“Democratising hedge funds” has been in general a “terrible idea” as “over the past 10 years, the average hedge fund product in a Ucits vehicle has done about 2% per annum after about 200 basis [points] of fees,” said Andrew Beer at DBi, which has $2.1bn in assets under management. That is “an absolutely terrible performance and an embarrassment” for the industry.
Beginning in 2006-07, Beer started to figure out how to replicate the hedge fund performance and concluded that “you can boil down what they’re doing to a handful of big trades.” He argues that the outperformance DBi’s funds over the hedge funds comes from efficiency and charging lower fees than their underlying source of investment ideas.
How does DBi second guess and match the timing of the hedge funds large positions?
DBi looks at the daily performance of a pool about 20 hedge funds in the last 20 days and can figure out the 10 big drivers of performance overtime. In Beer’s opinion, the core views in hedge funds are expressed in “70 or 100 positions” and the risk models at DBi “figure out the big positions, and you can copy them cheaply” in very liquid futures contracts.
There’s always been this dream of I want access to hedge funds, but I want it in a client friendly package.
“If they’re long or short heating oil, that’s not gonna matter. You know, if they’re long or short crude oil, that’s gonna matter, really.” With 10% of the positions, DBi asserts that “we can capture pretty much all that they’re [the hedge funds] doing,” and this was true even in March when the market experienced the “most radical macro moves” in a couple of days. In fact, DBi aims at achieving a “80-90% performance correlation with the underlying hedge funds.”
On timing, DBi thinks that the hedge fund managers are not moving their positions as fast as they claim, ensuring that a weekly review is sufficient to achieve their goals. The main goal of DBi is to replicate positions at hedge funds to extract alphas at lower cost for their fund investors.
Managed futures and equity hedge strategies packaged in Luxembourg Ucits funds
“There’s always been this dream of I want access to hedge funds, but I want it in a client friendly package,” Beer said in the interview. Thanks to the Ucits format and its daily liquidity, DBi can target retail as well as institutional investors.
DBi has teamed up with IMGP to exclusively distribute its strategies in the Eurozone through Luxembourg-based Ucits funds. IMGP takes substantial minority positions in independent investment management companies from which it distributes their funds to institutional and wealth managers in the US and in Europe while aiming at selling them in Asia as well. With 10 employees on the payroll, IMGP operates the logistics and “evangelises” its investment concepts under their Sicav and delegates the management of its sub-funds to investment managers.
The first strategy, reflected in the IMGP DBi Managed Futures fund, seeks “to replicate the pre-fee returns of a representative basket of leading managed futures hedge funds.” Beer explained that the best performing strategy for hedge funds last year was the managed futures approach, which is sometimes called CTAs.
These strategies use technical analysis and computer models looking at past patterns and “complicated relationships” to assess whether gold or crude oil are going up or down, for instance. DBi claims that the fund displays a “low correlation to equity over the long term” while offering “capital protection during periods of market stress.”
The IMGP Stable Return fund reflects a diversified strategy, according to the firm, which aims at replicating the positions of equity long/short hedge funds and generates alpha “regardless of the long-term direction of equity markets” coupled with the managed futures approach.