How Flexible Is Your Alternative Exposure?

Director, Research

Strategic allocation models typically carve out a portion of an investment portfolio for alternative investments, such as commodities, hedge funds, private equity or managed futures. These alternative asset classes provide exposure to less correlated assets, theoretically increasing returns and lowering risks over the long term. Of course, investors are glad when these types of exposure are performing well and adding to their portfolio returns, but many have trouble understanding why they even own these assets when they are underperforming. This year, that questionable asset class has been commodities, which have come under pressure year-to-date as a result of slow global growth, a rising U.S. dollar and falling oil prices. If this trend persists, we feel that commodity indexes that provide long-only exposure may be missing out on an opportunity. One asset class that has been utilized by institutional investors as a way to achieve diversification and performance potential in almost any market is managed futures. Unlike long-only investments, managed futures employ long/short strategies designed to profit from both rising and falling markets. Also, many managed futures are not confined to commodities futures but can also invest in currencies or interest rate futures. The ability to go long or short commodities, non-U.S. currencies and U.S. Treasuries has provided managed futures a performance edge year-to-date. The graph below illustrates the year-to-date performance of the Diversified Trends Indicator™ (DTI®) against some popular commodity indexes, to highlight the performance difference.   Year-to-Date Index Performance For definitions of indexes in the chart please visit our glossary.Exposure to Oil Had a Large Impact on Returns—Because oil has declined so dramatically year-to-date, by over 32%, the larger an index’s exposure to oil, the lower the overall return.1 The DBIQ Optimum Yield Diversified Commodity Index places more weight in what it classifies as the most heavily traded and important physical commodities, so it had a larger weight to oil over the period compared to the Thomson Reuters Equal Weight Continuous Commodity Total Return Index, which employs an equal weighting methodology. A unique feature of the DTI® is its ability to go long or flat oil, but never short. Since August, the index has been flat (meaning no exposure) to oil, allowing it to largely avoid the decline in oil prices. If the price trend reverses, the index has the ability to go long oil, and it could benefit from a rebound in prices. • Diversification Beyond Commodities Helped Drive Returns for DTI®—One of the most persistent trends year-to-date has been the strength of the U.S. dollar against other developed currencies. The flexibility for DTI® to go long or short non-U.S. currencies and U.S. Treasuries, beyond just commodities, has provided a further performance edge. DTI®’s performance has benefited from being long both Treasury bonds and Treasury notes, as interest rates have fallen in the U.S. year-to-date. DTI®’s performance also has benefited from being short the Japanese yen since August and short the euro since June. WisdomTree believes that we are still in the early innings for dollar strength, and this trend should continue into 2015 and beyond. An Established Strategy—Now in the Exchange-Traded Fund (ETF) Structure Traditionally, to access managed futures strategies, individuals would have to make significant investments with hedge funds or commodity trading advisors (CTAs)—an expensive proposition. These investments typically charge a 20% performance fee on top of a 2% annual fee. Additionally, CTAs generally lack transparency, have limited liquidity and can introduce single-manager risk. The WisdomTree Managed Futures Strategy Fund (WDTI) is managed using a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the DTI Index. These are some of the advantages we feel that an ETF structure can provide: • Low fees of only 95 basis points2 • Intraday liquidity • Full transparency of strategy and holding, displayed daily on • No investment minimums, sales loads or redemption fees • No K-1 filing3         1Source: Bloomberg, 12/31/13‒12/02/14. Refers to West Texas Intermediate Crude Oil Spot Price. 2Ordinary brokerage commissions apply. 3Schedule K-1 is a tax document issued for an investment in partnership interests.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. An investment in this Fund is speculative and involves a substantial degree of risk. One of the risks associated with the Fund is the complexity of the different factors that contribute to the Fund’s performance, as well as its correlation (or non-correlation) to other asset classes. These factors include use of long and short positions in commodity futures contracts, currency forward contracts, swaps and other derivatives. Derivative investments can be volatile and may be less liquid than other securities and more sensitive to the effects of varied economic conditions. The Fund should not be used as a proxy for taking long-only (or short-only) positions in commodities or currencies. The Fund could lose significant value during periods when long-only indexes rise (or short-only indexes decline). The Fund’s investment objective is based on historic price trends. There can be no assurance that such trends will be reflected in future market movements. The Fund generally does not make intramonth adjustments and therefore is subject to substantial losses if the market moves against the Fund’s established positions on an intramonth basis. In markets without sustained price trends or markets that quickly reverse or “whipsaw,” the Fund may suffer significant losses. The Fund is actively managed, thus the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. Diversification does not eliminate the risk of experiencing investment losses. Investments in commodities may be affected by overall market movements, changes in interest rates and other factors such as weather, disease, embargoes and international economic and political developments. Alpha Financial Technologies, LLC (“AFT”) has developed, maintained and owns rights to the methodology that is employed in connection with the Diversified Trends IndicatorTM (DTI®). DTI® is a registered mark of AFT. The Fund is not sponsored, endorsed, sold or promoted by AFT. The DTI® was created, compiled, maintained and is owned by AFT without regard to the Fund. The DTI® is licensed on an “as-is” basis, without warranties or guarantees or other terms concerning merchantability, absence of defects, fitness or use for a particular purpose, timeliness, accuracy, completeness, currentness or quality. Neither AFT nor its affiliates make any warranties or guarantees as to the results to be obtained in connection with the use of the DTI® or an investment in the Fund, and AFT and its affiliates shall have no liability in connection with any Fund investment.

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About the Contributor
Director, Research
Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. Now, as Director, Research he leads the Firm’s data analytics group, responsible for index creation, maintenance and reconstitution. Tripp travels domestically and internationally to speak about WisdomTree index capabilities and meets with clients across various sales channels. He is also involved in creating and communicating WisdomTree’s thoughts on the markets. Prior to joining WisdomTree, Tripp worked in various investment-related roles for TD Ameritrade, Wells Fargo Advisors, TIAA-CREF and Evergreen Investments. Tripp graduated from The University of North Carolina at Chapel Hill with dual degrees in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation.