Stockholm (HedgeNordic) – Trend-following CTAs or managed futures vehicles are often seen as effective diversifiers within investment portfolios, exhibiting limited correlation to equity and bond markets and performing well during market crises. Andrew Beer and Mathias Mamou-Mani, the founders of DBi (Dynamic Beta Investments), advocate for the simple replication of trend-following CTAs as an accessible strategy for many investors. They believe that this replication approach offers broad and cost-efficient exposure to a strategy with attractive return features, such as limited correlation, asymmetry, and fat tails.

“The concept behind Dynamic Beta Investments is tied around academic research and the idea that hedge fund strategies can be effectively replicated through a conventional factor-based model,” explains Mamou-Mani (pictured) on a chilly morning during his visit to Stockholm. While certain strategies such as market-neutral, relative value, or credit-based approaches may pose challenges for replication via factor-based models, many hedge fund strategies, such as long/short equity or more diversified ones, lend themselves to replication. DBi, which has partnered with iM Global Partner to run a series of replication-based strategies, dedicates a substantial portion of its resources to CTA replication.

“The concept behind Dynamic Beta Investments is tied around academic research and the idea that hedge fund strategies can be effectively replicated through a conventional factor-based model.”

Mathias Mamou-Mani

“The CTA strategy has become central to our investment activities,” points out Mamou-Mani. The team currently manages one of the world’s largest alternative ETFs, with its iMGP DBi Managed Futures Strategy ETF recently crossing the $1 billion milestone in assets under management. Modern-day trend-following strategies employ systematic approaches to identify and capture price trends across asset classes through futures trading. CTAs are known for their “crisis-alpha” characteristics, as trends often exhibit greater persistence during periods of significant market or economic turmoil.

The Beauty of CTA Replication

Though trend-following CTAs aim to systematically identify shorter to medium and longer-term trends across asset classes and investment instruments, there exists significant dispersion in performance and styles among them. Many large trend-following players have endeavored to distinguish themselves from basic trend-following models by incorporating complexity through statistical innovations, diversifying models, and expanding into more esoteric markets to pursue higher risk-adjusted returns. In contrast, replication returns to the core principles of traditional trend-following models and aims to provide several advantages, including reduced complexity, lower fees, and ideally, returns representative of the broader CTA industry.

“We love CTAs because they provide the necessary performance insights into market positioning,” explains Mathias Mamou-Mani. The team’s objective with replication is to deliver index-like returns of the world’s best and largest trend-following CTAs. “Through replication, we aim to deliver the returns of CTAs while capturing additional alpha through a more cost-effective structure,” he emphasizes. While traditional trend-following managers continually strive to differentiate themselves and enhance their strategies, Mamou-Mani contends that “only a handful of big factors in the market can account for the performance of CTAs.”

“Through replication, we aim to deliver the returns of CTAs while capturing additional alpha through a more cost-effective structure.”

Mathias Mamou-Mani

Some trend-following managers may invest in a wide range of markets, including more obscure or niche instruments such as Cocoa futures or regions like Thailand, or may utilize mean-reverting models or different time horizons for their trend-following models. “We are actually indifferent to the specific strategies employed by trend-following managers and how they differentiate themselves; that’s the beauty of replication,” asserts Mamou-Mani. “Everyone’s talking about Cocoa now, with Cocoa being one of the best trades for trend-followers. But how much do you think Cocoa will be contributing to performance over ten years?” muses Mamou-Mani.

Regardless of the strategies employed or instruments used by trend-following managers, the team at DBi strives to “achieve results closely aligned with trend-followers by focusing on a select few factors.” Andrew Beer and Mathias Mamou-Mani “just want to see what their current positioning is and identify the factors that replicate their positioning and performance.” According to Mamou-Mani, “the only thing that matters on the replication side is that their models and positioning do not move too fast.”

Cost-Efficient Avenue

In addition to the commitment to providing index-like CTA performance, the iMGP DBi Managed Futures Strategy also aims to represent a more cost-efficient avenue for accessing the risk-return profile of CTAs. “The advantage of replication is that we don’t require extensive infrastructure, numerous PhDs, technology, and other resources,” notes Mamou-Mani. “This allows us to reduce costs, which ultimately benefits the final investor.” Due to the asymmetric return profile of CTA performance, which may entail flat performance in some years followed by significant upside in certain market environments, the CTA replication strategy can potentially offer higher returns in both periods of subdued performance and strong years.

“Our ETF, for instance, charges less than a percent as a flat fee and we do not charge performance fees, which in the industry can reach as high as 20 or even 25 percent of gross returns,” points out Mamou-Mani. “Instead of investors earning just two percent, for instance, they can potentially earn around five percent even during periods when CTAs are not doing great,” he continues. “During years when CTAs excel, such as in 2022 or this year, we don’t charge performance fees and most of the returns are passed on to investors,” emphasizes Mamou-Mani. “We are able to outperform the index through this simple fee structure. The beauty of replication lies in charging lower fees while still capturing 90 percent of the significant trends, resulting in a high correlation to the index.”

“The beauty of replication lies in charging lower fees while still capturing 90 percent of the significant trends, resulting in a high correlation to the index.”

Mathias Mamou-Mani

Mamou-Mani concludes by stating that their replication strategy is not aimed at engaging in a “fight to the death” with the traditional trend-following managers. “We need them and I believe they also need us, as the CTA space has seen minimal growth over the past 20 years,” notes Mamou-Mani. “Some allocators prefer not to get too much into the weeds of CTA strategies. Our replication strategy serves as an efficient gateway for them to access the CTA space. We serve different purposes.”