Why Investors Should Lower Expectations For Making Money on Stocks

Vanguard, others predict bonds will rival single-digit returns on stocks; best bets are overseas.The era of big returns on stocks is over. It’s time for investors to recalibrate their expectations. That’s what many Wall Street firms and advisors are telling their clients.

Look for lower returns from U.S. stocks during the next decade compared with what has historically been the case, and expect U.S. bond returns that are on a par with equities. The best returns are projected for overseas stocks and bonds. Returns from most asset classes are projected to be positive.

“The next 10 years will be different than the last 10 years,” says Jim Masturzo, partner and chief investment officer of multi-asset strategies at Newport Beach, California-based Research Affiliates. “It will be more normal.”

Expect Single-Digit U.S. Stock Returns

With inflation at the highest levels in 40 years, against a backdrop of rising interest rates and a decline in valuations, long-term returns for U.S. equities are projected to be in the low- to mid single-digit territory. That’s compared with a historical yearly average of 12%-13% before inflation, and well below the nearly 16% average annual returns of the past decade.

This is clearly a whole new world to which investors are unaccustomed after decades of low inflation and the near-zero interest rates of the past 10 years. “Returns will be more muted compared with history and especially the past two years, especially for equities,” says Roger Aliaga-Diaz, head of portfolio construction and chief Americas economist at The Vanguard Group.

Bond Returns to Rival Stocks

On the brighter side, bonds are seen giving equities a run for their money, as fixed-income returns are projected to rival those of stocks.

“Bond market returns could equal equity returns with less risk,” says Joseph Carson, economic consultant and former chief economist at AllianceBernstein. Returns on stocks in the next decade will appear “minuscule” at 4%-5%, he says, mainly because “equity returns for three of the last four decades were far above average.”

Stocks benefited from declining inflation and lower bond yields in the 1980s. Stable inflation and expectations of “a new era of long cycles of growth and earnings” pushed stock returns higher in the 1990s. And “in the decade ending 2020 it was zero rates and inflated market multiples” that led to outsize gains in stocks, says Carson.

A line chart showing rolling annualized 10-year returns between 1971 and 2021.

The Lost Decade

The outlier decade proved to be 2000 through 2009, a period that included the terrorist attacks of Sept. 11, 2001, as well as two punishing recessions and accompanying bear markets that dragged down returns and set the stage for easy money conditions. In what became known as the Lost Decade, stocks delivered a negative annualized total return of 0.95%, the only decade outside the Great Depression in which total returns for the period were negative.

At the start of the decade, a bubble in technology, telecommunications, and media stocks burst, resulting in a recession and the bear market of 2000-02, when stocks fell nearly 50%.

Not long afterward came the global financial crisis of 2007-09, precipitated by a housing meltdown brought about by banks and mortgage companies extending credit and making nontraditional interest-only and adjustable-rate loans to high-risk borrowers that were then packaged into mortgage-backed securities and collateralized debt obligations and sold as stable and safe investments.

With home prices skyrocketing, the Federal Reserve started raising rates to cool the market, which prompted a wave of mortgage defaults and a subsequent liquidity crisis. The result: the deepest and longest-lasting recession since World War II. Stocks fell about 55%. The unemployment rate more than doubled.

The interventions to rescue the financial system and the economy during the crisis introduced ultraloose monetary policies that were reintroduced more recently during the pandemic crisis of 2020, creating a boom in asset prices and driving inflation to the highest levels since the 1980s. Aiming to rein in spiraling prices, the Fed has boosted the federal-funds rate six times this year at an aggressive pace and plans to continue until it sees clear signs that inflation is abating and heading back to its target rate of 2% from more than 8%.

That’s driven up yields on bonds, driving their prices lower, and sent stocks sliding. No one expects inflation and interest rates to stay at current levels over the next 10 years, but they will be at higher levels than has been the case in the past decade. And that will affect valuations.

The Case for Bonds

“Definitely, the case for bonds in the portfolio is coming back,” says Aliaga-Diaz of Vanguard. “Higher yields make the case for bonds stronger.” Over the next 10 years, Vanguard is forecasting annualized nominal returns, that is before adjusting for inflation, on U.S. equities of 4.7%-6.7% and U.S. bonds at 4.1%-5.1%.

Research Affiliates projects annualized nominal returns on U.S. equities of 2.3% over the next decade. Its forecast for U.S. bonds is 5.1% on an annualized nominal basis. Morningstar Investment Management projects U.S. stocks will deliver 5.5% in annualized nominal returns and 4.8% for U.S. bonds.

A grouped bar chart showing forecasts for annualized asset class returns over the next 10 yrs from Morningstar, Vanguard, and Research Affiliates.

Of course, stock and bond returns will vary from year to year, but these long-term annualized forecasts provide a gauge that helps firms construct diversified asset-allocation portfolios that can be tailored to optimize returns for different risk tolerances.

Investment firms also calculate these projections in real terms, which means they factor inflation into their models in addition to other variables such as valuations, earnings growth estimates, and dividend yields to obtain a more accurate assessment of potential total returns. Still, it has become standard practice for firms to issue forecasts in nominal terms because that is what is reflected in client accounts.

