- Investors have been hearing prognostications of “runaway inflation" for more than a decade now, since the end of the global financial crisis.
- With central banks and governments around the world offering up unprecedented stimulus spending to combat pandemic-induced economic disruption, these inflation calls have now reached a fever pitch.
- Dynamic Beta's Andrew Beer joins the podcast to make the case for why his firm's hedge-fund replication ETFs are the perfect antidote for inflation's effects on traditional 60/40 portfolios.
- This article includes a full transcript of the podcast that was posted last week.
Editors' Note: This is the transcript of the podcast we posted last week. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.
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Jonathan Liss: Welcome to Let's Talk ETFs. I'm your host Jonathan Liss, and I've been closely tracking the ETF space for more than 13 years through a variety of roles here at Seeking Alpha calm. Each week, a different guest and I will take an in depth look at a particular aspect of the rapidly evolving exchange traded fund space with a focus on how investors can best utilize ETFs to reach their investing goals.
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Welcome back to Let's Talk ETFs. A couple of important pieces of housekeeping here. The first is that next week on account of Passover and Good Friday, we'll be taking the week off, the first week we're taking off in a while. The other important piece of housekeeping is that I am moving on to other things at Seeking Alpha, focusing on rolling out our contributor Marketplace, the Seeking Alpha Marketplace. And as such, I really am not going to have time to focus on recording and producing a podcast on a weekly basis anymore.
So, within the next few episodes, you'll be introduced to our new host of this show. Jason Capul. He is the ETF News Editor at Seeking Alpha. I think he's going to be really just an excellent host of this show. And we'll continue to look at the ETF space through a range of different angles that allow investors to both understand this very unique investing vehicle better and also to be able to position portfolios based on new trends in the ETF space and in the investing landscape generally.
Anyway, it's been really great. You can continue to follow me, Jonathan Liss at Seeking Alpha. I'll continue to be involved both with this podcast behind the scenes and we'll still be co-host and occasionally, I'll be doing podcast for the Marketplace Roundtable Podcast and on occasion, as well. Follow me there, get alerts whenever I'm on podcast and definitely continue to follow this show.
For reference purposes, this podcast is being recorded on the morning of Wednesday, March 10th, 2021. My guest today is Andrew Beer, managing member of Dynamic Beta Investments. Andrew joined the hedge fund industry back in 1994 as a portfolio manager for Seth Klarman. He later started hedge funds and commodities in the Greater China region.
Since 2007, his singular focus has been on the second holy grail of hedge funds, how to outperform hedge funds with shallower drawdowns, lower fees and daily liquidity. DBi manages over $400 million in hedge fund replication-based strategies including the UCITS fund. Additionally, Andrew’s firm serves as co-manager on two hedge fund replication ETFs that trade in the U.S., the iM DBi Hedge Strategy ETF ticker symbol DBEH. And the iM DBi Managed Futures Strategy ETF DBMF.
All right, enough of an intro. Andrew, welcome to the podcast.
Andrew Beer: Thank you very much for having me.
JL: Yeah, it's great to have you here. So, let's dive right in. You've spent most of your life in the hedge fund industry, what prompted you to offer investors access to hedge fund replication strategies in an ETF wrapper?
AB: So, I didn't actually start with the idea of doing it in an ETF rather, what we were trying to solve was and this was going back to 2006 2007. At the time, a lot of institutional investors were increasing their allocations to hedge funds, but were struggling with was there simply a better way to do it, that would have liquidity, transparency, et cetera.
And so, there was research done in 2006 or 2007, that a very effective way to do that was not actually to invest in hedge funds, but to replicate what they do and what hedge fund replication is. And there are a couple of different definitions of it. Two versions of it, don't work terribly well, one version does work quite well.
And the basic idea was, was rather than investing in hedge funds, if you could see what they do or study what they do, and invested directly in the same exposures, you could match or outperform hedge funds. And so, this really began as an institutional product. It was also something that we had been done for a long time for high-net-worth investors.
And it was really only in 2018 that we decided to go into the ETF space because a strategic investor came along and they have been doing a deep dive into the overall liquid alt space. And we can talk about it a bit more. But most liquid alt products significantly underperform actual hedge funds. Most of are very poorly designed.
And they said, as we've looked at this space, you guys are the only guys that we found who have outperformed actual hedge funds, had better drawdown characteristic, low fees and daily liquidity, but 99.9% of investors would never find you. So, let's take a stake in your business and help you build some ETFs to take your products out to a broader world. And that's what brings us here today.
