend-following” managed futures ETFs in the US.

The Paris-listed iMGP DBi Managed Futures Fund R USD ETF will follow the same strategy as the largest US-listed ETF in the field, the $1.1bn iMGP DBi Managed Futures Strategy ETF (DBMF). A London listing is scheduled to follow. Fees are set at 0.75 per cent.

“Managed Futures ETFs are becoming a big thing in the US,” said Andrew Beer, co-founder of DBi and co-manager of the ETF. “Managed futures are one of the few alternative strategies where there are indisputable diversification benefits.”

Managed futures funds, trend-following “quant” hedge funds run by commodity trading advisers, take both long and short positions in futures contracts linked to equities, bonds, commodities and currencies, potentially allowing them to make money even when markets fall — as long as there is a clear trend for them to follow.

This momentum-surfing concept is dominated by relatively expensive hedge funds. Commodity trading advisers boasted $339bn in assets at the end of 2024, according to BarclayHedge, a data provider. However these funds, which are off limits to smaller investors, have not seen any growth in assets over the past decade.

Instead, more accessible, and generally cheaper, mutual funds and ETFs have begun to nibble away at hedge funds’ dominance.

US-domiciled managed futures mutual funds currently hold $15.2bn, a rise of 20 per cent since the start of 2020, according to data from Morningstar, while their European peers hold $13.2bn.

Several large houses, such as AQR, Winton, Man AHL, Pimco and Deka run systematic trend-following Ucits mutual funds in Europe.

Managed futures ETFs, the most liquid and typically cheapest vehicle, hold $2.9bn between the nine existing US funds, according to Morningstar, a more than tenfold increase since the start of 2020.

JPMorgan did operate a similar ETF in Europe, but it closed in 2020. The nearest existing alternative is the Kronos Strategy ETP Securities, although that only trades US equity futures.

“[The US market] has gone from $300mn to $3bn since we got into it [in 2019],” said Beer. “BlackRock, Invesco and Fidelity are all launching US managed futures ETFs in the belief that this space should not be $3bn, it should be $100bn or $200bn.

“I don’t see any reason why managed futures should even be in a hedge fund structure,” he added. “It’s liquid, you don’t need to tie up clients’ money in this [by limiting redemption windows].

“I wanted to prove you can do as well, or even better, than hedge funds, but in the most client-friendly vehicle, which is ETFs,” Beer added.

Beer was also critical of many of the existing managed futures mutual funds.

“Most of them have a performance fee. Why would you have one? Do you think your folks are going to model harder if they have an incentive fee? It makes no sense,” he argued.

DBMF aims to replicate the pre-fee performance of a representative basket of managed futures hedge funds operated by the likes of AHL and AQR by using an algorithm to attempt to determine the CTAs’ positioning, based on their daily performance. It then uses futures contracts linked to assets such as gold, oil, the yen, the euro, two- and 10-year Treasuries and the S&P 500 to attempt to achieve the same returns.

Since inception, it has chalked up an average annual total return of 7.3 per cent, above the 5.3 per cent of the SG CTA Index, which is weighed down by higher fees.

Kenneth Lamont, principal of research at Morningstar, was broadly supportive of the launch, although he felt the complexity of managed futures meant it might not be suitable for less sophisticated investors.

“What liquid alts claim to provide is less correlated returns to the broad market. They perform well at different times. That gives you the potential for higher risk-adjusted returns,” Lamont said. “Uncorrelated returns are the holy grail. That’s what everyone is looking for.”

The evidence appears to back this up. During each of the three worst years for a 60/40 portfolio of stocks and bonds this century, the SG CTA Index posted double-digit gains. Conversely, during four of the six years in which the index was in the red, a 60/40 portfolio made money.

“If [the new ETF] is doing a good job of providing CTA exposure at a lower cost then it should be applauded,” Lamont added.

“This is part of the democratisation of finance. It’s bringing strategies that were once only the preserve of sophisticated investors and opening them up to a potentially broader set of investors.

“There may be a place for it [but] I’m not sure that place is in Joe Bloggs’ portfolio on the street, given the complexity and fees,” he added.

Managed futures have been adversely impacted by the whipsaw markets that developed during the early days of US President Donald Trump’s somewhat idiosyncratic second term, with many of the most popular “Trump trades” now in the red.

Beer accepted this, but was optimistic that turbulence would prove temporary.

“The whole managed futures space was locked very much into the Trump trade, and then that reversed,” he said. “It’s down 4 per cent this month. These guys don’t always get it right.”