How to Beat Hedge Funds at Their Game

Andrew Beer explains Dynamic Beta ETF’s 23% return this year

Dynamic Beta packages some hedge-fund strategies into ETFs that charge a fraction of the management fees, and don’t come with all the strings attached about who can invest in them and when they can cash out?

Hedge-fund replication as a strategy is just trying to find the best way to identify what those funds trade and then copy them cheaply and efficiently today. And if you can do that, then you can do it in an ETF.

We copy the big positions of 20 large hedge funds that pursue a strategy called managed futures. Managed futures is one of those irritatingly vague and complicated terms that people use and don’t really understand. What these hedge funds do is they have quant-based strategies that are playing off the fact that the rest of us human investors are kind of emotional – we don’t change our minds easily, sometimes we pile into things too late, et cetera.
And so what that does is it creates trends in the market. An asset that starts rolling down a hill, kind of keeps rolling, and sometimes it accelerates. And they don’t get it right all the time, but sometimes they get it really right. And this year they’ve gotten it really right.

It’s the modern-day version of that guy that we all know with a candle chart who’s telling you that something has just broken through its moving average and it’s going to go keep going up.

It’s guys trying to figure out and constantly tweaking and changing the models and trying to figure out the right parameters over time. It’s a systematic strategy in that these guys, what they buy and sell every day is driven by computers. But there’s a very human side of how people end up building the models, what they like and what they don’t like.