JL: Yeah, sure. That makes a lot of sense. And ETFs certainly have democratized the investing world in that way. Do you happen to know what that breakdown of assets is in terms of retail versus institutional investors in the ETFs, that you guys serve as manager on?
AB: It's mostly it's not institutional, the ETFs are still too small for institutional, and it's interesting, I actually think that I think the ETFs will become the default allocations among smaller institutional investors by the time we probably hit our three year track records. But right now, it's both high net worth and retail, is where we see flows.
JL: Yeah, sure, that makes sense. And there's been a long-term gripe of line that I think listeners of the show will recognize. So, I generally buy and sell ETFs through two different platforms, I buy through TD Ameritrade. And that's where much of my discretionary money is not my retirement stuff, obviously but the money I actually get to play with and try to achieve some level of alpha or at least use the beta side of things.
And my kid’s college funds, and then my parents who have a much larger non-tax deferred account than any of that other stuff are in Merrill Edge, because they are Bank of America account holders. And Merrill Edge is just terrible. It's a platform because so few exchange traded funds that are available on places like Ameritrade are available on Merrill Edge. And it seems to me like they're doing just a massive disservice to people on the platform.
So, I'm going to go out on a limb and guess that your funds are possibly not available on platforms like Merrill Edge, despite the fact that there's really no reason they shouldn't be.
AB: Yeah, that's it. I mean, that's precisely the issue. And it's the chicken and egg issue that you get with ETFs, which is, when you're smaller, you're not available, you are available in places like TD Ameritrade that are very open and democratic. But a lot of the larger wealth management platforms have strict AUM limits.
And so, you have to overcome those first. And the irony for products like ours is that we appeal most strongly to the most sophisticated advisors, the ones who have been using both hedge funds and liquid alts and are very, very aware of the serious limitations of any of those products. And yet there is a struggle in terms of getting on boarded at the platforms where we have the advisor base who understands what we do.
JL: Yeah, now it makes total sense. And the reality is, I'm not even sure it's an asset, I think there's something possibly more nefarious going on, in terms of what I've been told is that on platforms like Merrill Edge, there's somewhat of a pay to play situation going on.
And so, for example, somebody that I've had on the show recently and sat around a couple times, Nancy Davis over at Quadratic IVOL ETF. I am very, very interested in getting my parents inflation protection money out of SCHP, out of the Schwab TIP ETF into IVOL, because IVOL is 85% and a CHP, but then it has the ability to profit off of volatility in the yield curve also.
And despite the fact that IVOL is like close to $2 billion in AUM, I still cannot buy it through Merrill platform. And that's just insane to me, that fund could be that large and still not be available on the platform.
AB: I'm sort of stuck. I spoke to Nancy about this a bit as well. And I mean, obviously huge congratulations where she said, phenomenal…
JL: Yeah, they’re killing it and there's a reason to find 2 billion, yeah.
AB: Yeah. And it's 2.3 as of yesterday, so
JL: Okay, cool. How you know it, I looked last week, and it was 1.7. So,
AB: I mean, every time she walked into the office, she seems to have another $20 billion or $50 billion. But no, it's – I mean, I think what you're pointing to is that underneath the surface in this industry, there is still so much disruption going on. We chose ETFs because we think that in three or five years, a lot of those issues, the access issues that you're describing will have been solved.
But I think in terms of ETFs, themselves, a lot of them have various different kinds of issues. So, if you have big if you have ETFs that are investing in liquid underlying assets, that can be a huge problem. And so, again, I think we decided to get on the path of ETFs. And we decided to go alone, because we had been circled for years by large traditional asset management firms who said, if we could take what you guys do for high-net-worth investors or institutional investors, we could take that out and create these products that would become that would solve, it would make investing in manners users easy for investors and advisors.
It would make investing in equity long, short, easy and efficient. And, but we struggled with those partnerships, because again, and in that case, there were biases to sell the product that went up 30% two months in a row. And we always used to describe it is a lot of the marketing departments that traditional asset management firms are like five-year olds playing soccer, where whoever's kick the ball, they all chase after it.
