Speaker 1: Wogan trillions. I'm Joel Webber and I'm Eric bel Tunis. Eric,
Speaker 1: there's a category that we haven't really spent that much
Speaker 1: time talking about un trillions, which is kind of incredible.
Speaker 1: But that's alternatives. And why why is that significant right now? Yeah,
Speaker 1: because the sixty and the forty, the equities and bonds
Speaker 1: that most people have as the portfolio is not really
Speaker 1: working like people thought. This year. The forty, which is
Speaker 1: the bonds, isn't really hedging the sixty. Normally that happens,
Speaker 1: and that's good and that's why you use bonds. But
Speaker 1: this year they're both down, and to me, that has
Speaker 1: opened the door to alternatives, which is literally what the
Speaker 1: name is. And I define alternatives as investment strategies that
Speaker 1: have non correlated return streams to stocks and bonds, so
Speaker 1: like they might have zero correlation or just a very
Speaker 1: small correlation, and therefore they can sometimes go up or
Speaker 1: go down less than the sixty and the forty, and
Speaker 1: they typically are lower vault. And in that category exists
Speaker 1: a lot of hedge fund strategies. So contrary to popular belief,
Speaker 1: um not all hedge funds are trying to like crush
Speaker 1: the market. A lot are trying to deliver something that
Speaker 1: might be UM have a higher sharp ratio, which means
Speaker 1: a decent return stream but at lower vall and with
Speaker 1: non correlative return. So that category has grown a ton
Speaker 1: this year. It's still small at five point one billion,
Speaker 1: but the percentage growth is big. And it's been waiting
Speaker 1: maybe fifteen years for this moment because stocks and bonds
Speaker 1: have just gone up easily, and it hasn't really been
Speaker 1: like something people search for, because why bother if you're
Speaker 1: sixty and forty is doing fine. There's a whole different
Speaker 1: ball game now, and so I think alternatives are having
Speaker 1: somewhat of a moment. So we're gonna talk about hedge
Speaker 1: funds strategies in an e t F rapper this time
Speaker 1: joining us. It's gonna be Andrew Beer of Dynamic Beta,
Speaker 1: Bob Elliott of Unlimited, and Cathy Burton, hedge fund reporter
Speaker 1: with Bloomberg News, this time on Trilliance Hedge Funns. Andrew, Bob, Cathy,
Speaker 1: Welcome to Trallians. Thank you so much, thanks for having us. Okay, Andrew,
Speaker 1: I want to start with you, UM, why hedge fund
Speaker 1: strategy and an ETF wrapper? Why do this at all?
Speaker 1: So Eric mentioned this idea that we've been waiting fifteen
Speaker 1: years for this moment. I've actually been working fifteen years
Speaker 1: for this moment. So I've been doing this incredibly long time. Uh.
Speaker 1: You know, we we knew that this breakdown of stocks
Speaker 1: and bonds would come at some point. You know, what
Speaker 1: we're living through in the two thousand tens was very
Speaker 1: very unusual. And you know, about seven or eight years ago,
Speaker 1: we started to focus on the strategy that we thought
Speaker 1: actually had the most diversification bang for the buck if
Speaker 1: you're starting with a portfolio, and it's a strategy called
Speaker 1: managed futures, And the easiest way to describe managed futures
Speaker 1: is it's like flood insurance where you get paid to wait.
Speaker 1: That's all you need to know about it from from
Speaker 1: a portfolio perspective. And so we saw it as one
Speaker 1: of these areas where you know, previously it had done
Speaker 1: really really well during the dot Com crisis, it had
Speaker 1: done really really well during the Great Financial Crisis, and
Speaker 1: the question was would it do well in another big
Speaker 1: crisis like that? And now the strategy is up overall
Speaker 1: around thirty percent this year, and we've been very, very
Speaker 1: fortunate to manage an et F that's in that area,
Speaker 1: Drill down what is it, what's in the portfolio? If
Speaker 1: I pull up the holding screen, what am I going
Speaker 1: to see? And it's active? So what are you doing?
Speaker 1: And by the way, the ticker d d m F right, yes, sir,
Speaker 1: so yeah, so so what what these strategies do is
Speaker 1: basically there are a bunch of hedge funds that are
Speaker 1: looking for trying to determine whether an asset is going
Speaker 1: to go up or down. Is oil, if oil has
Speaker 1: been going up, is going to keep going up? If
Speaker 1: rates have been going up, are they going to keep
Speaker 1: going up? If equities are going down, and are they
Speaker 1: gonna keep going down? And so the way that they
Speaker 1: express this is through financial derivitist called futures contracts, because
Speaker 1: these are very very efficient ways to bet on things
Speaker 1: going up or down. And so what we do in
Speaker 1: DBMF is we basically try to piggyback off of the
Speaker 1: core trades that these largest hedge funds are doing. So
Speaker 1: when they're betting that oil is going up, we simply
Speaker 1: expres us. It's the same way through a futures contract.
Speaker 1: If their betting rates are going to keep going up,
Speaker 1: we do the same thing, but also through things like
Speaker 1: treasury futures. So when you look at DBMF, what you
Speaker 1: basically see as a big pile of cash and cash
Speaker 1: like instruments and then a handful of derivative contracts through
Speaker 1: which we express those views. Okay, Bob, what are you doing?