As Vanguard’s Aliaga-Diaz explains: “If you start with a $1,000 investment in 2022 and your portfolio returns 10% in nominal terms in 2023, your account will be $1,100. In real terms, your account would be worth $1,080 measured in 2022 dollars.”

Many investors may be gun-shy about embracing bonds, burned by steep double-digit losses this year in their portfolios at a time when stocks fell into a bear market.

The popular investment strategy of structuring portfolios with a mix of 60% stocks and 40% bonds to achieve attractive risk-adjusted returns with lower volatility, the so-called 60/40 portfolio, failed to provide the diversification and balance that made it a tried-and-true investment approach for so long, delivering 10.6% average annual returns for the past 40 years.

The Morningstar US Moderate Target Allocation Index, which serves as a benchmark for the 60/40 strategy, is down 17.53% this year, while the Morningstar US Market Index is down more than 21%. But what worked so well for so long will work again, say strategists.

“There is a fear and concern that what we saw this year with stocks and bonds coming down together represents a new regime,” says Aliaga-Diaz. “But we will get back to the normal relationship.”

That view has been echoed by others, including Morgan Stanley’s chief cross-asset strategist Andrew Sheets, who has forecast a 10-year annualized return of 6.2% for the strategy. “While we do expect the 60/40 portfolio to deliver lower risk-adjusted returns compared with those over the last four decades, that doesn’t mean it is broken,” he wrote in a report issued this summer.

Starting Points Matter

A key driver of these forecasts comes down to prices: Lower prices point to higher implied returns. “Starting prices matter,” says Philip Straehl, global head of research and investment management at Morningstar Investment Management. “U.S. valuations have improved dramatically in the last 12 months. There’s been significant repricing in the U.S. equity markets.”

That’s even more true internationally, where stocks have had the added burden of coping with the strong U.S. dollar and weakened local currencies on top of inflation and rising rates. Strategists say developed and emerging markets represent the best opportunities for the highest returns.

Morningstar Investment Management forecasts stocks in developed international countries will return 9.4% annualized over the next decade. For emerging markets, the expectations are even rosier at 11.8%. Vanguard’s outlook for stocks in developed international countries is for annualized total returns of 7.2%-9.2%, and 7%-9% in emerging-markets equities. Research Affiliates is forecasting 13.1% returns annualized for emerging markets over the next 10 years and 12.6% annualized for developed international markets.

“Our recommendation would be to look outside the U.S.,” says John Thorndike, co-head of asset allocation at Boston-based investment manager GMO, which bases its outlook on a seven-year investing time frame. “If you are going to take equity risk, take the bulk of it in non-U.S. value stocks. We think you should take the risk. These stocks are attractive.”

By:

Source: Why Investors Should Lower Expectations for Making Money on Stocks | Morningstar

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Recession Watch: ‘Very Concerning’ Sign Of Serious Economic Slowdown Emerges As Stock Market Collapses

"Sentiment is palpably horrible," says one analyst as more experts turn increasingly bearish on the ... [+]  AFP via Getty Images

A growing rash of economists are warning the odds of a recession have increased amid a historic inversion of the yield curve—a telltale sign of a looming economic slowdown after the Federal Reserve on Wednesday raised rates to the highest level since the Great Recession and signaled its policy would be more aggressive than previously anticipated.

Yields on the 10-year Treasury surged more than 10 basis points to nab a new 11 year-high of 3.829% on Friday, while the 2-year Treasury hit a 15-year record of 4.266%—deepening the yield curve inversion to some 50 basis points, the widest gap in more than 30 years.

Since July the yield curve has been inverted—when short-term yields fall below longer-term returns—in a sign investors are more bearish about the economy’s long-term prospects, and the inversion only deepened after the Fed on Wednesday raised rates by 75 basis points and suggested it may institute another unusually large hike again in November.

In a note to clients, analyst Tom Essaye of the Sevens Report explained the steepening inversion “makes sense” because a more aggressive Fed, and higher rates that make borrowing more expensive, will temper demand and stunt economic growth in hopes of reducing inflation, but he also warned the magnitude of the inversion has become “very concerning.”

A Federal Reserve study in 2018 found every recession in the past 60 years has been preceded by a yield curve inversion, and Essaye says the widening gap between 2-year and 10-year Treasurys is “screaming that a serious economic contraction is coming,” adding “everyone should be preparing” for a material economic slowdown in the coming months and quarters.

In a Friday note, Bank of America economists said they expect the economy will fall into a recession in the first half of next year, with real GDP falling 1% after adding 5% last year, and unemployment rising to 5.6%—potentially wiping out more than a year of job gains.

Fed officials doubled down on their most aggressive economic tightening campaign in three decades on Wednesday, raising interest rates by three-fourths of a percentage point for the third time in a row and pushing borrowing costs to 3.25%—the highest level since 2008. Though they had originally projected the federal funds rate would only climb to 3.4% this year, they now project it will climb to 4.4%, suggesting another 75 basis point hike could be on the table in November.