And so, our products require a lot of education. They require a lot of talking to advisors, how can these help you in your business? What is it that you're trying to do? Because no product, if you have a product that only has a two-line elevator pitch, or it's based upon how well you did over recent period of time, it's that works well, if you're running a distribution team, but not so well, if you're trying to help people build, help to improve their allocation, so they do better over the next five years.
And so, we went on that path. And we realized this is a long game. And what I liked about the partner of the firm called iM Global partner, and they actually just announced that they're buying a big firm called Lipton Gregory. And but what's exciting to us about it is that when I first met with a CEO, in 2018, he said, we believe what's more important in the asset management business is what it looks like in three to five years, not what it looks like today.
And what we know is that to get to the right place, between here and there, you're going to have to make various pivots along the way. And so, we decided to stay small, stay nimble, and be able to work directly with advisors be able to control how we shape and talk about the diversification benefits, and what we do and where it fits in portfolios. Because, our belief is that similar to way IVOL, has become almost like the default inflation allocation for a lot of portfolios.
We think that you'll see the two ETFs that we created being the default 3% 5% 7% allocation across dozens or hundreds of different portfolios in three to five years. And I guess, because we're solving something that no one's really been able to solve in the space, which is, we want access to hedge funds, but we don't want performance drag.
We don't want to blow up, we don't want high fees. We don't want all these things that have caused this big industry wide reexamination of the whole liquid alt space where people are saying, it just hasn't worked well. So, what do we do now?
JL: Yeah, no, that's I think, very well put. And I think it is ultimately, a good strategy to put the end user first, make sure they actually know what they're getting into that they're using the products properly, and not just pushing them very aggressively, and then having it possibly blow up on people. So, I definitely want to get into how the two funds are constructed and how they work.
But before that, I think it will be good to get into the inflation conversation, because I think in terms of how you've constructed the funds, the liquid alts kind of alternative is something that really can be used to combat inflation. So, in late February, you put out a paper, the title of the paper was with inflation on the horizon, how can retail investors protect themselves and this is at dynamicbeta.com. Your site, listeners should definitely go check it out.
And in the paper, you outline the case for the potential for a major uptick in inflation on the horizon, explaining what investors can do to at least attempt to mitigate the effects of inflation on their portfolios. And I'd love to start with the case for inflation as you see it. So, we've been hearing calls for runaway inflation, I mean, really, since the end of the global financial crisis, but certainly towards the beginning of last year, really, once COVID became a global story, and was very clear that there was going to be massive economic slowdown on a global scale suddenly you see massive stimulus packages all over the place. Why is 2021 the moment when that theoretical case for inflation finally becomes real to investors?
AB: Sure. So, let me first throw out the caveat. So, I don't believe that that we DBi have any great ability to tell you what inflation is going to be in 18 months or 24 months. Rather, what we do is, our whole business is trying to basically being the hedge fund whispers. We are trying to understand what smart macro hedge funds, fundamentally driven hedge funds, how they are viewing the world, distilling it, and then either investigated our portfolios or writing about it, which is what the paper that you're talking about.
And by the way, anybody who tells you they know, what inflation is going to be in 24 months is either lying to you or selling you something, or they're delusional. This is sure, precisely the same, the reasons you've described.
JL: Yeah, I mean, their research on prognostication is pretty definitive that there's no ability to actually do it.
AB: Exactly, exactly. Republicans will tell you Republicans will win, Democrats will tell you, Democrats will win. If you're selling gold, you believe inflation is around the corner for the past 30 years. So, but the inflate -- the hedge fund inflation thesis is really what I was talking about. And that thesis started last fall. And it really has two legs.
And the first is that three independent forces could converge. You've got this huge fiscal package. And again, as Georgia went toward Democrats, this the idea of a very big fiscal package became a reality. You also have this incalculable pent-up demand as lockdowns are lifted, nobody knows what that is. But it looks and it feels big. And everybody that I talked to is thinking about, once I get a vaccine, what am I going to do then and whether it's travel, whether it's something, do something fun or exciting.
And then you've got the Fed stated intention to let the economy run hot. But I think but that's only one part of it. If that was priced into the market, then there's nothing interesting in it. But what makes this a great potential macro trade is the second and equally important leg of it, which is that this outcome was simply as wasn't priced in a few months ago.
And why, so first, as you described, most market observers, simply don't believe it's possible. What I hear again, and again, is this idea that inflation is going -- may go up above 2% for a period of time as these things converge, but then it's going to gently drop back below 2% without any major shocks. And essentially, this is what the Fed was saying last week.