Speaker 1: That's different because and you have a you came from Bridgewater, right,
Speaker 1: so I'm curious. You know that's a world's biggest hedge fund,
Speaker 1: Like what did you pick up there? And what are
Speaker 1: you doing with your tick HfN D well I I
Speaker 1: spent the first twenty years of my career basically in
Speaker 1: two and twenty institutions in two and twenty for those
Speaker 1: not in the two and twenty being UH. The typical
Speaker 1: fee structure of a hedge fund so management fee two
Speaker 1: percent of AUM management fee performance. And what I saw
Speaker 1: over time was that UM hedge funds UH and two
Speaker 1: and twenty managers generate great returns. They're they're very good
Speaker 1: at delivering alpha or sort of returns above of standard
Speaker 1: index investing. But what they do is they end up
Speaker 1: charging so many fees that the investor who invest in
Speaker 1: those products is typically worse off. Plus they're always in
Speaker 1: structures that are uh typically unaccessible to the everyday investor,
Speaker 1: and so that got me to thinking about whether there
Speaker 1: was a way to sort of bring a kind of
Speaker 1: low cost indexing idea that obviously is totally changed stocks
Speaker 1: and bonds, but bring it to the hedge fund space. Now,
Speaker 1: the goal they're being to track the gross of fees
Speaker 1: returns of the total hedge fund industry and all the
Speaker 1: different strategies that make up that so not includes things
Speaker 1: like equity long short, fixed income, arbitrage, global macro managed
Speaker 1: futures is andrew is highlighted, and basically create an index
Speaker 1: replication that looks like the hedge fund industry in the
Speaker 1: same way you might buy an index an index of
Speaker 1: the SP five under it, or an index that covers
Speaker 1: the global bond market. And so that's really what HfN
Speaker 1: D is all about, is is creating that index like
Speaker 1: product for the hedge fund space. Okay, Kathy, you've been
Speaker 1: covering hedge funds for a really long time. This feels
Speaker 1: like an existential crisis almost. It's like these guys have
Speaker 1: hedge fund industry has this magic formula that only they
Speaker 1: know they can charge a significant amount of money for
Speaker 1: have institutional clients with gigantic pools of money that they
Speaker 1: can drop on. But you know, an et F strategy,
Speaker 1: this opens the door, like I can invest like a
Speaker 1: hedge fund now, right, So how does this going over
Speaker 1: within the hedge fund community? Well, I think right now
Speaker 1: it's still a pretty small part. But it is a
Speaker 1: bit more of a threat, I would say, because there
Speaker 1: although there's some funds that are doing very well this year, uh,
Speaker 1: there are a lot that have not been able to
Speaker 1: take advantage of you know, to be short when the
Speaker 1: market drops. They've just done a pretty poor job overall.
Speaker 1: So I feel like it is a bit of a
Speaker 1: moment where we might see more people and just give
Speaker 1: us the lay the land of the hedge fund world
Speaker 1: right now, Um, I don't look at it every day,
Speaker 1: lest I heard it's about three trillion. Has that assets
Speaker 1: been going up or down? We talk about active mutual
Speaker 1: funds a lot on here, and they're seeing like eight
Speaker 1: billion outflows this year. How are hedge funds holding up
Speaker 1: through the whole sort of rise of passive? I mean,
Speaker 1: are they maintaining their niche? Our institutions still like is
Speaker 1: in love with them? Are they maybe forcing their fees down.
Speaker 1: Are they also getting like some fee compression. What's the
Speaker 1: state of things over there? Uh, it really varies. I
Speaker 1: would say overall fees have come down, but for certain
Speaker 1: funds that have done well, the fees have actually gone
Speaker 1: up in some instances. Overall, the assets have more or
Speaker 1: less kind of stabilized at that three trillion dollar level. Uh. Certainly,
Speaker 1: a lot of strategies like long short equity have lost assets,
Speaker 1: both because of the market fall and people pulling money.
Speaker 1: But at the same time, other some of the largest
Speaker 1: funds have made money this year, so that's helped bring
Speaker 1: assets up a little bit. So that's the stabilizing aspect
Speaker 1: of it. Both. You guys are looking to democratize hedge
Speaker 1: funds in general. I get it. It's clear. Here's the
Speaker 1: thing and what I you know, I've learned about institutions.
Speaker 1: I feel like they they want exclusivity. They almost think
Speaker 1: the e t F is like the the public pool
Speaker 1: down the street. I want the private pool in my
Speaker 1: backyard or at least the country club. I'm not I
Speaker 1: I need to do better things than that. And then
Speaker 1: on the flip side, you have advisors who may not
Speaker 1: even understand hedge funds enough to use them. So I
Speaker 1: sometimes think alts might get caught in the middle of
Speaker 1: both of those worlds, or have challenges selling two institutions
Speaker 1: who want exclusivity and advisors who may not totally even
Speaker 1: understand what you're talking about and get scared of under performance.
Speaker 1: So back to the point about fees, right, So, so
Speaker 1: the hedge fund industry is not going away, right In fact,
Speaker 1: and and and the hedge fund industry serves a very
Speaker 1: very valuable function for those institutional investors their products. They
Speaker 1: can assemble their own cars from hundreds of different you
Speaker 1: know parts, basically to meet their particular risk reward criteria.
Speaker 1: And most frankly, as much as they talk about it,
Speaker 1: they really don't care how much they're paying fees. Right,
Speaker 1: It's just them. Yes, fees have come down, but relative
Speaker 1: to the net A feed performance of hedge funds, they
Speaker 1: obviously haven't come down very much, and they're going up
Speaker 1: in certain circumstances. Our business plan is very different. Right,
Speaker 1: You've got six or seven trillion dollars of et F
Speaker 1: assets out there. You have a fifteen year history of
Speaker 1: pretty bad products, hedge fund products being put into ETFs.
Speaker 1: One of our competitors launched in the beginning of two
Speaker 1: thousand eleven, it's down over eleven years, where the hedge
Speaker 1: funds that it's supposed to be mimicking are up over
Speaker 1: that period of time. One of Bob's competitors has delivered
Speaker 1: two percent per anum since two thousand seven or two
Speaker 1: thousand eight, or to actually the beginning of two thousand nine.
