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Speaker 1: Bloomberg Audio Studios, podcasts, radio news, I'm right, I can wrong,

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Speaker 1: mound song big.

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Speaker 2: And then makes no difference.

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Speaker 3: As we learned in twenty twenty two, sometimes all supposedly

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Speaker 3: uncorrelated asset classes moved together. Stocks went down, bonds went down,

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Speaker 3: tips went down, commodities went down, Bitcoin went down. Very

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Speaker 3: few things bucked the trend. One version of that is

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Speaker 3: a variety of alternative investments that are designed to not

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Speaker 3: correlate to one during periods of stress. Let's talk to

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Speaker 3: Andrew Beer. He's a hedge fund veteran and founder of

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Speaker 3: Dynamic Beta Investments or DBI that focus on hedge fund

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Speaker 3: replication strategies delivered through low cost liquid vehicles like atfs

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Speaker 3: and mutual funds. Liquid alts manage futures, a variety of

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Speaker 3: strategies that are specifically designed to not trade like stocks

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Speaker 3: and bonds. So, Andrew, let's start with the basic question.

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Speaker 3: Stocks and bonds seems to have become a whole lot

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Speaker 3: more correlated in recent years. How should that change how

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Speaker 3: we think about correlation and the need for diversifiers.

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Speaker 2: Sure, well, it is the question of the twenty twenties

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Speaker 2: from a wealth management perspective. So I used to call

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Speaker 2: bonds the Superman of diversifiers in twenty tens, that they

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Speaker 2: had terrific risk adjusted returns. If you they almost never

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Speaker 2: went down. The maximum drawn on it was four percent,

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Speaker 2: and they tended to go up or do better when

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Speaker 2: when equities were doing less well. The problem this decade

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Speaker 2: is that, and this is people have shown this over

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Speaker 2: long period of times, is that was unusual. In fact,

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Speaker 2: if you go back over long periods of time, particularly

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Speaker 2: when inflation gets above about two percent, stocks and bonds

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Speaker 2: tend to move together. So astonishingly bonds have earned less

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Speaker 2: than cash over the past ten years. And now in

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Speaker 2: the correlations of creeping up, that tears up the basic

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Speaker 2: playbook of a sixty forty model portfolio because and so

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Speaker 2: what people are doing is think about what can we

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Speaker 2: put into a portfolio, and really, really the goal is

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Speaker 2: to diversify equity risk because remember, I mean Morren Buffett

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Speaker 2: had that great quote and they said if you did

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Speaker 2: networkshire Hathaway, what would you do with your money? And

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Speaker 2: he said, I put ninety five percent into the SPI

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Speaker 2: one hundred and five percent in cash. That's great if

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Speaker 2: you're him and you can weather a forty percent or

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Speaker 2: fifty percent draw down and breathe whatever, and you carry

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Speaker 2: it for the next for the rebound. But most investors

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Speaker 2: don't have that kind of risk tolerance, and they need

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Speaker 2: things that are going to help to protect them during

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Speaker 2: during difficult market environments.

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Speaker 3: So how do we avoid these specific diversification failures that

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Speaker 3: we see in typical portfolios? How do each of your

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Speaker 3: funds mapped to a different hole in that diversification process?

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Speaker 2: So on on our side, you know what, we've tended

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Speaker 2: to look at our strategies that are durable and have

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Speaker 2: worked for long periods of time, and then try to

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Speaker 2: find out ways to make them work in mutual funds

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Speaker 2: or ETFs or in Europe we do it in useage funds.

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Speaker 2: But I've also been an enormous critic of this this

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Speaker 2: broad industry that is built up around what are called

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Speaker 2: liquid alternative products. Now, remember I come from a legitimate

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Speaker 2: hedge fund background, and when i've but I've been writing

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Speaker 2: about this category of supposed diversifiers for fifteen years and

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Speaker 2: it's a catastrophe that these strategies on average have correlations

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Speaker 2: often around point a to equities, and they've delivered two

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Speaker 2: to three percent per annum over a period of time

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Speaker 2: when fifteen years, when equities have gone up by fourteen

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Speaker 2: or fifteen percent a year. That I think is the

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Speaker 2: is the most critical issue is that ninety five percent

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Speaker 2: of things that people will pitch you are supposed to work,

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Speaker 2: just don't and don't add value. And we have tried

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Speaker 2: to address that and say, no, there actually are things

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Speaker 2: that work, but you've got to take a somewhat different

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Speaker 2: approach in terms of how you think about it.