This just seems like it is one outcome. And it's one possibility. And if it's right, it's fantastic. But it also seems a little bit fantastical to kind of place all of your bets on that. And so why is it from a first a lot of the people who predicted inflation, early 2000s, were proved wrong. And they don't want to make the same mistake again.
If you're an advisor or you’re wealth manager who kind of went on a limb in 2012, or 2011, talking about devaluation of currencies, you kind of had to retreat, and it's hard to go back on the change in position. The other is that others don't want to stray too far from consensus. I mean, if you're at a wealth manager, and everyone's saying 2%, if you want to be aggressive, you'll go to 2.25%. You don't go to 4%. Because if you're wrong, goodbye career.
So, what makes this interesting is that you have these different variables converging at the same time that you have a very, very, very tight consensus. And my guess is, and you can tell me if I'm wrong, but a lot of people who've gotten on the call have kind of had very, very confidently stated that the consensus view is what's going to happen.
And what we know is that there's a broad range of outcomes, and just that I look at how most people are positioned their portfolios, they're not ready for inflation, they're still not. And so what hedge funds are really saying is that if it starts to move, you're going to be want to buy flood insurance before the flood, because this is going to have a huge impact on across people's portfolios across asset prices. And honestly, hedge funds are delighted about the opportunity.
JL: Yeah, sure. I mean, what I'm hearing here, though, is that beyond the reopen trade, which or just the reopening behavior that I think we can expect, and maybe some kind of roaring 20s redax in terms of people just kind of going out and going nuts and spending freely for the first time in two years, or whatever it ends up being when things finally reopen.
If you do look at I think similar cases in terms of just the debt levels, you'd look at Japan in the 90s or Western Europe of the 2010s, it is hard to see how the U.S. is different is similar demographic trends in terms of pushing growth downwards U.S. is just not growing population at a very rapid rate and the kind of debt levels that have occurred as a result of the pandemic seem to actually lead to deflationary death spirals, or at least have in other cases, not inflation.
Because while you have this quote unquote money printing, which is obviously not an accurate term, every dollar is backed up in the Treasury, but you do have a lot more money on the government's books, but that money doesn't seem to actually be circulating through society in any way. And so, while I think that case is a reasonable one, it doesn't seem like it necessarily has to go down that way.
AB: Or it doesn't. That's the whole point, right? It doesn't have to go down that way. And even I mean, what's going to happen over so, the first leg of coverage of this was that inflation essentially had been left for debt. I mean, the people the concern a few years ago was deflation, not inflation. When people were worried about what's going to happen to their equity portfolios, except for maybe 2013, when we have the taper tantrum, they're really in.
But again, I mean, think about where valuations on equity markets were back then, relative to where they are today, there really hasn't been much concern as to what would happen, that we would have inflation to come back. It was globalization, deflation, zero interest rates forever. But by the time you got to last year, it was very, very clear was that everybody had the same bet on and the same bet is we're going to have zero interest rates forever.
And that bet is the underpinning for I mean again, I think, Paul singer from Elliott made this great comment where he was talking about the returns on investment grade fixed income is I don't remember the exact adjective he used but catastrophic disaster or something like that. But, he was talking about an asset class, that in the best case scenario, credit spreads don't widen, we don't go through a terrible period rates don't rise, you're going to earn a little over 1% per annum for eight years.
And in 10 weeks, we've lost 6%. Right. So, the risk reward on that or risk award of investing in treasuries, 10-year treasuries are down 8% year-to-date. So, you've given up all 10 years of returns, literally, from where you were standing last year in eight or 10 weeks. And so, I think, like, I think we know that that I think the point of it is that the diversification that people assume as in their portfolios is probably not there.
And as people process, whether this is whether inflation coming back is not a zero percent probability, but might be a 25% probability, then this is going to cause massive readjustments across portfolios. I was talking to an alligator yesterday, who was we're talking about the macro hedge funds that he's invested in. He said, not a single one of them has exposure to U.S. stocks anymore.
And a year or two ago, they did. And predominantly if they have equity exposure, and also in emerging markets, they're short treasuries. So, I guess, the whole point of regime changes is if they occur, they don't happen all at once people don't walk in tomorrow and say, Oh, you're right, inflation is back. That that, you know, people have vested interest in a consensus view, it takes a long time for people to change.