Speaker 1: So when you talk about democratization, if these are your
Speaker 1: options for democratization, don't bother. And that was the lesson
Speaker 1: of the two thousand tents. Let's talk about the competitors.
Speaker 1: I want to bring up the tickers, but there are
Speaker 1: some hedge fund ETFs that have an equity bias in them.
Speaker 1: They're only partially hedged, and I think that was to
Speaker 1: try to sell them to advisors in the up times
Speaker 1: that so that you still got you got that like
Speaker 1: Beta kick, but now Beta is bad and it's maybe
Speaker 1: making the actual hedge working less. Is that what you're
Speaker 1: talking about here, whereas yours are more all in hedge.
Speaker 1: But it's also the complexity of it. Our our mission
Speaker 1: as advisor education right and in fact, in fact when
Speaker 1: we built are the two ETFs that we run the
Speaker 1: ideas that they're supposed to be incredibly simple and elegant
Speaker 1: building blocks for advisors who want to use them in
Speaker 1: their portfolio. They're supposed to understand how they work underneath
Speaker 1: the hood and what it is we're trying to achieve,
Speaker 1: and we have to build a better language around it
Speaker 1: because we have to be able to explain it in
Speaker 1: a way not where somebody gets off the phone understanding
Speaker 1: what we're talking about, but three weeks later, not having
Speaker 1: thought about it for three weeks. They've got to be
Speaker 1: able to sit down with their client who knows nothing
Speaker 1: about the space and be able to communicate the value
Speaker 1: proposition why it's there. And so our view has been
Speaker 1: that there have been a lot of hedge fund like
Speaker 1: products that have been put into et f rappers that
Speaker 1: never should have been there. Some of them are designed
Speaker 1: to as you say, they are almost in a Noman's
Speaker 1: land between the really really dynamic, thematic type products that
Speaker 1: people buy and sell every day on a regular basis
Speaker 1: and the asset allocators who want something where they can
Speaker 1: say I want this strategy, and I want it in
Speaker 1: a predictable, simple, straightforward way that I can explain to
Speaker 1: my clients. I think one of the most interesting things
Speaker 1: when I talk to advisors is nearly every advisor I
Speaker 1: talked to is looking for alternatives. They appreciate and recognize
Speaker 1: the challenges that SIXT has had will have on a
Speaker 1: forward looking basis, and so they need to have something
Speaker 1: that gives their clients something better, frankly, than they can
Speaker 1: do on their own to just invest in in index investing.
Speaker 1: And the problem those advisors face is when they look
Speaker 1: at alternatives, they structures that are very unpalatable. So they
Speaker 1: see traditional LP positions that are highly concentrated, they see
Speaker 1: those positions that are very tax and efficient. Are those
Speaker 1: structures are very tax and efficient? And they say to themselves,
Speaker 1: this is a hard way. It is hard to get
Speaker 1: access to alternative investment products. And so I think what
Speaker 1: they're looking for the problem is clear in terms of
Speaker 1: the need for alternatives and the desire for a simplified,
Speaker 1: tax efficient structure that the e t F provides. And
Speaker 1: so they're looking for institutional quality, world class investors coming
Speaker 1: to the e t F market offering those sorts of products.
Speaker 1: And I think, you know, Andrew and I both have
Speaker 1: that sort of pedigree and experience that we know how
Speaker 1: institutional quality hedge fund strategies work and can put those
Speaker 1: into the package that that is much more accessible to
Speaker 1: investors and advised. So I'm curious when you're talking to
Speaker 1: your advisors, the the idea of a non correlated asset
Speaker 1: very appealing. Obviously, how do you break down how you
Speaker 1: achieve that? We've heard, we've heard how how Andrew does it?
Speaker 1: But how do you do it? Well? What we do
Speaker 1: is we use machine learning techniques to basically look over
Speaker 1: the shoulder of the asset managers. There's a lot of
Speaker 1: information that you can see in uh in what managers
Speaker 1: are doing from their pattern of returns, and that's reported
Speaker 1: regularly their teams basically right, No, not their teams thirteen
Speaker 1: have to have some issues because they only give you
Speaker 1: a very small slice, a small picture into what they're doing.
Speaker 1: If you're sophisticated hedge funds, you're doing a lot more
Speaker 1: than what's in that their team f report. And so instead,
Speaker 1: what we do is we look at the pattern of returns,
Speaker 1: and having built proprietary hedge fund strategies across various hedge
Speaker 1: fund styles, we can look at those pattern of returns.
Speaker 1: We can compare it to a plausible set of exposures
Speaker 1: that they might have on or might drive their returns
Speaker 1: at any point in time, and basically solve for what's
Speaker 1: that portfolio look like that is generating the returns that
Speaker 1: we're seeing. So you're like reverse engineering or portfolio using
Speaker 1: machine learning exactly exactly. And one of the things that's
Speaker 1: very important is you can obviously solve for any particular
Speaker 1: point in time with a regression that will give you
Speaker 1: answers that who knows exactly whether it's right or wrong.