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Speaker 3: So whenever I speak to either portfolio managers or anybody

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Speaker 3: else's who's working on an allocation, they want to know

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Speaker 3: about draw downs and volatility and sharp ratios. What do

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Speaker 3: these various diverse fires do to kind of wonky like those.

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Speaker 2: The strategy that we've described having the most diversification bang

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Speaker 2: for the buck is a strategy called managed futures and

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Speaker 2: it's the core of what we do. And we came

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Speaker 2: in it again, we came in from your side of

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Speaker 2: the table as we're looking for something that would help

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Speaker 2: our portfolios. And then there's a second part of it,

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Speaker 2: how do we make it work well? Because there's this

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Speaker 2: great book that was written called where are the Customer's

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Speaker 2: yachts talk about how Wall Street took all this money.

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Speaker 2: The asset management industry tries desperately to take as much

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Speaker 2: money as they can from any kind of product, and

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Speaker 2: the more complicated they make it, the easier it is

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Speaker 2: for the charge exorbitant fees. But what the strategy is

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Speaker 2: very very unusual and has no correlation to stocks and

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Speaker 2: bonds over a long period of time, and and tends

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Speaker 2: to do best in the most difficult market environments. But

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Speaker 2: it's not a high sharp ratio strategy. There are certain

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Speaker 2: hedge funds that have sharp ratios of two, which, if

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Speaker 2: you know a few under it's almost magical from an

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Speaker 2: investment perspective. This is not that. But what was compelling

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Speaker 2: about it is I can make it work and do

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Speaker 2: better than the actual hedge funds, but in liquid accessible

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Speaker 2: vehicles like ETFs.

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Speaker 3: Huh. So when I think of things like managed futures

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Speaker 3: or derivative based long short leverage strategies, my first thought

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Speaker 3: is what's the risk that this is going to blow up?

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Speaker 3: I don't tend to think of this is certain ways

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Speaker 3: these are expressed as diversifiers. How do you reconcile that?

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Speaker 3: How do you do things differently? Than some of these

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Speaker 3: other blow up risk funds we've seen, and every year

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Speaker 3: we read about one of them.

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Speaker 2: You know, blown up manu features is a strategy, is interesting,

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Speaker 2: and the blow up risk is very very low for

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Speaker 2: the following reasons. So blow ups usually happen because you've

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Speaker 2: borrowed money and somebody wants it back at the wrong time,

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Speaker 2: and you have something you can't sell to fulfill it.

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Speaker 3: Right.

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Speaker 2: That's Lehman Brothers, that's Bear Stearns, that's you know, that's

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Speaker 2: the long legacy of true blow ups or or its

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Speaker 2: fraud and mispricing of assets. There was a mutual funk

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Speaker 2: called Infinity Q that kind of just made up its

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Speaker 2: numbers what mania features funds. And again it's terrible term

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Speaker 2: manu features, But futures contracts are some of the deepest,

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Speaker 2: most liquid contracts that you can possibly trade. And so

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Speaker 2: when things these guys will go through periods where they

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Speaker 2: have draw downs, but they don't hold onto the positions

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Speaker 2: with a white knuckle grip, and they scale out of positions.

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Speaker 2: Like even everyone is long gold and silver last week,

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Speaker 2: they will have cut gold and silver, and so if

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Speaker 2: gold and silver go down another fifty percent from here,

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Speaker 2: they will have reduced their risks. So when you look

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Speaker 2: at the overall strategy over a twenty five year period

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Speaker 2: of time, the maximum drawdown is only sixteen percent, whereas

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Speaker 2: inequities you've had a forty percent and a fifty percent

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Speaker 2: and several twenty percent plus drawdowns over that period of time.