And so, I think what at least part of what, what I think the optimism for hedge funds lies over the next five or 10 years is that if you just look at a standard 60-40 portfolio, it's hard to see how you're going to make much money if you have a lot of exposure in U.S. investing great credit, and you have a lot of exposure in U.S. tech stocks at high valuations.
And so in that context, finding more ways to get diversification, we think is important for people's portfolios, because a lot of the things that people would use as, for instance simple or static inflation hedges, like going out and buying tips, as you mentioned, or even buying gold, I mean, gold is down 9% year-to-date. Maybe that's telling you inflation is not coming back, or maybe it's telling you that people like Bitcoin more than gold, this is sort of a complicated business, and we'll just have to see the way it plays out.
JL: Yeah. Totally. So, I'm 40 I really have no recollection of real inflation. I’ve read about the 70s and early 80s when I was a little kid, but refresh people's memory here. For people that haven't gone through this for a while, or maybe for younger listeners that never have, what effects will inflation likely have on let's say, a typical 60-40 style portfolio. So, you've got your equities you've got your different types of fixed income exposure, both government and corporate, what kind of effects if there is real inflation can people expect to see there?
AB: Sure. So, I'm not, I'm not quite 40. I'm 53. So, I was actually trying to think about what it was like in the 1970s. And I was a little bit blissfully unaware. I'm sure the cost of my Reggie bar has a New York Yankees fan had gone up somewhat. But I was not wildly aware of it. I think what I do know is that the efforts to bring inflation under control. And I think this is a part of the story that has not been covered yet.
Is that when people talk about what if inflation starts to get out of control, and they say, oh, the Fed will raise interest rates, that will very quickly put the genie back in the bottle. What you'll see, I think, a lot more coverage of over if this threat looks as real as it may be, is the world has changed. So, one experience that I did have is in the first job that I had back in 1990, the chairman of the firm that I worked for was Paul Volcker.
And I got to work with Paul Volcker on a number of different projects. And when people describe what he was willing to do, basically willing to raise interest rates, unemployment be damned, back in the early 1980s, to bring inflation under control, that required a very, very particular kind of personality, who was literally impervious to criticism.
And having worked with a guy, I mean, he was six foot eight, he was enormous. He had this kind of presence to him that he just looked and felt physically immobile. And also, but this was after years and years and years of inflation that was really eating the core out of the U.S. economy. So, there was, whatever political will there was to back it, it took me years and years and years to develop.
The notion that if we started to see a spike in inflation, that you would have a Powell fed in this political environment, who would be easily say, you know, what, we're going to jack rates 300 basis points through the economy into recession to put it back in the bottle. I have a hard time seeing that. And I don't think that's been sufficiently I don't think that the political animus the social dislocation has been really covered at all, because look at what we've just gone through in this country politically.
And now you have I mean, imagine the vilification of an organization that's willing to throw the economy into recession for both sides of the political aisle. So, I think that's part of the thinking on hedge funds, people who were around back then, was that if it does get out of control, then watch out.
JL: Yeah, definitely. And in terms of just the current debt levels, is that really even in the playbook to raise rates that much? I suppose anything's possible. But it seems like the U.S. government's debt servicing costs would spiral out of control if that were the case.
AB: Yeah. And I think I was just talking to somebody the other day about it. And the question is whether the parties in power have an incentive for inflation to go up or not. And one guy kind of outlined the thesis, he said, well, let's say inflation goes to 4%. And the government's debt servicing costs go up, but then they're issuing new, they're basically going to the market and buying their own debt back at $0.70 on the dollar.
So, is that a net positive or net negative? I don't know. I mean, it's but look, I think all the points you're raising, I think this is the whole point of a consensus view is that is, this whole idea that the U.S. economy can't afford to have rates go up, and therefore rates will remain low. These are all very powerful arguments. And again, having been in this business for a long time, if you're 55% right in a situation, you're doing something absolutely right.
Very best traders are right on maybe 55% of other specific trades. But I think what we have right now, going back to your question about the impact on a 60-40 portfolio, I think, if we do enter an inflationary environment, I think there are two big risks that people are sitting on that it just kind of gradually built up over time. People didn't make a conscious decision.
But if you think about if you'd started the 2010s after the last decade in U.S. equities, people have pretty high exposure to emerging markets. We were coming out of the commodity boom, that's where global growth was. We thought we weren't going to have any growth in the U.S. for foreseeable period, people were talking about, that's when people were really talking about Japanification of the US.