Speaker 1: What we do with frankly machine learning techniques that didn't
Speaker 1: exist ten or fifteen years ago, what we're able to
Speaker 1: do is solve for the path of of positions that
Speaker 1: that hedge fund manager might have on through time, which
Speaker 1: then helps us understand more effectively what positions they have
Speaker 1: on now. And that's what we use to inform what
Speaker 1: we put on in terms of the assets back in
Speaker 1: the e t F. So it's really really what we're
Speaker 1: trying to do is sort of infer the wisdom of
Speaker 1: the whole hedge fund community. Are they long growth stocks
Speaker 1: or short growth stocks? Do that? Are they long bonds
Speaker 1: or are they short bonds? Were trying to infer that
Speaker 1: from the aggregate hedge fund community and then put that
Speaker 1: together in something that's simple and easy to access for
Speaker 1: the everyday investors. How do you decide who's in and
Speaker 1: out at that index? We look at everybody. Uh. One
Speaker 1: of the great lessons I think many institutional investors have learned,
Speaker 1: particularly the most sophisticated, is that it's very hard to
Speaker 1: predict exactly which manager is likely to be successful and
Speaker 1: which one isn't. The most successful and sophisticated sovereign wealth
Speaker 1: funds and other institutional managers, what they do is they
Speaker 1: build a diversified portfolio of hedge funds, of thirty or
Speaker 1: fifty hedge funds that are world class and nature and
Speaker 1: they basically say, we don't know exactly which one is
Speaker 1: going to perform well or poorly at any particular point
Speaker 1: in time, but I put together thirty or fifty hedge
Speaker 1: funds together, and that's going to create a nice diversified
Speaker 1: portfolio that over time is going to go up into
Speaker 1: the right it's going to generate pretty good returns. And
Speaker 1: so that's really we're sort of drawing on that expertise
Speaker 1: and saying, instead of looking just one strategy or one manager,
Speaker 1: build an aggregated portfolio, a diversified portfolio, which is likely
Speaker 1: over time to be more consistent than just focusing on
Speaker 1: one manager, one strategy. Do you ever hedge over that
Speaker 1: in any way? What we're doing with HfN D, we
Speaker 1: we don't apply any of our own proprietary views or
Speaker 1: or or or other or other strategies on top of it.
Speaker 1: What we're trying to do is is match the hedge
Speaker 1: fund index grossive fees to be clear, which is a
Speaker 1: important consideration because, uh, when you look at hedge fund
Speaker 1: returns grossive fees, they're pretty good. You know, you you
Speaker 1: have returns that are better than stocks, a bit better
Speaker 1: than stocks, and volatility that's about half what you'd see
Speaker 1: holding stock index return. So that's a that's a pretty
Speaker 1: good return stream that most investors and advisors were wanting
Speaker 1: their portfolio. It's just typically they're too expensive to access,
Speaker 1: uh or or you know, the fees are too high,
Speaker 1: or you can't access the best the best ones because
Speaker 1: they won't take your money. And so that's what we're
Speaker 1: trying to do to really create that democratization of that
Speaker 1: diversified low cost index fund concept just for the for
Speaker 1: the hedge fund space. So what's the best way to
Speaker 1: use your your product, because I guess looking back at
Speaker 1: ten years, it must have been frustrating. Everything everything everywhere
Speaker 1: was going up, and yet you had to kind of
Speaker 1: like wait for a moment, and that moment may have
Speaker 1: arrived now. And so you're you know, you're selling picks
Speaker 1: on the way to a gold rush all of a sudden.
Speaker 1: Um but I'm you know, I'm curious, like now that
Speaker 1: this is happening, how are you telling investors to think
Speaker 1: about using the product now and going forward? So um so,
Speaker 1: to stick with my flood insurance analogies flood not gold rushes.
Speaker 1: So um so, Look, you can overpay for flood insurance
Speaker 1: and if a flood doesn't happen for five or six years,
Speaker 1: you've probably given up your policy when you need it.
Speaker 1: That happened to a lot of people in this space. Uh.
Speaker 1: The Manatutre space on the hedge fund side was notorious,
Speaker 1: and actually Bloomberg wrote an article nearly a decade ago
Speaker 1: talking about how of all gains in the space had
Speaker 1: gone to everybody but clients. Um So, obviously it's it's
Speaker 1: got a lot better since then, and some of the
Speaker 1: funds we track have actually been leaders in in in
Speaker 1: making it somewhat more rational, but it's still an area
Speaker 1: that could be very expensive to invest in. And the
Speaker 1: other is is the fine print in the policies and
Speaker 1: you know, so you get it by a flood, but
Speaker 1: it turns out the flood was from a storm surge um.
Speaker 1: So there are plenty of funds this year, including some
Speaker 1: very popular funds that have actually gone down in a
Speaker 1: year where everybody else has gone up. And so you know,
Speaker 1: this is an area if you if you pull institutional
Speaker 1: investors and you say where do I get the most
Speaker 1: diversification bang for the buck Manachuchers is always at the
Speaker 1: top of the list, going back to your point zero
Speaker 1: correlation over time, and it's hit the trifecta of gains
Speaker 1: during the dot Com crisis, the GFC, and this year.
Speaker 1: The problem is it's been very very difficult people to access.
Speaker 1: And we're trying to make it simple and easy, not
Speaker 1: for the institutional investors who can do it and they've
Speaker 1: done it successfully, but rather for the trillions of dollars
Speaker 1: of ETF based model portfolios that have never had an
Speaker 1: access point to get into this space. So Joel I
Speaker 1: have kind of trolled Andrew a little bit on Twitter
Speaker 1: by calling his fund the arc of the fed hiking
Speaker 1: era um, because you know, Cathy would is obviously like,
Speaker 1: do you get a commission for that? Sounds it sounds
Speaker 1: pretty good. Well, if you're on Twitter, not everybody's a
Speaker 1: Cathy fan. I mean i'd say almost the majority, especially
Speaker 1: the professionals. They just they she she really gets under
Speaker 1: their skin. Um. And so obviously she's down in the
Speaker 1: past like year or two, not having a good time,
Speaker 1: although the investors are pretty loyal. But the reason I
Speaker 1: say that is because if you look at ARCS flow
Speaker 1: chart and dbmfs there they sort of hung in oblivion
Speaker 1: for a while and then bam, the out performance started.
