Managed Futures, Infinite Banking, BDCs
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Managed Futures.

Hang on a second. Where's everyone going? Do not. You can't stop the podcast after two words. I know they're not the most attractive words you've heard. Managed futures. But look, this is something that is growing in popularity, or at least I'm being asked a lot about it. We have a listener question on the subject of managed futures funds. We're going to talk about that this episode. Also, Bitcoin ETFs and something called infinite banking.

And finally, BDCs, business development companies. Listening in is our audio producer, Alexis Moore. Hi, Alexis. Hey, Jack. I know you're a little under the weather. You've got your tea there. Can you tell? I won't ask you to talk too, too much. I just have to ask this assortment of, we've got some great listener questions. It seems like you've picked

some of the hard ones for me are you are you trying to stump me are you testing me to see whether i'll uh whether i'll crumble on a managed futures question i i don't think you are stumpable you are uh the unstumpable jack but that's trademark by the way no one else tried to take that

I know. I think they're really interesting and I'm curious about some of them myself. So I'm looking forward to getting into it. All right. We're going to go through all four of these. It's going to be, I'm going to try not to make it too long of an episode. This will not be a deep dive on any of these topics. This will be a shallow splash around. You will not need inflatable swimmies on your arms. You'll be fine. Let's jump in. We have audio for three of the four questions, not for this first one. So I'll just read the email.

It says, hi, Jack. I've just listened to your podcast this evening. I noticed that you and other financial commentators never seem to bring up managed futures or other liquid alts as diversifiers. I'm thinking of funds like QDSNX or DBMF. Any particular reason for this? Love your show. That's Bernie from Chicago. Thank you, Bernie. The show loves you right back.

Is there a reason that I don't talk about liquid alts more? I think so. I think it's because they're complicated. Also, like a lot of packaged investment products, I'm not sure that you need them. Although I definitely don't want to dismiss this category altogether just because it's complicated, just because a lot of folks haven't heard of it. There's very smart and sensible people working on liquid alts. So let's give them their due.

So what are managed futures? Futures like options are derivative securities. They derive their value from movements in something else. They're bets. You can bet that the thing is going up. You can bet that it's going down. You can bet both at the same time if you want to.

You can make up and down bets in an organized way that has a market neutral effect. What do I mean by that? Well, let's take the S&P 500, not the weighted index. Let's just take the 500 stocks, an equal weight S&P 500 index.

i could take those 500 stocks and i could pick my 250 favorites out of the group and i could bet for them and i could take my 250 least favorites and i could bet against them what you would end up with and i'm oversimplifying here but you'd end up with a portfolio that's not really betting on the stock market it's betting on my stock picking ability we wouldn't track the broad rise in stock prices over time we just try to make money on winners versus losers

And that comes in handy if you think that the market is about to suddenly decline severely. And if you end up being right, then you might not want broad exposure to the stock market. You might just want a market neutral strategy that collects profits along the way. Hedge funds do this sort of thing all the time and not just with stocks, of course, with bonds, with commodities, with currencies, not just in the US, but around the world. Hedge funds are lumped into a broader group called alternative investments.

there are alternatives to plain vanilla investments like stocks and bonds and often when you invest in a hedge fund you have to lock up your money for some amount of time they're not always liquid in other words but there are mutual funds and etfs out there that use these same sorts of strategies so we call those fund options liquid alts they're liquid versions of these alternative investments there are different strategies for a managed futures portfolio

One of the most common is trend following. You just have a model that buys things when they're going up and sells things when they're going down. You don't really have to develop a thesis about why those things are rising and why those other things are falling. What you're betting on is the tendency for these changes to roll out gradually rather than all at once. Sometimes things start rising and then everyone says, hey, what's going on? Why are these things rising over here? Okay, I see what the story is. I think I'll buy in too. And then they keep rising for a while.

So you're betting on the tendency of these trends to play out over time. And since you're betting on some things and against other things, and since you're making bets not just on or against stocks, but also bonds, currencies, other assets, you can end up with correlations that are very low relative to the U.S. stock market or the world stock market or to bonds. And if you have a successful model or strategy, you can have handsome returns. How high are the returns for managed futures?

I can say with confidence, I don't know. I mean, of course, we have funds and we can look at histories, but just how high are the returns in general? I think it's very difficult to say. I think it's actually difficult to say that about stocks, and we know a heck of a lot about stocks. If you've held an ETF that invests in the U.S. stock market, in the S&P 500, you've made over the past 20 years 14% a year annualized.