“With this new alignment between the Fed and markets, the questions now are when and how bad the recession will hit,” says Mace McCain, the chief investment officer of Frost Investment Advisors. Stocks plunged deeper into bear market territory after the Fed’s hawkish message, with major indexes eclipsing yearly lows on Friday. The S&P 500 is down 23% this year, and economists at Goldman project it will sink another 3% by December and could take more than a year to recover losses.

The tech-heavy Nasdaq has plummeted 32% since January, the Dow nearly 20%. “Looking out over the next one to two months, we don’t have much conviction at all on equities,” says Adam Crisafulli, founder of Vital Knowledge Media. “Sentiment is palpably horrible.” Existing home sales fell for the seventh straight month in August as rising interest rates continued to sideline potential home buyers, according to the National Association of Realtors.

In a statement, the association’s chief economist Lawrence Yun called the housing sector “most sensitive to” the Fed’s interest rate hikes and said the softness in home sales reflects this year’s escalating mortgage rates, which hit a 15-year high of nearly 6.3% this week—driving up the cost of monthly payments on new mortgages by more than 55%, an average of hundreds of dollars each month.

Despite pockets of the economy already reeling from the Fed’s hawkish policy, the job market remains firmly strong, effectively justifying the aggressive action. Initial jobless claims were little changed this week and continued claims actually edged lower. However, many experts say it’s inevitable that the labor market will soon start to cool. “It’s possible that the unemployment rate could gently glide higher and wages cool without an outright recession—but it’s never happened before,” says Bill Adams, chief economist for Comerica Bank.

Though it slowed for a second-month straight, inflation clocked in at a worse-than-expected 8.3% in August—far worse than the Fed’s long-standing target of 2%. Bank of America economists project inflation won’t return to that level until the end of 2024.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business

Source: Recession Watch: ‘Very Concerning’ Sign Of Serious Economic Slowdown Emerges As Stock Market Collapses

Critics by

Adam Tooze has a cult following among economists and historians alike. The famed English economic historian, once hailed by New York Magazine as “impeccably credentialed, improbably charming”, is in Australia after speaking at Sydney’s Festival of Dangerous Ideas.

The decision by the US Federal Reserve to raise its key interest rate by another 75 basis points this week, and its plans for further increases, have raised the spectre of a global economic slowdown. Overnight, the Bank of England lifted its key rate by 0.5%, matching Indonesia and the Philippines, while the Swiss National Bank and South Africa opted for a 0.75 percentage point rise.

Tooze, a history professor at New York’s Columbia University and a frequent contributor to the Guardian, has detailed the gathering economic headwinds and has analysed for Guardian Australia the key areas of the current financial turmoil.

‘Extremely severe’ recession risk

The chances of a global recession were now “extremely severe”, as central banks in many parts of the world raise interest rates to curb inflation. “It’s the single most dramatic simultaneous tightening of monetary policy ever,” Tooze said. The winding back of Covid support packages by governments as the pandemic tide recedes also meant fiscal brakes were being tapped.

“US fiscal policy right now is massively contractionary,” Tooze said. “It’s a 4.5% of GDP negative drag.”

Textbook moment of ‘failed technocracy’

Tooze predicted the current policies of central banks and governments would be marked in future textbooks as a “classic moment of failed technocracy”. The US Fed Reserve lifted its cash rate target range by 75bp to 3% to 3.25% on Wednesday, US time. It also indicated it expected increases of as much as another 125bp this year even as Fed chairman Jerome Powell warned of a possible recession.

Tooze said other central banks will be under pressure to follow. Australia’s Reserve Bank governor, Philip Lowe, said last week the bank would probably lift its cash rate 25bp or 50bp on 4 October, making it a record six increases in as many months. The lives of 100s of millions of people and their employment prospects would be scarred by a recession, Tooze said: “This will mark those people’s lives for the rest of their lives.”

Australian fallout

Private economists forecast Australian property price falls of as much as 20%, the steepest decline since the 1980s as rates rise. Tooze said Australia and Canada had two of the “most overheated” property markets in the world, and he predicted “huge effects” from higher borrowing costs.

One source of support for the market might also be less forthcoming in the future. The surge in both Chinese students and property buying in Australia, US and elsewhere, had partly been a “capital flight story”, he says. Buying a flat to provide accommodation while studying was one way to get money out of China.

Signs have lately been mounting of a renewed effort by Chinese to move money abroad ahead of a major Chinese Communist party meeting in Beijing next month that will formally extend the leadership of President Xi Jinping. To counter that capital flight, authorities are making it harder for people “beyond certain networks” to access passports, Tooze said. “It’s really quite difficult now for the Chinese to discreetly exit.”

China worries

The RBA deputy governor, Michele Bullock, on Wednesday described the global economy as being “on a bit of a knife-edge”. One reason was the fragile state of China’s economy. Its Covid-zero policy disrupted supply chains and a plunging property market had “still not worked itself out”, she said. Demand for Australian iron ore, in particular, hinged on the success of government efforts to support real estate.