Speaker 1: The people came. You had the shiny object moment up
Speaker 1: this year, which is phenomenal because the markets down or
Speaker 1: something like that. So that's a fifty percentage point above it.
Speaker 1: One billion in assets were one point one allion. That
Speaker 1: doesn't seem like a lot, but relative to alts, that's
Speaker 1: market share of the category. I don't think I've ever
Speaker 1: seen a fund go from nothing to market share in
Speaker 1: a year. So in a way, even though you're a
Speaker 1: smaller scale, it is an ARC type phenomenon in that category.
Speaker 1: And the question I would have for you is, now
Speaker 1: that you've got all this love and people you know,
Speaker 1: kind of going to that shiny nous, let's say the
Speaker 1: Fed pivots or they just say we're done hiking, and that,
Speaker 1: you know, that kind of turns on that whole ARC
Speaker 1: trade again. Um, do you prepare them for like maybe
Speaker 1: the fact that it won't be up every year? I mean,
Speaker 1: how how's that going? And is that like a like
Speaker 1: a fear of yours that like what goes up comes down?
Speaker 1: I mean, I don't know. I'm just curious where your
Speaker 1: heads out on that. Well, there are a couple of
Speaker 1: differences dark. One is I'm not going to tell people
Speaker 1: that we're gonna make thirty Okay, let's let's let's get
Speaker 1: that very straight. Um. The other difference that we're actually
Speaker 1: an interesting similarity is you know, and you and I
Speaker 1: have exchanged thoughts on this is that part of the
Speaker 1: reason ARC started out as a stock picking story, and
Speaker 1: then over time people realize it really wasn't as much
Speaker 1: a stock picking story as access to a particular strategy,
Speaker 1: a thematic strategy that that that people didn't have access
Speaker 1: to otherwise and you know, as I've also said, I'm
Speaker 1: I'm a huge respect for the decision that Kathy would
Speaker 1: made to launch those et f s when she did,
Speaker 1: although I have also been critical of maybe some of
Speaker 1: the things she said publicly. Um, but but that's what
Speaker 1: DBMF is, right. DBMF is supposed to be if instead
Speaker 1: of thematic play, it's the strategy play. And and now
Speaker 1: what you're gonna have in the beginning of three the
Speaker 1: narrative is going to be, it's not stocks bonds in
Speaker 1: real estate that didn't work. It's probably not gonna be stocks,
Speaker 1: bonds in private equity that didn't work. It's gonna be stocks,
Speaker 1: bonds and manner futures. Because that's if you need three
Speaker 1: legs of the stool, those are the three best legs
Speaker 1: to have over time. Our play is not too displace
Speaker 1: hedge funds. You know. In fact, I encourage everybody that
Speaker 1: I know who runs one of these strategies to set
Speaker 1: them up in e t F s and to broaden
Speaker 1: because I think I think E t F allocators should
Speaker 1: have more opportunities and more options to invest in. But
Speaker 1: we're supposed to be the easy allocation that you want
Speaker 1: to start with it. You don't know the space very well.
Speaker 1: You're supposed to be able to say, all right, boy,
Speaker 1: I can see how ten percent of this and my
Speaker 1: portfolio would have made a huge difference this year. And yes,
Speaker 1: if the world comes back tomorrow, the other is going
Speaker 1: to do great. But on the other hand, if as
Speaker 1: a lot of hetche ones think today that this could
Speaker 1: go on for a number of years as we try
Speaker 1: to renormalize, this could be a very very valuable part,
Speaker 1: and we're supposed to be the easy way to get access.
Speaker 1: Also similar between you and Cathy as you both go
Speaker 1: where Vanguard doesn't Cathy's active share to say, the SMP
Speaker 1: fire is like meaning only two percent overlap, You're gonna
Speaker 1: have no overlap with Vanguard. Um. I call him vfcs
Speaker 1: Vanguard free zones like and because just talk to an
Speaker 1: active manager support like no taxes like duty for any
Speaker 1: duty free. Yeah, if you can party there a little bit, Yeah,
Speaker 1: it's still fun. Um. So I do think if you're
Speaker 1: serving up something that you can't get that hasn't been
Speaker 1: vanguarded yet, you're also in a good spot as a
Speaker 1: as an active manager or product provider. Because the Vanguard
Speaker 1: really hills the sixty. I mean, they're pushing so many
Speaker 1: people to get cheaper or even out of business. But
Speaker 1: this is something where you can come in here, have
Speaker 1: some creativity. Um. Other firms like Simplify have done option overlays,
Speaker 1: so you can talk a little bit about the sort
Speaker 1: of changing dynamic of Active and the fact that Active
Speaker 1: might have a I don't know, more of a home
Speaker 1: over here in the future versus sort of the traditional
Speaker 1: Let me get mostly like the SNP and try to
Speaker 1: pick a few stocks to outperform it by two percent
Speaker 1: that year. Yeah, I think a lot of investors and
Speaker 1: allocators have looked at ETFs as basically being the low
Speaker 1: cost and ex solution, and they've delivered in spades along
Speaker 1: that dimension. And you know, innovators like Vanguard as well
Speaker 1: as a variety of different producers have created a vast
Speaker 1: set of products that are available that are sort of
Speaker 1: the picks and shovels that you might have have or
Speaker 1: want to build a portfolio. But I think we're really
Speaker 1: we're entering the now next really the next generation, or
Speaker 1: i'd say sort of the third generation. We sort of
Speaker 1: had the index, uh the index ETF generation. Then we
Speaker 1: had uh, maybe the style or the or the thematic
Speaker 1: UH E t F generation, which you know, I think
Speaker 1: it we're sort of closing the book on more and
Speaker 1: more today and now we're going to see sophisticated asset
Speaker 1: strategies in the package of an e t F. That's
Speaker 1: really what where we're going in terms of the et
Speaker 1: F space. And the reason why that is is that
Speaker 1: the E t F is the best structure for the investor,
Speaker 1: hands down, whether it's taxes, liquidity, transparency, it is the
Speaker 1: best structure. And so what we're gonna see is that
Speaker 1: sophisticated asset managers are going to to use that structure
Speaker 1: when they can to to basically create a product which
Speaker 1: is much more investor friendly than UH than products like
Speaker 1: traditional LP positions, which I mean, every advisor we talked
Speaker 1: to just just UH hates an LP structure. Everyone hates
Speaker 1: an LP structure in the paperwork, the taxes, all this stuff.
