WTMF: The First Managed Futures ETF to Hold Bitcoin Futures
By Matthieu Aydemir
The recent rise of cryptocurrencies as an asset class has been nothing short of spectacular. Incredible returns have naturally led to increased demand from investors seeking access to cryptocurrencies.
A cryptocurrency, in short, is a digital currency that is generally not controlled by any central authority. Among these various cryptocurrencies, Bitcoin (BTC-USD) has been the dominant token with a market cap of around $ 900 billion, currently accounting for around 40% of the global cryptocurrency market cap.
The CME group started offering Bitcoin futures in late 2017 to take advantage of the growing demand for exposure. Almost four years later, we’ve now seen Bitcoin futures make their way into ETFs and have added them to our own WisdomTree Enhanced Commodity Strategy Fund (GCC).
As part of our goal to continuously innovate and improve our managed futures product, we allocated 1.5% exposure to Bitcoin futures in the WisdomTree Managed Futures Strategy Fund (WTMF) in early January 2022. . WTMF will not invest directly in Bitcoin.
WTMF is a systematic trend following strategy providing exposure to stocks, commodities, currencies and interest rates through positions in futures contracts seeking to achieve positive total returns in rising markets. or falling that are not directly correlated to returns on equities or broadly defined fixed income securities of the market. . We believe the addition of Bitcoin futures not only further sets WTMF apart from other managed futures ETFs, but provides investors with exposure to Bitcoin in a risk-aware manner.
Ultimately, we believe what makes Bitcoin attractive to investors is the potential for large absolute returns.
However, there are other features of Bitcoin that make it a worthwhile addition to our managed futures product. Specifically, Bitcoin has always been a great way to diversify compared to other traditional asset classes.
In the chart below, we show the correlation of Bitcoin spot rate with other asset classes. We are looking at the correlation of the Bitcoin spot rate with other asset classes through December 31, 2017, around the time CME Bitcoin futures started trading.
While spot yields can differ significantly from forward yields, we would expect the spot rate to provide a reasonable approximation for a first month Bitcoin contract when examining the correlation.
We see that over this period, Bitcoin was weakly correlated with other asset classes.
We believe that the low historical correlation between Bitcoin futures and other asset classes bodes well for improving the risk-adjusted return profile of a multi-asset fund like WTMF. We made some significant changes to WTMF in June 2021 with the aim of improving the risk-adjusted return, and it would be interesting to examine the correlation between Bitcoin and the Restructured Fund. We can see that the Bitcoin spot rate has been weakly correlated to the Fund since the restructuring of June 4, 2021.
Bitcoin futures exposure in WTMF is obtained through futures contracts traded on the Chicago Mercantile Exchange (CME). CME Bitcoin futures are now very liquid, with a 60-day Average Daily Volume (ADV) of around 7,700 as of November 30, 2021. Assuming a fund under management of around $ 155 million, trading in a 3% allowance would only be 0.23% of the 60-day ADV.
It is important to have a well-defined goal when designing a strategy. The incredible increase in Bitcoin prices in recent years is certainly a cause for excitement. However, you have to be careful, because Bitcoin has historically been extremely volatile. Our goal is simple: to provide investors with exposure to Bitcoin through a systematic strategy designed to reduce volatility compared to a long-only strategy while capturing some of the upside potential that Bitcoin offers.
Due to Bitcoin’s historically high volatility, for now we are allocating only 3% nominal exposure to the Bitcoin exposure. The aim here is for the Bitcoin component to contribute significantly but not to dominate the volatility profile of the Fund.
Since WTMF is a systematic trend following fund, the Bitcoin strategy should also be able to dynamically adjust exposures based on the strength of the price trend. To better protect against prolonged declines, we use a momentum signal that reacts more quickly to recent information. The amount of the nominal 3% we invest depends on the strength of the trend signal.
Finally, given that Bitcoin has shown an uptrend in the long term, for now, we are preventing the model from taking short positions. Instead, we just allocate it to the money. This potentially reduces the volatility of the model. The long / flat model for the Bitcoin component is shown in the figure below.
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For the January rebalancing, the fund will take a 1.5% long position in Bitcoin futures (shown under the Cryptocurrency sector in the chart above). In particular, the fund remains net long in most of the commodities, equities and US dollar index sectors. The fund is also short rate contracts.
As part of our goal of continuously improving our managed futures product, WTMF is now the first systematic ETF to track trends to provide investors with access to Bitcoin futures exposure. The Fund is currently a long 1.5% Bitcoin futures contract after the January rebalance. We believe that adding exposure to Bitcoin futures has the potential to improve the Fund’s risk-adjusted return as well as further diversify the constituents of the Fund. Our aim is to provide investors with this exposure in a risk controlled manner via a systematic long / flat trend following strategy that reacts quickly to changing market conditions.
Significant risks associated with this article
There are risks associated with investing, including possible loss of capital. An investment in this Fund is speculative, involves a substantial degree of risk and should not constitute the entire portfolio of an investor. One of the risks associated with the Fund is the complexity of the various factors that contribute to the performance of the Fund, as well as its correlation (or non-correlation) with other asset classes. These factors include the use of long and short positions in commodity futures, foreign exchange forward contracts, swaps and other derivatives. Derivatives can be volatile and may be less liquid than other securities and more sensitive to the effects of various economic conditions.
Additionally, bitcoin and bitcoin futures are a relatively new asset class. They are subject to unique and substantial risks and historically have been subject to significant price volatility. Although the bitcoin futures market has grown significantly since bitcoin futures contracts began trading, there is no guarantee that this growth will continue. The price of bitcoin could drop sharply (including to zero), which should have a similar impact on the bitcoin futures price. The Fund should not be used as a proxy to take only long (or only short) positions in commodities or currencies. The Fund could lose significant value during periods when long indices only rise (or short indices only) fall.
The investment objective of the Fund is based on historical price trends. There can be no assurance that these trends will be reflected in future market movements. The Fund generally does not make intra-monthly adjustments and is therefore subject to substantial losses if the market moves relative to the Fund’s established positions on an intra-monthly basis. In markets without sustained price trends or in markets that reverse rapidly or “crash”, the Fund may experience significant losses. As the Fund is actively managed, the ability of the Fund to achieve its objectives will depend on the efficiency of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gains distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
Matthew Aydemir, Research Analyst
Matt Aydemir began his career at WisdomTree as a Research Analyst in January 2020. He is responsible for quantitative research on WisdomTree products, as well as the maintenance and reconstruction of WisdomTree indices. Prior to joining WisdomTree full time, Matt worked in the research team as an intern, where he developed portfolio analysis tools. Matt received his Masters in Financial Engineering from Columbia University in 2020 and his BS in Chemical Engineering from the University of Waterloo in 2016.
Editor’s Note: The bullet points for this article were chosen by the editors of Seeking Alpha.