Hedge fund strategies utilize a range of approaches to maximize returns on market swings. And while the funds are traditionally targeted at accredited investors, they are now becoming more accessible through ETFs.
New York-based firm Dynamic Beta investments runs the iMGP DBi Hedge Strategy ETF (DBEH) in the U.S. The fund uses futures contracts to model the performance of 40 equity long/short hedge funds to deliver equity-like returns over time.
"The idea is really smart guys are going to know not just what stocks to buy, but what stock to short," Andrew Beer, founder of Dynamic Beta investments, told Bob Pisani on CNBC's "ETF Edge" on Monday.
"Our conclusion was that most of what they get right are big shifts in the market," Beer said. "They get off the tracks as the train is coming down."
Beer explained that when interest rates start to go up, spooked investors deviate from FAANG stocks that are dependent upon low rates to emerging markets and value stocks. To counter that, DBEH employs a diversified pool of funds to better identify factor shifts.
"If we get that right and put it into an ETF, we've given an allocator a really valuable tool because it's less risky than equities but can generate equity-like returns over time," he said.
While the fund emulates hedge fund strategies, it operates index-based futures contracts rather than individual stocks. Beer explained that the approach materializes an expanding need from traders going forward.
"Sixty/forty and being long stocks and bonds did incredibly well for a decade," he said. "We're trying to give you the building blocks where you can say, 'I want this much in this strategy, I want that much in that strategy.' It's as simple as investing in an S&P 500 ETF. That's what we're trying to do."
