Managed Futures Could Benefit From Continued Fed Aggression

Economic indicators largely point to a slowdown and potential easing in inflation, but not at a satisfactory pace according to St. Louis Federal Reserve Chairman James Bullard. Further Fed aggression through rate hikes could have serious economic repercussions, but managed futures, a strategy that can take long – and especially short – positions in a number of currency classes ‘assets, are well placed to ride the economic tides.

Bullard is a voting member of the FOMC that sets monetary policy and recently said that “the key rate is not yet in an area that can be considered tight enough,” CNBC reported.

The St. Louis Fed President uses economic standards based on the work of Stanford economics professor John Taylor, dubbed the Taylor rule. It’s an algebraic equation that calculates where interest rates should be based on inflation and real GDP, and applying Taylor’s rule to current inflation puts the Fed’s terminal rates somewhere between 5% and 7%, which is 100 basis points more than the current rate of 3.75% – 4%.

“So far, the change in monetary policy stance appears to have had only limited effects on observed inflation, but market prices suggest disinflation is expected in 2023,” Bullard said.

Under this approach, the lowest bounds would be 5% interest rates to place monetary policy in a significantly restrictive range, according to Bullard. Markets are currently pricing in 5% as the upper end of rate hikes by mid-2023.

Not all Fed officials share this kind of outlook: Kansas City Fed President Esther George told the WSJ, “In my 40 years with the Fed, I haven’t seen a moment of this kind of tightening without you getting painful results. .”

Some Fed officials officially backed easing to a 0.50% hike at the December FOMC meeting, but there is unified caution — regardless of the outlook — about the Fed ceasing rate hikes too much. early.

“For me, the most important issue for this committee, looking into next year, is to be careful not to stop too soon,” George said. “That was the lesson of the 1970s and 1980s is to think, ‘Oh, we’ve got it now, we can stop’, and then you find inflation really does come back somehow. other.”

Shorts Can Overcome Fed Aggression

Managed futures have been a popular benchmark this year for hedging portfolios against volatility while delivering strong performance. Because they invest in the futures market, they can provide an uncorrelated stream of returns from stocks and bonds for portfolios.

“When rates are higher, 60/40 stops working because stocks and bonds tend to go up and down together. This means investors need strategies, like managed futures, that can be short if needed,” said Andrew Beer, co-portfolio manager of the iMGP DBi Managed Futures Strategy ETF (DBMF) and managing member of Dynamic Beta investments, in a communication to VettaFi.

Any advisor can invest directly in a stock or bond, taking a long position in that security, but managed futures contracts are particularly attractive for their ability to take short positions in a range of asset classes. Additionally, because they invest based on the true trend of the assets, they react dynamically to changing market positions and capitalize on dislocations and volatility. Their ability to short Treasuries as well as other asset classes that are negatively impacted by Fed aggression makes them an attractive investment heading into 2023.

This ability has been a boon this year when volatility has been pronounced and prolonged. The iMGP DBi Managed Futures Strategy ETF (DBMF) has been a very successful and immensely popular choice for advisors and investors in the challenging environment of 2022.

“While recent market volatility has caused CTAs to reduce some risk, we believe they are still positioned for higher rates and more market turbulence,” Beer said.

Recent position changes in DBMF currently have the fund short Crude Oil and long Yen and EAFE stocks, with short positions in the remaining currencies it is invested in, as well as Treasuries and Commodities. from 17/11/22.

The position the fund takes in domestically managed futures and futures is determined by the dynamic beta engine which analyzes the 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the average performance of CTA hedge funds. hedge funds (not the posts).

DBMF has a management fee of 0.95%.

For more news, insights and strategy, visit the Managed Futures channel.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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