Speaker 1: It's terrible. When you can get that in the E
Speaker 1: t F structure. Et F are not cheap anymore. They're
Speaker 1: ideal packages for sophisticated strategies, and so you know, I
Speaker 1: think if anything, I mean Andrew was obviously UH on
Speaker 1: the very much the cutting edge of this years ago.
Speaker 1: I think we're starting to see what will be a
Speaker 1: lot of institutional quality folks coming into the e t
Speaker 1: F space, utilizing its efficiencies uh and and offering a
Speaker 1: lot of differentiated products in the way that the vanguards
Speaker 1: and the wisdom trees, etcetera. Cannot. Are you seeing other
Speaker 1: um E t F people trying to follow what you're
Speaker 1: doing at all? Yeah? For sure, I mean, I I
Speaker 1: get UH. It's interesting. When I started Unlimited, I had
Speaker 1: never issued an e t F. I didn't know much
Speaker 1: about the ets base. As you know. I came from
Speaker 1: the from the hedge, the traditional hedge fund space at Bridgewater,
Speaker 1: and I think the e t F community was very important.
Speaker 1: It was very helpful in sort of uh coming and
Speaker 1: letting me ask questions and have the picked their brain
Speaker 1: about what's the best way to set these things up. Uh.
Speaker 1: And I came along way in terms of understanding ETF
Speaker 1: through that process of the course of the last year.
Speaker 1: And now I'm getting the calls from people who I
Speaker 1: knew in the two and twenties space basically calling me
Speaker 1: up and saying, what about having an et F for
Speaker 1: sophisticated structure. Let's talk about that, what do you do,
Speaker 1: how do you structure it? What have you met? HF?
Speaker 1: And well it's you know, it's interesting. Goldman just announced
Speaker 1: last week they're coming up with a white label business,
Speaker 1: which is major because there are small, small white labors
Speaker 1: label issuers on the indie side, but Goldmen doing it.
Speaker 1: And the reason they did it is they said they
Speaker 1: had institutional clients who were talking about converting their s
Speaker 1: M A or their hedge fund into an e t F.
Speaker 1: Now you can just convert it. You don't even need
Speaker 1: to launch a new one. So we could see a
Speaker 1: wave of existing funds convert. My guess is if a
Speaker 1: fund's really successful and still charging two and twenty, they're
Speaker 1: not converting. But I do think some will look at
Speaker 1: this as an option because why, you know, it'd be
Speaker 1: like if you're a band, and why wouldn't you offer
Speaker 1: your music digitally rather than just on CD and and vinyl.
Speaker 1: It just makes sense. I'll tell you what we're seeing
Speaker 1: on our side, which is that so we're, as you mentioned,
Speaker 1: were one point one billion now and with all of
Speaker 1: our competitors in the mannor Tucher space where maybe one
Speaker 1: point seven billion, and simplifying ct A has had great
Speaker 1: success as well. Um, but how big should this space be? Right?
Speaker 1: It's there trillions and trillions of dollars of e t
Speaker 1: F based model portfolios that have zero exposure to the space.
Speaker 1: It's there's four hundred billion dollars maybe five billion dollars
Speaker 1: of hedge fund assets allocated the strategy and essentially zero
Speaker 1: in the e t F world. So I'm getting calls
Speaker 1: from people who are saying, we can see this going
Speaker 1: to a fifty billion dollar space, a hundred billion dollars space,
Speaker 1: at two hundred billion dollars space over the next decade,
Speaker 1: and that all of a sudden changes the calculus for
Speaker 1: because it's cheaper, as we know in the et F land,
Speaker 1: you're not going to make as much money, but if
Speaker 1: you do it right, you can have that that that
Speaker 1: that that massive scalability. So I do I agree with Bob.
Speaker 1: I think, I mean, I think the world has changed
Speaker 1: in a way. I have very very strong views on
Speaker 1: what products I think will succeed in not which is
Speaker 1: a longer conversation. And again, is the money going to
Speaker 1: come from advisors in retail or institutions or both. It
Speaker 1: will come from model portfolios Okay, So which will be
Speaker 1: which will start when? It'll start with the independent areas
Speaker 1: where we've seen demand, Then it will migrate to the
Speaker 1: top tier wealth management platforms, and then once it gets
Speaker 1: big and becomes established, then you'll start to see institutional
Speaker 1: allocas money. For those who don't know, a model would
Speaker 1: be like something an advisor can just buy and has
Speaker 1: the whole portfolio already made. That way, the advisor can
Speaker 1: focus on getting new clients and like tax stuff exactly. Yeah, okay,
Speaker 1: but since you're new to the space, I'm curious, is
Speaker 1: there anything relatively new to the E t F space?
Speaker 1: I guess they should clarify. Is there anything that the
Speaker 1: e t F can't do that you wish it could do?