Does that mean that that's what stocks return in general? I don't think so. I think the past 20 years was pretty good. If you go back to 1900, you've made closer to 10% a year in U.S. stocks, not quite as much. If you look at not just the U.S. stock market, but the entire world, all of the stock markets that have been available over that time, you've made a few points less than that. If you include cases where you had stock holdings that absolutely went kablooey,

Think of the Bolshevik Revolution in Russia. Think of the Communist Revolution in China. There was expropriation of private assets during those revolutions. Those were small markets at the time, so if you held stocks all around the world, they were only a sliver of your holdings. But you have to account for the markets that didn't make it, the ones that went to zero.

So when you do all that, you end up with a return that's nowhere near 14% a year or even 10% a year for U.S. stocks. But it's safely above the returns that were available on bonds and on bills. And it's safely above the rate of inflation. I think that's the best you can say about stocks is that over long time periods, they tend to outperform other asset classes. This is not physics. We can't get into a lab and with perfect precision, prove out our theories. This is human behavior.

So if that's as much as we know about stocks, how much do we know about the many groups of people who are pursuing future strategies to try to generate positive returns? There's an index of managed futures. It's called the

I'm going to say Societe General. How am I doing, Alexis? I can't pronounce French things, by the way. Very close. Close enough? Very close, I would say. Societe General CTA Index, Equal Weight Popular Managed Futures Strategies. From January 2000 through May of last year, it gained 4.8% annualized.

That was a little more than a point behind a global stock market index. And it was a little less than a point above a global bond index. So somewhere in between stocks and bonds for that time period. Now, Bernie, you mentioned two particular funds, and I want to address those. QDSNX, that is Quiznos.com.

Dogology, it's a hot dog place. I don't know the NATO alphabet, so most of my references are fast food restaurants. Let me mix it up. Saxophone, Nathaniel, X-Ray. QDSNX, that is the AQR Diversifying Strategies Fund. Basically, there's a company called AQR that has a bunch of liquid alt strategies.

And this fund that you mentioned has a mix of them. Their multi-asset fund, their diversified arbitrage fund, their macro opportunities fund, their equity market neutral fund, managed futures strategy HV fund, style premium alternative fund. And the fees, just calculating the fees are a complicated discussion with a fund like that. But let's just say that Morningstar lists their adjusted expense ratio as a little over 1.5% a year.

And if you've held that fund over the past five years, you've made annualized 12%. That's not as good as the 20% plus you've made in stocks, but it's a heck of a lot better than the just shy of 1% a year you would have made on Schwab U.S. Aggregate Bond ETF.

how about dbmf that is the here's the name of it there's going to be some acronyms that is the imgp dbi manage futures strategy etf so iykyk which is how the young people say if you know you know whoa yeah i'm with it i see

i mentioned trend following earlier think of this fund as trend following the trend followers it shoots for a performance that's kind of middle of the pack for the group but with lower fees the fees here are 0.85 percent a year that's half what you could pay on a lot of these funds and the performance well it's not as good as the other one that we talked about but it's still in between stocks and bonds over the past five years

Six and a half percent a year as a total return. Again, that's versus 20% plus for stocks and just under a percent a year for bonds. So this is a good pitch. The pitch is 60-40 investing is dead. This idea that you put 60% of your money in stocks and 40% in bonds and you call it a day, that's the old-fashioned way of doing it.

The new fashion way is you use managed futures to give you sort of stock like returns, but with bond like diversification of stocks. In fact, even better than bonds, they'll say, because there are years when bonds fall while stocks are falling. I really want to stress 2022 that year, DBMF.

It gained 23% and that was 40 points better than if you had a 60/40 portfolio of stocks and bonds because both stocks and bonds did lousy that year. That's unusual, but it does sometimes happen. It was really at the end of that year that people talked about the death of 60/40 investing.

i always thought that that conversation was misplaced the death of 60 40 investing should have been when bonds yielded close to zero which was at the beginning of that year remember as bond prices fall their yields mathematically rise so by the end of that year because bonds had tumbled in price the yields were better at the end of 2022 that wasn't really the death of 60 40 if anything it was the rebirth of 60 40 because you could once again get some yield on your bonds

At the start of 2022, a 10-year treasury yielded 1.6%. Pitiful. At the end of 2022, it yielded 3.9%. Still not great, but better. The historical average 10-year treasury yield over the past half century is up in the 5% to 6% range. So yields are still lower than they have been historically, but they're better than they were.