The Chinese property bubble is not just any property bubble – it’s the largest single phase of accumulation of wealth in economic history,” Tooze said, noting the number of private property owners had jumped from near zero to 300 million in a few decades. “They poured more concrete in three years [in the early 2010s] than the United States in all of the 20th century,” he said. The Chinese government may yet stabilise the market.

“The amazing thing is that big money in the west is taking a huge gamble on the capacity of an authoritarian regime unfettered by the rule of law to pull off the largest single exercise in macro-prudential, macro-financial stabilisation the world has ever seen,” Tooze said. Assuming they can do that, BHP, Rio Tinto and Fortescue – and a large part of the Australian economy – “are all fine”.

One cause for optimism

Tooze said the “extraordinary progress” in cutting the cost of solar and wind energy was a “real case for optimism”, at least as far as action to limit global heating was concerned. “The disappointment is we could be even further down those cost curves” if the US and Europe and elsewhere had matched China’s investment. Improving battery technology would be “fundamental” to advancing decarbonisation efforts because of the intermittency of renewables.

He cited data from the International Energy Agency on total public funded energy research – totalling $US23bn ($A35bn) in 2021 – as proof we can do more. “If we were serious about the energy transition,” he said, “you’d think we would be collectively spending more than what Americans spend [each year] just on treats and food for their dogs and cats”.

.

Related contents:

China’s Economic Recovery Faces Fresh Risks From Global Slowdown BNN Bloomberg

Institutional strengths emerge in China’s fight against COVID-19, economic slowdown China.org.cn

Microsoft plans to add 1,000 jobs in China despite economic slowdown in the country PingWest

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Economic forecast: marked slowdown on the horizon Swiss Government (Press Release)
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Web3 Developers Can Thrive In The Bear Market With The Right Support Services

The blockchain and crypto sector is undoubtedly going through difficult times, with the market falling $2 trillion since its November 21 peak. An overwhelming negative sentiment is shrinking the industry’s resources while weekly outflows amount to $102 million.

The Crypto Fear & Greed Index shows that investors remain “fearful” of the current bear market conditions. But history teaches us that this lack of hype and market exuberance actually provides fertile conditions for developing innovative technological solutions.

When the DotCom Bubble burst in the early 2000s, companies like Amazon, e-Bay, Google, Facebook, and Cisco all survived the crash. Indeed, they emerged from the crash stronger because their developers continued building instead of allowing volatile markets and negative sentiment distract them. Similarly, crypto projects like Tron, ChainLink, Polkadot, and EOS, were able to survive the 2017 ICO craze and the crypto winter that followed.

Bear markets have historically filtered out opportunists and stupid capital to make way for real innovators delivering scaleable market solutions and longer-term investor growth.

Nevertheless, bear markets also entail a shortage of capital as investor disappear or sit on the sidelines and liquidity disappears from the market. Only a handful of serious project developers, entrepreneurs, and long-term investors stay back to support each other.

These stakeholders require a space where they can connect, collaborate, and build cutting-edge technologies to sustain themselves and the industry overall. Incubators, launchpads, and accelerators become crucial resources for entrepreneurs, companies, and developers during a bear market.

Incubators can be essential to a company’s long-term survival and success. The National Business Incubator Association reports that 87 percent of incubated startups continue to survive after five years—twice the success rate of startups that develop completely on their own. Moreover, 84 percent of incubated companies share the incubator’s community, creating a wide but well-knit network of entrepreneurs, advisors, developers, and investors, however, community support is just one aspect of incubators.

Among the diverse services offered by crypto launchpads, fundraising is one of the most important. Since developers and entrepreneurs usually do not have large amounts of capital available, startups need financial assistance to build their protocols. Venture capitalists and angel investors associated with an incubator provide the much-needed liquidity for early-stage Web3 companies. This funding helps startups focus on development, scaling operations, marketing, and hiring.

In addition to funding, incubators provide the expertise and experience of professionals to mentor startup employees during early stage development. Domain experts act as consultants to project leaders during incubation to build better products that are ready for mass markets. TDeFi, an incubator for DeFi protocols, offers a “Lifetime Advisory Program” for incubated companies. This ensures that protocols continue to get the support and assistance of mentors, even after their official launch.TDeFi’s CEO Gaurav Dubey explains, “Mentoring comes in varied forms. Apart from ideation, launchpads assist in designing utility-based, growth-oriented tokenomics, which is necessary for attracting investors. A well-networked incubator always finds strategic investors for startups even in a bear market.”

Incubators like TDeFi also provide post-launch assistance to comply with a country’s crypto legislation and follow regulatory best practices. To date, TDeFi has incubated over 40 startups across the DeFi, NFT, gaming, metaverse, infrastructure, and healthcare sectors.

Despite the bear market, blockchain gaming and game-based NFTs have thrived recently, outperforming other crypto-based sectors. The DappRadar-BGA Blockchain Games Report recorded 1.1 million unique active wallets (UAWs) in Q2 2022, making up 52 percent of all UAWs. Investor sentiment also remained strong in the blockchain gaming domain, with investments amounting to $2.5 billion in Q2 2022, a clip rate that appears to continue in the year.