And then look at the decade we have. But and over the course of that decade, every quarter that went by your S&P was going up in your emerging markets wasn't going up nearly as much. So, unless you were literally every quarter rebalancing your portfolio and taking money from the S&P and putting back in the iM, by the time you got to the end of the decade, you probably had very little iM exposure.
And so, and what has the S&P become over that period of time, it's become much more techie. It's companies with where you're discounting rapidly growing earnings streams that go out a decade, two decades, whatever. And they tend to be sensitive to interest rates. So, I found a telling when this guy was talking about the positioning of his macro hedge funds, he says none of them own the S&P anymore, even though they do think a lot of the companies in it are some of the best companies in the world, they think the valuations are too sensitive to rising interest rates.
And so, given the fact when we say 60-40, what we're really saying is most of the 60 is the S&P 500. And when we're saying 40, again, for most investors, most of it is, is going to be investment grade fixed income. And, maybe some things like that, again, the math on fixed income is if we go up another a couple 100 basis points in rates, you're going to lose 10% or 15% more on your portfolio.
So you can have really both your stocks and bonds going down at the same time. And the question is, what do you take from your 60-40 that potentially does better?
JL: Okay, so I think this leads really well into to the next point here, and that is, how can investors best combat the effects of inflation within their portfolios. And again, as you pointed out, this doesn't mean that you have a crystal ball, and you know, where rates and where inflation levels are going, although I think it's safe to assume after the inflation numbers for 2020, which we're essentially, at the zero bound there, there really was no inflation in 2020.
And I think people could kind of see that with their own eyes in many different areas. But what should investors be doing to get beyond that typical 60-40 allocation overweights to U.S. equities, and to investment grade corporates and get the diversification in they need to deal with different possible outcomes here.
AB: Sure. So, I mean, I'll talk specifically about what we do, because there are a lot of different things that people are doing. And but I think in the interest of time, so the one that we think is the most direct inflation hedge, which we talked about is managed futures as a strategy. What managed futures hedge funds do is they run computer models, essentially, to try to understand both long and short how assets are moving.
So, if gold is going down, is it likely to continue to go down. Is this the 30-year Treasury is declining in price as yields are rising? Is that likely to continue? And when they tend to do best, or when you have these regime changes, and because they can go long and short across commodities, equities, currencies and rates, they've tended to do very well in periods like 2008, or the early 2000s, when you've already been 2014 2015, when you had oil prices collapse.
When you have these kinds of big changes as people are rethinking across their portfolios, you get these huge trillions of dollars of capital flowing back and forth, changing prices over time, they tend to do very well. So, the ETF or ETF strategy on that is basically the thesis is…
JL: And just to remind people, this is the iM DBi Managed Futures Strategy ETF ticker symbol DBMF.
AB: Thank you. So, the ETF, what we believe very, very strongly that managed futures as a strategy has a lot of diversification benefits, but single managers within managed futures do not. And sort of the example is, if you decided that you wanted to invest in you wanted to increase exposure to value stocks today, to bet on an economic recovery, no one in the right mind would go out and say I'm just going to buy this stock and call it a day.
Like people buy value stocks broadly, they buy portfolios of stocks, they buy value managers, et cetera, all of which have diversification. So, what we do in the ETF is basically, we take 20 of the largest managed futures hedge funds, and we copy their positions in the futures markets in a low cost way. And the reason the low cost is critically important, is even if you're an institutional investor, and you invest in hedge funds, the costs are still incredibly high.
And so, before investors make $1, there's usually four or 500 basis points of fees and expenses that get paid to the manager and counterparties, et cetera. And so, what we set out to do in 2015, and then ultimately came into this ETF in 2019, was to find a way to cut out all these fees, so we do better. So, if you look at how we've done since inception, we're up about seven this year, for a few minutes ago. And we've done about 20% in absolute return since we started in May of 2019.
But relative to the overall space, we've roughly doubled their performance by cutting out fees. So, we have this expression that fee reduction is the purest form of alpha. And if you want to avoid blow ups in hedge funds, you diversify across lots of managers and avoid single manager risk. So, we think this is the most direct play, and we call it a dynamic inflation hedge.
Because as we've seen in our portfolios, for instance, we're very short the 30-year Treasury today. That may not be true in six months, depending upon what happens with Treasury yields. But we were very heavily long gold at one point last year, and then we weren't long gold during the period of time when gold was declining. We've sort of added some gold back recently.