Anyhow, I mentioned that to say that if you've got a fund that's five or six years old and if its performance record includes the best possible year imaginable for these strategies, not only did they make a ton of money, but a combined stock and bond portfolio had such an abysmal year that literally at the end of that year, there was a discussion about does investing still work?

If you include a year like that for managed future strategies, you're going to have handsome long-term returns to talk about for many years to come. Right now, your five-year returns are excellent. Five years from now, your 10-year returns will probably be excellent. As long as you're looking at a record that includes 2022, you're going to come out shining for a long time to come. But of course, when you're talking about returns, it has everything to do with the starting date. What if you had bought these funds and you held them this year?

This year, year to date as I speak, your S&P 500 fund is down about 4%, not terrible. You've made 2% and change on your bond funds. So bonds are once again doing their job. They're helping to diversify the decline you've taken in your stock portfolio. The AQR fund that I mentioned, it's up a lot. You've made 5% and change so far this year.

The other fund we've talked about, DBMF, that one's down. It looks more stock-like. It's down 2% and changed this year. This is just a small time period, a few months. But it's just to say the promise of these funds, there's two words that you'll hear in connection with these funds, crisis alpha. Think of alpha as an ability to beat the market. And funds that claim to produce crisis alpha say that when everything else is going kablooey, our fund is going to hold up well.

Okay, I don't know what the rest of the year will bring, whether this will be a kablooey year or not. So far this year, I'm not sure that one fund is earning its fees for investors. The other fund is up a lot, but with such a hodgepodge of strategies in there, we don't know why, whether it's reproducible, whether those are the kind of long-term returns you can bank on if you're saving for the next 20, 30 years. So where do I come down on managed futures funds, Bernie?

Like most things with plump fees that Wall Street sells, I don't think you need them. But I do think it's a much more interesting conversation if we go back to a world where bonds have punitive yields. We go back to a 1% and change 10-year treasury, and people are once again bidding up the price of cartoon virtual ape faces online.

That's non-fungible tokens. It was a whole thing for a little while there. If we go back to that world where 60-40 does look, if not dead, then maybe comatose for a while, I'd be more inclined to consider a fund like these. And when I say more inclined to consider them, I mean more inclined for you to consider them. I'm not buying them no matter what.

Okay, that took longer than I thought, but it was complicated. I think that was the longest one. I think we got two real short ones and I think we've got a medium one coming up. Alexa, should we take a quick break right here? Let's do it. Yeah. We'll be right back.

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I was never really a runner. The way I see running is a gift, especially when you have stage four cancer. I'm Anne. I'm running the Boston Marathon presented by Bank of America. I run for Dana-Farber Cancer Institute to give people like me a chance to thrive in life, even with cancer.

Join Bank of America in helping Anne's cause. Give if you can at bfa.com slash support Anne. What would you like the power to do? References to charitable organizations is not an endorsement by Bank of America Corporation. Copyright 2025. Welcome back. I promised you two short answers and a medium. Here's a short one. I think the question is about Bitcoin ETFs. And this is Brian from, wait, Great Loop. Great Loop.

Great Loop? That's a name? It's a name. Is Brian on a boat? Because I'm looking here from the National Ocean Service. It says, what is the Great Loop? A continuous waterway that recreational mariners can travel that includes part of the Atlantic Gulf intercoastal waterways, the Great Lakes, Canadian heritage canals. It goes on. There's a lot here. Anyhow, Brian, ahoy, matey.

That's the, what's the worst thing I've ever done on this podcast. I want to apologize to the boating community. Go ahead, Brian. My question for you involves Bitcoin ETFs. I did some Coinbase trading of a small amount, but found that the trading commissions were too steep. It seems to me that I can get the same results by buying Bitcoin ETFs. Am I missing something important or is this a good way to get exposure to Bitcoin for a small percentage of my portfolio?

