‘Like a drunk stumbling across the highway.’ How one fund is preparing for market turmoil even as stocks have surged.
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Today’s inflation report puts macro in the spotlight and makes it a good day to check in with the world of CTAs, or commodity trading advisors, which make their money by betting on an array of futures markets, typically following trends. After a sensational 2022 when the world turned upside down — the SG CTA index returned 20.1% last year — this year that index is flat.
Andrew Beer, the co-portfolio manager of the iMGP DBI Managed Futures Strategy ETF?DBMF,?-0.07% ,?which seeks to replicate the average return of the 20 largest managed futures hedge funds, told investors in a presentation about how the market keeps dodging landmines.
“On the macro front, we cannot shake the image that the markets have been like a drunk stumbling across a highway,” says Beer. “You sit there and watch an eighteen wheeler barrel down on this guy and clench your eyes shut– only to open them seconds later, watch the dust settle and find that he’s still standing. Then he stumbles into the next lane and it happens again. And again.” Those 18-wheelers include the European energy crisis, the regional bank crisis, and the threat of a U.S. debt default, not to mention the recessionary fears present all year.
Beer suggests that maybe this drunk will go splat. “Hedge fund luminaries, in general, are sticking to the view that we’re in for a series of rolling crises – we may have dodged these eighteen wheelers, but they’ll keep coming over the horizon. If one hits, watch out.”
Its biggest position is a short of the Japanese yen, based on the view the Fed hikes while the Bank of Japan sits tight. The fund is also long the S&P 500?SPX,?+0.67% ?versus both non-U.S. developed markets as well as emerging markets, which he says is “arguably a growth vs value bet, which lines up with the AI frenzy but not necessarily with higher rates, which tend to benefit value stocks.” The fund has a modest bet on longer rates, is long gold — perhaps a hedge if inflation surprises on the upside — and short crude oil, which he says is a recession hedge.
The fund hasn’t done great this year, falling 5%, but he says it’s a hedge against further turmoil. “For a variety of reasons, most allocators move slowly – which actually works fine most of the time; however, when the world shifts faster, it can be a disadvantage. And that’s why managed futures were so successful in 2022 – inflation came back too fast for most allocators to adapt. So I view managed futures as a hedge against a world that keeps changing fast – and that certainly seems to describe the world today.”
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