But the whole idea is that we don't really know which asset classes are going to move and when they're going to move, but we think that broadly asset classes will be moving a lot. And then on the equity long short side, the opportunity there really is to is that hedge funds have moved most of their exposure out of U.S. large cap stocks.
And so, what we saw last year and there are a couple of papers on our website, one is called hedge funds are back, which we wrote last year, and another one is called dusting off Graham and Dodd. And it was talking about hedge funds and how they view investing in value. They did a major pivot away from U.S. large cap tech stocks last year. And that's part of what drove that ETF had about 1000 basis points of alpha relative to the S&P 500 last year.
JL: And just again to just to remind people who are following along here, we're talking about the iM DBi Hedge Strategy ETF ticker symbol DBEH now, correct?
AB: Yes, thank you. And so there what we do, again, we have this belief that equity long short as a strategy over long periods of time has actually provided a lot of diversification benefits, equity like returns, but with a lot less risk. But again, investing in a single fund doesn't make sense. So, we seek to replicate the pre fee performance of 40 large equity long short hedge funds. And these are big institutional names that are some are value guys, some are growth guys, some are emerging market specialists, et cetera.
And again, the idea is what we try to capture are their core asset allocation decisions, because that's what drives most alpha over time. And so, what this does in an inflationary environment is if, again, depending on how it plays out, it's potentially a way to get exposure to markets where hedge funds are voting with their portfolios and pocketbooks by saying, we believe that small cap stocks are going to have much better return potential over time.
And we believe that emerging market stocks will do much better in this environment. And so, they're both different ways to do it. I think the one that's candidly much more powerful from a diversification perspective is DBMF. But for those who are concerned about their being overexposed to do tech stocks, DBHS has great value as well.
JL: Interesting. And just out of curiosity, logistically, how are you actually seeing what these hedge funds whose strategies you're replicating are doing in real time because somebody like me, let's just say, like, I'm looking at the 13 apps, but I'm on a major delay, by the time I see what these guys are doing in terms of giving their hands. So how are you able to, let's say, have strategies that reflect what they're actually doing now, and not what they were doing I don't know, two or three months ago, once you've seen that the filings?
AB: Sure, so in the managed futures side, it's easy, we actually do have daily data. And we look at about the past 20 days of data. And the key, the real thing that we brought to this business, when we got involved is we understand what happens underneath the hood. And manager’s hedge funds will change their positions over the course of weeks and months, but they don't do it over a single day.
And so, we look at the past 20 days of data. And that tells us with great accuracy, how they're invested today. Doesn't tell us with great accuracy, how they're invested in a month or two months, but it does for today. And so, every Monday we rebalance that portfolio. On the equity long short side, they actually the portfolios move much more slowly.
So, we literally just use monthly performance data going back for about the past year. And then we have ways of weighting it more recently. But the key there is that if you look at these portfolios on a granular position by position basis and how they're exposed, they change over quarters, not single months or certainly not weeks. So even through the most volatile conditions in 2020, our shifts in exposures lined up incredibly closely with the actual hedge funds.
JL: Interesting. That's actually really fascinating. And so, I guess there's some combination of big data analysis that you're doing to be able to unpack what some of these long short funds are doing by simply looking at returns, I guess, and then correlating that to different asset classes or slices and asset classes?
AB: That's right. I mean the analogy that we use is, if you came to us with just a return stream, and said, these are the daily or monthly numbers of a fund, and we're not going to tell you what we do, we could run that through our models and tell you with great accuracy, you know, this guy's a U.S., it's simply because they -- he's obviously U.S. large cap manager, he's a U.S. small cap value manager like that would be very similar. Or he's a bond investor, whatever it is.
In hedge funds, it's more complicated because they do things across different asset classes. So we use, a much more complicated versions of that, basically break it down and says, you know, how much exposure do they have to emerging markets? And is that going up or down? What about small caps versus large caps? What about this kind of big and major categories?
And so part of the innovation also that we brought to the space was understanding that alpha generation for hedge funds occurs most often at the portfolio level. So, if you sit down with a hedge fund, and they will often like to talk about a given stock. But if the stock is 50 basis points to their portfolio, it has roughly zero impact on their returns, even if they are incredibly right.
