Dynamic Beta Uses ETFs to Replicate Hedge Funds

When you start your hedge fund career at Seth Klarman’s Baupost Group LLC, every job move after might feel like a step down. But that was hardly the primary issue confronting Andrew Beer, founder and managing member of Dynamic Beta investments and this week’s guest on the Masters in Business podcast.

In moving to start his own firm, Beer sought to address industry issues including illiquidity, high fees and expenses, lack of transparency and “single manager risk.” Dynamic Beta’s answer was to create exchange-traded funds that seek to replicate illiquid alternatives at lower costs, but with full transparency and comparable performance after fees. Beer notes that hedge funds are unconstrained, providing flexibility beyond the mutual fund-style “box.” Finding a way to duplicate the positives of hedge funds while removing the negatives has been the holy grail of the “liquid alts” sector.

Dynamic Beta aims to reverse engineer the best of the hedge fund industry’s allocations. Assuming the biggest consistent long-term generator of alpha is sector allocation, Dynamic Beta tracks 40 of the largest best performing funds’ monthly performance to drive its own allocation decisions. Replicating this allocation in an ETF wrapper provides daily liquidity and transparency while still capturing performance after fees. The firm’s hedge fund replication fund, iM DBi Long Short Hedge Strategy ETF, is up more than 30% since it launched in December 2019, versus a gain of about 20% for the S&P 500 Index.

Beer has an explanation as to why hedge fund fees remain high: Those who allocate funds to hedge funds are allocating other people’s money, so “they really don’t care about fees.”

A list of his favorite books are here; A transcript of our conversation is available here.

You can stream and download our full conversation, including the podcast extras on iTunesSpotifyStitcherGoogleBloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with the legendary fund manager Ron Baron of Baron Funds. Founded in 1982, the firm manages $49 billion and is known for its long-term, fundamental and active approach to growth investing.  Sixteen of 17 Baron Funds, representing 98.3% of assets, outperformed their passive benchmark since inception. The Baron Partners Fund was up 148% in 2020.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”

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