Thank you from Brian on my great loop journey. Thank you, Brian. Your question is, are these ETFs a good way to get Bitcoin exposure for a small percentage of your portfolio? Your question is not, should I get some Bitcoin exposure? It's assuming you are going to do this. Are ETFs a way to go? And I say, sure. The fees are low. They're easy. These have only been around, by the way, since they were approved last year at the start of 2024.

so you see a lot more choices out there the fees do tend to be lower they're easier i think than buying bitcoin directly you don't have to worry about having a crypto wallet and so forth i know that there's a community out there that's saying that's not the point the point is you got to get out of the regular banking system and into the blockchain and you have to have your thing that's disconnected you have to do to decentralize whatever whatever okay if that's what you're into but brian just wants some exposure here for a small portion of his portfolio

He's on the great loop. He can't be bothered with things that are cumbersome for Brian. I think that ETFs are a fine choice. Let's do another. What I, what I hope will be a short ish answer for me. Let's hear from, um, do we have Kevin from Pennsylvania? We do now. Is he on any kind of a circuit? Is he in Brian was on the great loop as Kevin, uh, is he doing like a national parks thing? Is he climbing the highest peak in all 50 States? What's he up to? He just says he's from Pennsylvania.

Well, that's enough. The Keystone State, that's enough, right? You don't need more than that. Go ahead, Kevin. Hi, Jack. Quick question. If someone were interested in investing in private company debt, would they be better off buying shares in a business development corporation or one of the ETFs that have sprung up that hold this type of debt?

Thanks so much. Thank you, Kevin. BDC stands for Business Development Company. These were created by Congress in 1980, the Small Business Investment Act of 1980. And the idea was to help small and mid-sized companies gain access to capital. BDCs were once described to me somewhat hilariously as a poor man's private credit. That is, I can assure you, a misunderstanding of what it is to be poor.

As someone who was born into a poor family, I can promise you we did not spend our time thinking about the merits or lack thereof of private credit versus liquid alternatives. A BDC is more accurately described as a liquid alternative to private credit. You don't have to lock up your money for years in the fund. BDCs are basically closed-end funds, but they do the same sort of investing. There's lending, there's equity investments, and there's mixes of the two.

The deal with BDCs is you can get high yields higher than you could in quality bonds. They're as easy to buy as stocks, but of course they come with risk. There's credit risk, meaning some of the companies might not pay back what they owe. There's the risk of interest rate fluctuations. It's not quite the same as bonds. BDCs have to raise money to lend money. They typically use a mix of fixed rate and floating rate loans, so it can become more expensive for them to borrow as rates rise.

Do you need them as an investor if you don't own BDCs? Are you being negligent in your portfolio management? I don't think so. But I have no particular objections to investors who understand the risks and want to buy in. That wasn't your question, Kevin. Your question specifically was, if you're thinking about BDCs, would you be better off buying them inside an ETF, an exchange-traded fund?

I don't know if I'd say better, Kevin, if you're buying BDCs in the form of an ETF, you're buying a bundle of BDCs. And keep in mind that each one has a big basket of financing that is provided, credit, equity and so on. So you're basically diversifying. And I guess the point there is to reduce your risk. But if minimizing risk is the goal.

I'm not sure that BDCs are the thing for it to begin with. It's just another wrapper and another fee. And I guess my question in the end is, what are you getting that is better than stocks or better than bonds or that sufficiently improves your portfolio and does it reliably during times of crisis, which is when you really need it? I'm just not feeling the need.

And I'm not one of these 3% guys. I'm not a guy who says, you know, I think for 3% of your portfolio, it makes sense. When people say that, I feel like they're trying to have it both ways. If the thing doesn't do well, they're going to say, that's why I stress the importance of minimizing your exposure to 3%. And if it does great, they're going to say, you see, my recommendation paid off. So neither better nor worse on the ETF structure versus buying individual BDCs, just a bit of a different risk profile, a little more fees.

Okay, Alexis, that's three questions down, one to go. We're in the home stretch. People are out there walking the dog right now, as many do when they listen to this podcast. They're saying, we're getting close. We're almost back home now. Marshmello did her business a few blocks back. They're saying, Jack, are you going to land this thing on time? Well, keep your tray tables in the upright position. We're mixing metaphors and bringing this dog walk in for a landing. Let's hear from Javier from Alabama.

Hi Jack, this is Javier from Alabama. I wanted to ask you what you thought about the concept of infinite banking. I've been pitched this idea as a way to kind of save money, create a life insurance policy, and also take out personal loan from myself for other expenses such as paying down student loans. Mostly I'm just curious, you know,

how you might use the concept of dividend banking as a savings or investment strategy as a 26-year-old about to graduate medical school. Always appreciate your thoughts. Thanks. Thank you, Javier. This is a tricky one. Well, actually, it's not tricky at all.