What's going to matter much more is, if you were a hedge fund, who happened to have loved FAANG stocks going into 2020, you had an incredible first half, even if you were in the bottom decile of tech funds, you did that you had an incredible first half of 2020. And so really, what we try to do is synthesize and understand how these guys are positioned, and then deliver in a very investor friendly, low-cost package.
JL: Sure. And then final question here. Are these funds DBEH DBMF, are you envisioning them as core portfolio holdings? Or is this something that you imagine for many investors is more of a satellite strategy, where they use this to juice returns a bit at the edges, but they're still really just anchored in those large index types of funds? Just curious how you envision the funds being used?
AB: Sure, so we think I mean, our whole thesis is that a 60-40 portfolio, we use it as a shorthand. But in reality, I think when you look at people's portfolios in three to five years, it'll be 15 different asset class buckets. So, it won't just be 60, it'll be the 60 will be broken down, or the 40 will be broken down. And that's already happened. So, people use 60-40 is shorthand.
But I think as people, as portfolios get more diversified across asset classes and strategies, the people who are building the models will say, should we include managed futures? And if so, how much? And should we include equity long short, if so, and how much? And when they do that, what they do is they look at 20 or 30 years of hedge fund data, and then decide that they want it to be a 5% allocation.
The whole problem, or one of the huge problems of the liquid alt space, is that somebody would say I want a 5% allocation to managed futures, and give it to a single guy. And that's the equivalent of saying, I want a 5% allocation to value stocks, and just going out and picking one stock.
There is no --whatever diversification benefits of the strategy are lost, because that one guy over the next two or three years is going to go through some awful period, and you'll redeem, you won't be able to explain what the hell happened, clients will be pissed, and then it kind of it's sort of created this left this bitter taste in people's mouth about the liquid alt space.
But to us, it was incredibly is entirely predictable. We've been writing about this since 2012, you should not invest in a single hedge fund strategy and call it a day, excuse me a single hedge fund and call it a day. So, the goal here is that when you do have those 10 or 15 different asset class buckets, and they want a 5% allocation of managed futures, they can make this ETF their one stop allocation, because the ETF itself represents 20 underlying funds.
And so, you do get diversification across sub strategies in individual managers, but it's packaged in a single fund. So, in that way, our products are designed to be index plus, and the plus is because we outperform by cutting out fees. And so, it's supposed to have the predictability of a multi manager vehicle, but without two layers of fees without.
And so, in that way we say the goal here is to be the default allocation, where every time somebody wants a 3% or 5% allocation of managed futures, unless they have a really good reason not to they'll pick us. Same thing with equity long, short,
JL: Nice. Anyway, this has been great, Andrew. And it's fascinating stuff. It's fascinating to see how you're taking a strategy, which maybe has had kind of mixed results. And really, I think many people have had that kind of reaction to that you're describing where they interacted with a single manager. And then they said, you know what, this isn't for me, but you're taking an entirely different approach here, combining the best of diversification and indexing with the kind of strategies which are simply not possible in a rules based index. So well done there.
AB: Thank you.
JL: Yeah, sure. Absolutely. So where should investors who want to keep on researching this go to find you online? Where's the best place to follow you?
AB: Sure. So, for our firm, our website is wwwdynamicbeta.com. And we, anytime we publish research or write bylined articles, it shows up there. But I'm also pretty active on LinkedIn. So please feel free to reach out to me over LinkedIn and you'll see that I post missives on hedge funds and things like that, just really data that I find interesting. And I think there's now a fairly large following of people who check it regularly.
And then for the ETFs ourselves, I mean, our partner who launched them, their website is imgp.com and so fact sheets and things like that are available or you can just go to the Morningstar website and which has all the relevant information as well. Morningstar is very user friendly app I’ll say.
JL: Yeah, sure. Definitely. All right, anyway, Andrew, I want to wish you best of luck and hope we can do this again sometime.
AB: I look forward to it. Thank you very much Jonathan.
JL: For disclosures Andrew Beer is long DBMF and DBEH. I Jonathan Liss, I’m long, SCHP. If you've been enjoying Let's Talk ETFs, you can subscribe on Apple podcasts, Google podcasts, Spotify, or whichever podcast platform you prefer. And if you find this podcast useful, please consider leaving a review on one of those platforms so that other investors can discover it. You can also find this podcast on seekingalpha.com by typing Let's Talk ETFs into the search bar at the top of the site.
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