Against this backdrop, NFT gaming launchpads and accelerators like QGlobe are helping new gaming projects build their products in a bear market. QGlobe offers support for metaverse and crypto gaming startups by organizing IGOs and providing product development, tokenomics, and marketing strategies.

Apollo Green, CEO and founder of QGlobe, says, “Amidst a turbulent market, the gaming sector is performing well and successfully weathering the storm. At this critical juncture, we need efficient gaming launchpads to build promising projects to help us out of this crypto winter.”

The Crypto Industry Needs Everyday Resources

Regardless of the size of startup, companies must manage employee payrolls and account for financial transactions, and annual audits. Payments and bookkeeping can be time-consuming and often become an enormous administrative challenge for these companies to tackle, leading to increased chances of fraud and data entry errors.

Automating the crypto finance infrastructure is necessary to help companies manage their accounts efficiently. Blockchain-based automated platforms can help save time, reduce human error via on-chain reconciliation, and ensure robust bookkeeping practices. Automation may also help crypto companies devote their time and resources toward innovation and building their platform.

Industry now offers solutions for Web3 businesses to manage their crypto invoices, employee salaries, and balance sheets.

Protocols like Request Finance provide a non-custodial, decentralized platform for invoice generation and payment management featuring real-time, on-chain settlement. Request Finance supports batch payments to multiple addresses, invoice requests, and integration with multi-sig wallets like Gnosis. Companies like The Sandbox, Maker DAO, and RealT use Request Finance for managing financial operations, invoicing solutions, and as a payment gateway.

Emphasizing the need for payment request protocols, Christophe L., co-founder and CEO of Request Finance, said, “Making crypto mainstream by focusing on real world use cases, is crucial for emerging from this bear market. Invoicing and payroll dApps can enable more businesses to adopt crypto, especially stablecoins in a compliant manner.”

For everyday crypto usage, investors, blockchain entrepreneurs, traders, and general users need one another imporant resource — tax calculators. As countries worldwide begin increasingly adopting crypto regulations, it likewise becomes necessary to understand tax liabilities and file for tax.

Calculating crypto tax is not an easy task. Users are liable for capital gains and income tax, depending on the nature of the transaction. Moreover, some countries require recording crypto transactions in local currency value before filing for taxes. This becomes a time and resource-intensive process.

Some users turn to resources like CryptoTaxCalculator to accurately calculate their taxes by importing transaction data from crypto exchanges and non-exchange platforms. CryptoTaxCalculator lets users directly upload data from DeFi platforms, staking protocols, NFT marketplaces, mining, ICO/IDO/IGOs, and airdrops via CSV or API for calculating taxes.

In-Person Discussion is the Most Important Resource

When it comes down to it, one resource emerges as the most crucial of all – talent. No matter how many software resources we have at our fingertips, nothing beats face-to-face conversations and exchanging ideas. Indeed, talent is the largest and richest resource we have for developing new products and innovative technologies.

Following a long pandemic-induced hiatus in conferences, meetings, and hackathons, these events are finally back for offline sessions. Through these events, crypto companies, blockchain entrepreneurs, and Web3 developers can all come together to discover technological solutions for solving real-world problems.

DCENTRAL will host one of Web3’s largest conferences this November 28-30 in Miami right before Art Basel, a massive global art event. The conference will bring together innovators across 30+ Layer-1 and Layer-2 DeFi, NFT, Metaverse, DAO, and Gaming protocols.

Justin Wu, co-founder and CEO of DCENTRAL Conference, elaborated on the need for such conferences, stating, “The bear market is giving us the time and space to build robust Web3 protocols. This is high time we collaborate and learn from each other to make Web3 sustainable in the long run.”

By using incubators, launchpads, accelerators, and business support services, and reconnecting to talent pools with in-person interactions, entrepreneurs and developers can create a veritable armada for taking on the bear market with a greater capacity to innovate. With the right resources and networks, successful earlier stage plays will weather the storm and emerge from the bear market with resilience: greater talent, stronger businesses, and more innovative products and services.

I cover fintech, crypto and digital assets, and sustainable finance and investments, and promote policies for a transparent, secure, and quality digital financial future for everyone.

Source: Web3 Developers Can Thrive In The Bear Market With The Right Support Services

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Low Fee Hedge Fund ETF Gives Investors A Bear-Market Refuge With 22% Return This Year

With both stocks and bonds falling sharply this year, investors becoming discouraged by a standard 60/40 portfolio are beginning to pile into one three-year-old ETF that has served as an effective hedge for this year’s bear market.

New York-based Dynamic Beta Investments’ managed futures strategy ETF has gained 22% this year, far outperforming the S&P 500 Index’s 10% decline and the Bloomberg U.S. Aggregate Bond Index’s 10% drop. Managed futures funds are actively managed portfolios of futures contracts for assets ranging from stock indexes to commodities like oil and gold. Dynamic Beta’s fund aims to replicate managed futures strategies at 20 other hedge funds and investment firms and charges a mere 0.85% in management fees.