The answer is simple. The backlash is you hear from some angry folks who sell this stuff online. There's a lively community of social media people who sell insurance, typically with high fees. That's why they're so motivated to sell it. And they talk about it like they've invented something new, infinite banking. This discussion has actually been around since I was a kid.

I don't know about the particular strategy you've heard about, but basically there's a type of life insurance you can buy called whole life insurance. And it has an investment component and it protects you, like the name says, for your whole life. And you pay into it and you can make extra payments into it and really build up a cash value. And you can use that cash value to borrow against. And I guess you could say you could be your own bank. You could provide your own credit to yourself, borrow money when you need it.

now i'm going to tell you two things maybe three it's always a bad idea to give the number up front i'm going to tell you an indeterminate number of things briefly number one my first career type job was as a stock broker i've talked about this before it was for a big wire house we were paid on commission i was terrible at selling things but that's besides the point i remember the fees if you wanted to generate commissions stock trades did not really bring in the fees

Bonds were a little better depending what you were selling. The real fees were in mutual funds. You could sell mutual funds with sales charges. They have front end loads or back end loads or level loads. Those would pay much more than stocks would. But the biggest money of all, the guys who were really swinging for the fences were guys who would go out and get their insurance licenses and they would sell annuities.

an annuity is an insurance contract that has an investment component and there's a lot going on there you've got fees for the insurance you've got fees for the investments i'm not saying they're all bad i'm not saying they're all high fee i'm just saying it's easier to hide big fees in annuities than it is in most things certainly easier than in a stock or a bond or even a mutual fund okay that's point one point two insurance people hate when i say this but

Insurance is a losing proposition. I mean, that doesn't mean you should never buy it. You probably should buy some. But insurance is based on casino math, literally. We've talked about this in the past in this podcast. Probability math, the same math that determines the outcome of dice games, that's the math that you use to price life insurance contracts. You need a combination of probability math and highly accurate, detailed records for when and how people die over time.

Once you know enough about when people are likely to die, you can use the dice math to sell those people bets on their death and you build in some profit for yourself. Just like the casino builds in profits on its bets.

which means that there's no such thing generally as a winning life insurance bet. Yes, you can buy a life insurance policy and you can keel over a couple of weeks from now and financially that policy would have paid off very well. But you can't know that at the outset. The point is they're priced against you. And because of that, you should view insurance in general as a penalty you pay for not having enough money to self-insure.

Don't be offended with that. Most people do not have enough money to self-insure. You need many, many millions of dollars to do that. If you're a young worker and the key breadwinner for your family and you have small kids, you need life insurance. The way to get that insurance is probably to buy something called term life. Term life, unlike whole life, you buy it for a set time period, 10 or 20 years. It's usually a lot cheaper than whole life because you're not buying it for your whole life.

And it doesn't have an investment component. There's nothing fancy about it. It's kind of a commodity product. So it's very competitive. It's easy to find term life insurance where the cost is reasonable. And you buy that for however long it's going to take for you to save up enough money to provide for your family yourself in the event of your death.

If you're taking all that extra money you would have spent on a whole life policy and you're putting it in a basic mutual fund, maybe you're buying that inside a tax deferred account like an IRA or a 401k. Maybe you're just buying something and not selling for decades so you keep taxes low. You're going to get there over decades. You're going to save a lot in fees and you're going to accomplish the same thing you would with infinite banking or whatever it goes by. When you need money, you'll be able to use your savings, not turn to a bank for a loan.

So is infinite banking a good idea? No, not the way they're describing it with expensive whole life insurance. Do your own infinite banking by buying cheap term insurance to protect your loved ones for as long as you need to. Meanwhile, spending less than you earn and putting the difference in something that's going to earn you a good return over time with as low fees as possible. A cheap stock index fund is perfect for the job. You can put some in a cheap bond index fund for diversification.

Do that for a couple of few decades and you'll become wealthy. Then teach your kids and grandkids how to handle money and they'll stay wealthy. And that's the best kind of infinite banking. Alexis, poor thing under the weather. Do you feel better or worse after hearing about managed futures? Better, definitely. That's what people say. Tea with honey and a little liquid alt discussion. And that's it for me. We've covered a lot of ground here. Marshmallow had a great walk. Who's a good girl?

Brian has added some nautical miles. I want to thank him and Bernie and Javier and Kevin. If you have a question you'd like answered on the podcast, just make us a recording. Use the voice memo app on your phone. You can send it to jack.how, that's H-O-U-G-H, at barons.com. Thank you all, and we'll see you next week.