Speaker 1: I think for what we're trying to do, the E
Speaker 1: t F is a perfect package and rapper. Um, there's
Speaker 1: natural limitations in terms of UH running strategies that are
Speaker 1: particularly high frequency or with a great deal of turnover,
Speaker 1: where the E t F rapper isn't necessarily the the
Speaker 1: best strategy that that you can are the best structure
Speaker 1: that you could use. But I'll tell you the vast,
Speaker 1: vast majority of sophisticated asset strategies are ones that uh
Speaker 1: that fit well into an E t F type structure,
Speaker 1: and frankly, you know would would really benefit from that
Speaker 1: very uh, that very positive investor friendly structure relative to
Speaker 1: the typical things that are out there. Andrew about you.
Speaker 1: Since you've been you've been in the game for a bit.
Speaker 1: Anything that you could add to your wish list of
Speaker 1: things in E t F could do so. So the
Speaker 1: reason we do it the way that we do it,
Speaker 1: which is essentially copying the big trades cheaply with these
Speaker 1: very efficient liquid instruments, is because we don't run into
Speaker 1: those hurdles that you normally run into. Make no mistake,
Speaker 1: hedge fund strategy should never be put into an et
Speaker 1: F right, It's I mean, I wrote probably the seminal
Speaker 1: paper thous in two thousand fourteen on the mutual fund
Speaker 1: space that when you take a hedge fund strategy, you
Speaker 1: often kill it when you try to when you try
Speaker 1: to tie it up with those constraints. Um. So, I
Speaker 1: think you know, our view is that the vehicle itself
Speaker 1: is extraordinarily valuable in part because you've had this exponential
Speaker 1: geometric growth of the space. Um. But um, but you
Speaker 1: have to be very very careful about what you put
Speaker 1: into e t f s because those constraints are very
Speaker 1: very real, and if you have a strategy that doesn't
Speaker 1: fit with it very well, you will lose what you
Speaker 1: wanted in the process. And I think the history of
Speaker 1: head fund products in the ETF has been in general,
Speaker 1: it has been pretty abysmal. I have a question for
Speaker 1: you but about um the fact that hedge fund are
Speaker 1: doing more and more private investments. So how do you
Speaker 1: end up going around replicating those things which you can't well.
Speaker 1: I think most of hedge fund businesses, or what have
Speaker 1: traditionally been hedge fund businesses, are looking to the private
Speaker 1: space to generate returns either most of the time through
Speaker 1: other vehicles or structures that are less sort of traditional
Speaker 1: hedge fund type structures and more private vehicles in a
Speaker 1: variety of different ways. And so a lot of what
Speaker 1: we're doing, we're really focused here with h F n
Speaker 1: D on the traditional hedge fund space, the trading of
Speaker 1: liquid markets to generate alpha, where some of those private
Speaker 1: market elements are are less relevant or or less impactful
Speaker 1: to the to what's generating the returns um So, Bob,
Speaker 1: you know, I have a long history with Bridgewater and
Speaker 1: writing about Bridgewater because a couple interesting things. You talk
Speaker 1: about the E T F being such a great vehicle
Speaker 1: that I would sometimes use Bridgewater thirteen F to sort
Speaker 1: of explain to people, you have the biggest hedge fund
Speaker 1: in the world. You guys must have had four or
Speaker 1: five billion in ETFs, might even been even more. I
Speaker 1: think it was a risk parity strategy, and all Weather
Speaker 1: Fund used E T S four UM And then I
Speaker 1: would say, and guess what the E M or whatever
Speaker 1: ticker they're in. My mom pays the same fee because
Speaker 1: it kills the share class system that the mutual fund
Speaker 1: world has. And I thought that's kind of cool. But
Speaker 1: then I was looking at your thirteen F. This might
Speaker 1: have been ten years ago when I saw you were
Speaker 1: in an e M and I AMG had come out
Speaker 1: like a few years before, and it was getting liquid,
Speaker 1: and I M G is like, I don't know, fifteen
Speaker 1: BIPs and E M was like sixty nine. So I
Speaker 1: did the math and I wrote this article for Bloomberg
Speaker 1: Opinion that said if Bridgewater moved to e M or
Speaker 1: I MG, they would save seventy two million dollars a year.
Speaker 1: I was like, they could even hire like one or
Speaker 1: two people. That was my little joke. Anyway, that's for
Speaker 1: the that's for the people back. So, Um, then you did,
Speaker 1: and I want to ask, was it my article? I
Speaker 1: I was not not involved in in uh in the
Speaker 1: selection of the the et F while I was there.
Speaker 1: So but but let me tell you, we're reading everything
Speaker 1: you guys, right, and you know there's no uh no
Speaker 1: shame in grabbing great ideas from people who are outside
Speaker 1: and using that to make your product better. So I
Speaker 1: want just five of that. That's all I asked. You're
Speaker 1: not gonna get it. Um, let's bring it back to
Speaker 1: investors right now. Um, what are you expecting your products
Speaker 1: to to do and evolve over the course of the
Speaker 1: next few months as we continue to see, um, you know,
Speaker 1: very chaotic moment in the market. So as I've been
Speaker 1: telling people so Ministratus broadly and again, what we do
Speaker 1: is going to be dependent upon what these incredibly smart
Speaker 1: hedgephones we're spending all day, you know, with our computers
Speaker 1: trying to figure this stuff out. Um. But we've been
Speaker 1: in crush protect a moode all year and it's been basically,
Speaker 1: if you had to put it into a sentence hedge funds.