Dynamic Beta’s founder and co-managing member Andrew Beer, who runs the firm with a Paris-based partner Mathias Mamou-Mani, boasts that a podcast recently dubbed him the “Jack Bogle of hedge funds.” “No one has figured out how to pick which hedge fund’s going to do well, just like they haven’t figured out how to pick which stock is going to do well,” Beer says.

“The most reliable way to outperform is by cutting fees.” Most managed futures hedge funds charge limited partners 20% in performance fees based on profits and 2% administration fees per year. Managed futures funds have largely fallen out of favor in the last decade, lagging behind stocks during the bull market following the Great Recession. Societe Generale’s CTA index tracking the 20 largest such funds at firms like Clifford Asness’ AQR and Systematica Investments has gained more than 7% in a year only once since 2010.

But when the stock market plunged in years like 2002 and 2008, the index returned double digits. Many of these hedge funds are out of reach for retail investors, with high account minimums and management and performance fees that eat away at returns. Beer contends that Dynamic Beta’s ETF, trading under the ticker DBMF, can come close to replicating their portfolios for a fraction of the cost.

Dynamic Beta’s model analyzes daily data on returns for the 20 funds in the managed futures index and maps it to the market’s daily fluctuations to approximate how long or short the hedge funds are in futures contracts for various stock indexes, bonds, currencies and commodities. The ETF rebalances every Monday based exclusively on this algorithm. It’s grown from $65 million to $418 million in assets this year, with heavy inflows through June and July.

The biggest driver of DBMF’s gains this year has been its heavy short position on the Japanese yen, which has declined 14% against the dollar in 2022. The fund is also short the euro, short U.S. Treasuries and short the S&P 500 and international stocks. Its only long position is in crude oil. DBMF’s portfolio is simple, with just 10 futures contracts included, but that macro picture can replicate 90% or more of the pre-fee returns of leading hedge funds, Beer says.

“We’re not trying to say these guys have X amount in pork bellies and copy that. We’re basically saying, what are the big trades?” Beer says. “You don’t need to pay somebody 4% or 5% to do the big trades. We’ll do it and we’ll do it efficiently.” Beer started his career out of Harvard Business School in 1994 in the traditional hedge fund world, landing a job working for Seth Klarman’s Baupost Group.

In the early 2000s, he tried his hand at branching out on his own, cofounding two small hedge funds: commodity trading firm Pinnacle Asset Management and China-focused Apex Capital Management. After a few years, he started the venture that would become Dynamic Beta in 2007 as Belenos Capital Management. Its initial fund did well in the recession, but growth was slow for the first decade while its assets were housed in managed accounts with higher minimums.

It didn’t help marketing that managed futures flopped for the next several years. In 2018, French firm iM Global Partner bought a 50% stake in Dynamic Beta. IMGP scours the world for unique asset managers to partner with and was looking for a footprint in the “liquid alternatives” space. With their help, Beer and his staff launched the managed futures ETF in May 2019, and an equity long-short ETF came next in December of that year, aiming to replicate the gross returns of 40 equity hedge funds.

That fund hasn’t generated as much traction, with just $16 million in assets, and it’s down 1.6% this year. With three UCITS products–effectively mutual funds which are based in the European Union–as well, Dynamic Beta now manages $1.2 billion altogether. There are no other managed-futures ETFs close to the size of DBMF, though the firm does have competition in the broader hedge-fund-replication sector.

New York Life subsidiary Index IQ offers a hedge multi-strategy tracker ETF (QAI), down 7% this year, which seeks to replicate a variety of tactics. It has 0.75% management fees and $730 million in assets. Beer is hopeful that any of Dynamic Beta’s products could scale to become multi-billion dollar funds as investment advisors look beyond traditional stock-and-bond allocations.

“We believe that there are thousands or tens of thousands of RIAs who are now looking at the collapse in 60/40 portfolios and saying, I need something to add to this,” Beer says. “The next step is to get a big following in the wirehouses and the Morgan Stanleys and Merrill Lynches of the world.”

I’m a reporter on Forbes’ money team covering investing trends and Wall Street’s difference-makers. I’ve reported on the world’s billionaires for Forbes’ wealth team and was previously an

Source: Low Fee Hedge Fund ETF Gives Investors A Bear-Market Refuge With 22% Return This Year

Critics by Benzinga.com. Benzinga

Among the certainties on Wall Street are the following: Hedge funds usually carry high fees while exchange-traded funds usually carry low fees.

Some ETFs grant investors exposure to hedge fund strategies or stocks held by hedge funds without the punitive often found in the hedge fund space. For example, the Goldman Sachs Hedge Industry VIP ETF (NYSE: GVIP), which debuted in November, gives investors hedge fund-esque access at a somewhat reasonable fee.

Finding A VIP In GVIP

“GVIP’s 10.7 percent gain year to date through May 4 was ahead of the S&P 500’s 7.4 percent,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday. “While constructed from the bottom up, information technology (32 percent of assets) and consumer discretionary (27 percent) stocks are most prominently held. Consumer staples (4 percent) and industrials (4 percent) stocks were underweighted relative to the S&P 500. There are currently 19 stocks that were now in the ETF at the end of 2016.”

GVIP follows the Goldman Sachs Hedge Fund VIP Index and holds the 50 stocks that appear most frequently in 13F filing as top hedge fund holdings. GVIP charges 0.45 percent year, or $45 on a $10,000 investment. That is nearly double the average fee for U.S.-listed ETFs, but still cheap compared to a direct hedge fund investment.

Going With The GURU

The Global X Guru Index ETF (NYSE: GURU) is one of the seasoned names among hedge fund ETFs, having debuted nearly five years ago. The ETF follows the Solactive Guru Index. GURU holds stocks that are deemed to be “high conviction” hedge fund ideas.

GURU, “with approximately $60 million in assets, but down from a year earlier is a more established way individuals can invest in stocks held by hedge funds. GURU launched in 2012 and is comprised of the top US listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and other characteristics,” said Rosenbluth.

CFRA has Market-Weight ratings on GURU and GVIP. GURU charges 0.75 percent per year, or $75 on a $10,000 stake.

Related links:

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Crypto Winter Watch: All The Big Layoffs, Record Withdrawals And Bankruptcies Sparked By The $2 Trillion Crash

Fears of global recession and the worst inflation in more than 40 years have wreaked havoc on the nascent cryptocurrency market this year—unleashing a fierce crypto winter that’s forced once high-flying firms into bankruptcy and pushed investors into panic-selling mode. The turmoil has already claimed trillions of dollars in market value, billions of dollars in frozen funds and thousands of jobs, but current casualties may only mark the beginning of the storm.

“There will be others that come forward with trouble—I don’t think it ends here,” Marcus Sotiriou, an analyst at London digital asset brokerage GlobalBlock, tells Forbes, noting that close to a dozen firms—including Peter Thiel-backed Vauld—face an uncertain fate after locking customers out of their funds or initiating restructuring proceedings over the past month. “It’s going to be a sustained period of pain,” he says.

It’s anyone’s guess whether the current crypto bear market will ultimately rival the years-long crypto winters of 2014 and 2018—the latter wiping 80% from bitcoin’s price while crushing hundreds of then buzzy new tokens. Sotiriou posits this downturn could last up to 12 months unless persistent inflation soon cools down, allowing the Federal Reserve to ease up on aggressive interest rate hikes that make risky assets less attractive to investors. Analysts aren’t so sure that will happen.

“This is necessary for any financial market to mature and evolve,” argues Matteo Dante Perruccio, a partner at crypto investment firm Wave Financial who envisions that cryptocurrency prices will take at least six months—and up to two years—before recovering, similar to cycles past. “But this time, there’s a difference,” he adds, pointing to a wave of institutional money—from the likes of Tesla, Goldman Sachs, Morgan Stanley and more—that fueled widespread adoption during the pandemic:

“When we inevitably come back into an appreciating market, it’s going to be more sustained and healthier, with less speculation and more tried and true investment philosophy.”As crypto investors wait for brighter days ahead, Forbes is tracking all the carnage from the latest crypto winter, including layoffs, price plunges and record selling—as well as the lifelines and acquisitions that may help cushion the blow. Here’s the damage, so far:

Trillions In Value Erased

Low interest rates and government stimulus measures fueled skyrocketing cryptocurrency prices during the pandemic, but the Federal Reserve’s decision to curb rising inflation by hiking interest rates has since battered investor sentiment—ushering in some of the crypto market’s biggest losses in history. After amassing a record value above $3 trillion in November 2021, the cryptocurrency market posted its worst first half ever and has plummeted to about $950 billion, a nearly 60% drop this year, according to CoinGecko.

Piling on to bearish sentiment, Terra’s luna token, a once top cryptocurrency worth more than $40 billion, lost virtually all its value within a week in May after sister token TerraUSD, a stablecoin meant to hold a price of $1, broke its dollar peg as markets collapsed. Meanwhile, top cryptocurrencies bitcoin, ether and BNB have plunged 70%, 75% and 65% from record highs, respectively. It’s taken the market years to recover from similar declines: When growing regulation sparked a fierce crypto winter beginning in 2017, it took more than 1,000 days for the world’s largest cryptocurrency to nab a new high.

Thousands Laid Off

Faced with steep market declines, cryptocurrency companies have laid off more than 2,000 workers in less than five weeks. By far the biggest blow, popular brokerage Coinbase laid off 1,180 employees, or about 18% of its workforce, on June 14—weeks after the firm’s billionaire CEO, Brian Armstrong, warned investors that a potential recession could lead to a prolonged bear market for cryptocurrencies. In a note announcing the layoffs, Armstrong said he was planning “for the worst” and acknowledged the firm “grew too quickly” during the pandemic bull market.