Speaker 1: These hedge funds were perfectly happy in a low inflation world,
Speaker 1: but they saw the bread crumbs and they switched to
Speaker 1: a view that inflation was gonna gonna pick up, and
Speaker 1: and that's played out through their portfolios. The thing about
Speaker 1: these strategies, and what makes it very very different from
Speaker 1: Cathy would is they change over time. They are and
Speaker 1: so you look at this strategy over a very very
Speaker 1: long period of time, they almost never go down more
Speaker 1: than ten from the front peak to a trough. They
Speaker 1: don't hold onto things with the white knuckle grip, and
Speaker 1: so it's going to be depend upon what happens in
Speaker 1: the world. You know, when you talk about as an
Speaker 1: active strategy, what makes the strategy valuable is that it
Speaker 1: will change what it does over time and and for
Speaker 1: from an asset allocator's perspective, you have to be comfortable
Speaker 1: with that that that that the index itself is not
Speaker 1: static exposure. The index itself is what these hedge funds
Speaker 1: are doing and how they're making money over time and
Speaker 1: over the past twenty two years where we have good
Speaker 1: data on it. It's just simply the best diversifier for portfolio.
Speaker 1: And I think my my, my thought is similar to
Speaker 1: to what Andrew saying in terms of uh, we with
Speaker 1: h F and D. Really, what we're trying to do
Speaker 1: is gain the wisdom of the hedge fund community in
Speaker 1: terms of how to navigate through what is, frankly the
Speaker 1: most challenging investing environment that you know, we've seen in
Speaker 1: fifteen plus years. And so how exactly that plays out
Speaker 1: is I think pretty uncertain, and so the question I
Speaker 1: think that should be on most investors minds today is
Speaker 1: do you essentially hold index positions and hope that that
Speaker 1: works out, or do you hire the smartest, most sophisticated
Speaker 1: asset managers in the world to navigate through this environment
Speaker 1: that you know it's very challenging and benefit from that
Speaker 1: dynamic through time. As Andrew says, that positioning, what what
Speaker 1: the positioning is today will inevitably evolved based upon the
Speaker 1: evolving set of economic conditions, and so, uh, really, what
Speaker 1: you're trying to do with these structures is, in a
Speaker 1: very simple way, higher the best to navigate through this environment.
Speaker 1: But as a compliment, I would assume, right you would
Speaker 1: be a portion of a bigger pie which would still
Speaker 1: contain the sixty forty right, because it would be tough
Speaker 1: sell to get everybody to drop every sixty forty come over.
Speaker 1: I mean, are you able to get anybody to do that?
Speaker 1: I mean I would assume that's hard. They're not doing that.
Speaker 1: I think any if you go back to the structuring
Speaker 1: of any portfolio, you want to think about the returns
Speaker 1: that come from beta or passive indexing invests index investing,
Speaker 1: which are pretty reliable over long periods of time, and
Speaker 1: then you want to think about the returns from alpha
Speaker 1: as a compliment. Uh. And you know alpha is less reliable,
Speaker 1: less correlated, and so you certainly want when you think
Speaker 1: about balancing those two things, your beta allocation and your
Speaker 1: alpha allocation, it's not you know, you put all your
Speaker 1: money on alpha and let it go, because beta has
Speaker 1: a real important purpose. I think there's lots of work
Speaker 1: investors could do to create a more balanced beta portfolio
Speaker 1: relative to where they are now. Commodities, gold, things like that.
Speaker 1: But you know, typically a good alts portfolio, if you
Speaker 1: look at the most sophisticated investors in the world, is
Speaker 1: maybe thirty percent of their portfolio of their portfolio looking
Speaker 1: for alpha related to alternative investment strategies or hedge fund strategies. Yeah,
Speaker 1: on the manistutus at the allocations five, it's it's bounder
Speaker 1: than that range. Depends on depends, It depends on your
Speaker 1: view of the world, it depends on what else you have.
Speaker 1: But at all it's always it should always be view
Speaker 1: as a compliment. Okay, last question one that we often
Speaker 1: ask on trillions. Favorite et F ticker other than your own, Bob,
Speaker 1: I'm gonna start with you. I love the tickers that
Speaker 1: give you a little chuckle, so like, uh like an ahoy?
Speaker 1: I like that or honestly the K pop one. I
Speaker 1: thought it was, you know, just you know when you're
Speaker 1: when you're going through this very serious business and so
Speaker 1: it's just every once in a while nice to get
Speaker 1: a little laugh out of it. Yeah, wait a second, ahoy,
Speaker 1: is that like a leveraged shipping e T I forgot
Speaker 1: it's it's it's a recent et F focus done the
Speaker 1: oceans Andrew h without a question, happy h a p
Speaker 1: I which is uh Dan Rli and Harper Capital teamed
Speaker 1: up for that one. I'm a huge fan of Dan
Speaker 1: r Relli, the behavioral finance guru, and uh, I love
Speaker 1: that one. I'll give you I'll give you a second
Speaker 1: one as well, which is one of our competitors, which maybe,
Speaker 1: but our competitors simplified got C T A. And when
Speaker 1: I saw that come, I thought, oh man, it's definitely
Speaker 1: easier them, which is still it was all my chicken scratch,
Speaker 1: but we got it so so simplify. Paul, You are welcome, Andrew, Bob,
Speaker 1: Cathy thinks so much for joining us ly, thank you
Speaker 1: for having us, Thank you, thank you so much great
Speaker 1: being here. Thanks for listening to Trillions Until next time.
Speaker 1: You can find us on the Bloomberg Terminal, Bloomberg dot com,
Speaker 1: Apple Podcast, Spotify, or wherever else you'd like to listen.
Speaker 1: We'd love to hear from you. We're on Twitter, I'm
Speaker 1: at Joel Webber Show. He's at Eric Faltunus. This episode
Speaker 1: of Trillions was produced by Magnus Hendrickson. Bye