“It was surprising, and it was hard,” one former employee posted on LinkedIn. Others described the cuts as “abrupt” and “sudden.” Also in June, Gemini, the exchange founded by the billionaire Winklevii twins, said it would cut about 10% of its 1,000 employees, and exchanges Crypto.com and BlockFi said they would terminate 5% and 20% of their workforces, affecting some 260 and 170 employees, respectively. Since then, lending platform Celsius reportedly laid off 150 workers, and Austrian trading platform Bitpanda cut 270 jobs, calling the move “necessary . . . to navigate the storm and get out of it financially healthy.”

Record Selling

Investors piled out of cryptocurrency investment funds at a record pace as bitcoin plunged to an 18-month low last month. Outflows totaled $423 million in the week of June 17, virtually erasing all inflows this year and eclipsing the prior record of $198 million from January, according to crypto asset management firm CoinShares. The turbulence pushed the assets under management of crypto investment products to a record-low $21.6 billion last month, down 37% from May, as “looming liquidation threats” fueled “panic” among investors after Luna’s crash, CryptoCompare analysts wrote in a report.

Meanwhile, Bank of America reports the number of its customers using cryptocurrency tumbled more than 50% to fewer than 500,000 since the market’s highs in November. Even bullish crypto firms have had to reckon with the changing market. On Tuesday, top miner Core Scientific revealed it sold a majority of its bitcoin pile at an average cost of $23,000 last month, raising more than $167 million. In a statement, CEO Mike Levitt attributed the sales to “tremendous stress” driven by weak markets, higher interest rates and “historic inflation.”

Canada-based Bitfarms, which made headlines in January by joining Tesla and former billionaire Michael Saylor’s MicroStrategy in buying bitcoin for its balance sheet, also offloaded a large sum, dumping 3,000 bitcoins, or nearly half its pile, for $62 milion late last month. “It’s typical behavior for bitcoin miners to sell during the final stages of a bear market,” explains Sotiriou, noting some firms may need to shore up funds to cover expenses or stay solvent as high inflation tacks on to operating costs.

Billions In Frozen Cash

Citing “extreme market conditions,” crypto lender Celsius became the first major platform to pause withdrawals and transfers between customer accounts on June 13. Within days, others followed suit: Babel Finance, CoinFLEX and Voyager all froze withdrawals. None have re-enabled access, thus making billions of dollars in funds inaccessible to their investors.

“They’re in a really sticky situation because they’ve been irresponsible with clients’ funds, somehow lost out and are now unable to pay back their clients—and there’s no guarantee they’ll pay the money back,” explains Sotiriou. In its most recent quarterly filing, publicly traded Coinbase warned of the risk, disclosing customers would be treated as “unsecured creditors,” or lenders without collateral to fall back on, in the event the company goes bankrupt.

Bankruptcies And Liquidations

A handful of crypto firms are simply collapsing. On June 27, Voyager issued a notice of default to beleaguered Singapore-based crypto hedge fund Three Arrows Capital (3AC) for failing to make payments on $675 million in bitcoin and stablecoin loans. 3AC at one point managed some $3 billion, but Singapore financial regulators condemned the firm late last month, saying it provided false information and only had the authority to manage up to $250 million.

On top of that, 3AC’s troubles were exacerbated by the sell-off’s impact on its risky investments, which reportedly included overleveraged bets on the Grayscale Bitcoin Trust and about $200 million in now-worthless Luna. On Friday, a British Virgin Islands court reportedly ordered 3AC to liquidate its assets, deeming the firm insolvent; it filed for bankruptcy the same day.

With 3AC’s fate sealed, Voyager itself filed for bankruptcy on Wednesday—a mere five days after it suspended trading. “While I strongly believe in this future, the prolonged volatility and contagion in the crypto markets require us to take deliberate and decisive action now,” Voyager CEO Stephen Ehrlich said in a statement. In a court filing, the firm disclosed that it had more than 100,000 creditors and up to $10 billion in assets. Vauld and Celsius have also announced they’re exploring restructuring options.

Lifelines And War Chests

Some crypto companies are hoping to be rescued before being forced to shut their doors by turning to more stable counterparts. On Friday, FTX, the exchange founded by billionaire Sam Bankman-Fried, entered into an agreement to buy embattled BlockFi for as much as $240 million. “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers,” he told Forbes last month after providing BlockFi and Voyager with $750 million in credit lines between FTX and his quantitative trading firm Alameda.

More recently, he has said FTX has a “few billion” more to help struggling companies. Meanwhile, Goldman Sachs is reportedly looking to raise $2 billion to help buy up distressed assets from Celsius, and other legacy institutions are also showing interest. “I have this knee-jerk reaction that if you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping, that’s the time to double down,”

Fidelity CEO Abby Johnson, who this year shepherded the firm’s industry-first decision to allow bitcoin in 401(k) plans, said last month when asked about what could be her third crypto winter. “That’s usually the right move.” “It’s incredibly encouraging,” says Dante Perrucio. “Big institutions looking for distressed crypto assets means they believe that the industry is going to come back—and come back strong—despite this very complicated period we’re all in.”

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism …

Source: Crypto Winter Watch: All The Big Layoffs, Record Withdrawals And Bankruptcies Sparked By The $2 Trillion Crash

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