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Speaker 2: Bonds have also had a sixteen percent draw down. So

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Speaker 2: it's there's a perception that it's very, very risky with

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Speaker 2: high blow up risk. That is simply because as you say,

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Speaker 2: it sounds like and it is a leverage, long, short

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Speaker 2: road based black box.

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Speaker 3: But they're called managed for a reason, right, So let's

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Speaker 3: talk about the tendency for some of these, especially on

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Speaker 3: the private side, these very strategies to kind of quietly

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Speaker 3: drift back towards equity beta over time. Like sometimes we

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Speaker 3: see someone's identified a particular strategy that is both non correlated,

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Speaker 3: diversified and generating real alpha, but it tends not to

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Speaker 3: have persistency. How do you avoid this kind of problem

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Speaker 3: what someone else is called fake diversification.

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Speaker 2: I think the structure of the traditional asset management business

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Speaker 2: from a returns perspective is deeply, deeply flawed. That again,

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Speaker 2: you are talking about an industry that has destroyed value

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Speaker 2: for decades net of the fees that they've charged because

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Speaker 2: low cost index products have done better. The product development

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Speaker 2: and sales across the industry is equally flawed in that product.

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Speaker 2: In the hedge fund industry, when a credible hedge fund

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Speaker 2: launches a product, they think there's a great investment opportunity,

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Speaker 2: and they're going to bring in their capital clients and

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Speaker 2: they're going to and they're going to try to capitalize

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Speaker 2: on that opportunity. In the traditional asset management space, it's

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Speaker 2: designed by the equivalent of the car salesman on the

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Speaker 2: on the showroom floor who thinks he can sell it

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Speaker 2: to you, and all he cares about is getting that

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Speaker 2: commission up front. So it's there's a structural reason why

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Speaker 2: hundreds and hundreds of products have been offered which which

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Speaker 2: have failed any measure of diversification. And also funds. Ben

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Speaker 2: Johnson at morning Star has a great expression called the

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Speaker 2: spaghetti canon, and he said, these guys will launch six funds,

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Speaker 2: and they will come in and one of the six

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Speaker 2: will be doing well, and that's all they'll talk to

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Speaker 2: you about. So it's it's so the odds are really

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Speaker 2: stacked against the average. And you know, unless you're somebody

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Speaker 2: like me who digs in and wants to see every

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Speaker 2: fund that's out there and tear it apart, it's it's

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Speaker 2: extremely difficult to see through this marketing haze and fuzz.

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Speaker 2: So back to the point about things that were look

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Speaker 2: great until they look horrible. I think that is a

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Speaker 2: that is a marketing success, but an investment catastrophe.

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Speaker 3: So let's talk a little bit about the spaghetti canon.

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Speaker 3: You've built a variety of replication strategies. How do you

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Speaker 3: avoid simply layering on new sources of hidden risk under

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Speaker 3: the banner of diversification. Just throwing stuff up against the

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Speaker 3: wall to see what sticks. Isn't a good strategy other

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Speaker 3: than hey, we know what we can market. How do

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Speaker 3: you find diversification but not add risk.

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Speaker 2: So in our case, we've only we only have two

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Speaker 2: strategies because the other eight or ten that we've looked

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Speaker 2: at don't work. If I come in and describe to

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Speaker 2: you what we built and why we built it. And

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Speaker 2: now again, ours is a relatively unusual business in that

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Speaker 2: we're basically saying, in two hedge funds strategies, we like

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Speaker 2: what hedge funds do but we can beat them by

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Speaker 2: copying them cheaply, and we can do it at a

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Speaker 2: liquid fashion's that's called hedge fund replication. We know, we

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Speaker 2: figure out their big trades, we figure out where their

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Speaker 2: conviction is. But instead of paying them a lot of

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Speaker 2: money to implement the trades, often in very complicated ways,

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Speaker 2: we can synthesize it and do it and do it efficiently.

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Speaker 2: I've only launched strategies where I've been eighty percent confident

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Speaker 2: I could beat hedge funds at their own game.

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Speaker 3: And that so let's talk about some of those strategies.

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Speaker 3: Because when you I think when a lot of people

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Speaker 3: hear the name hedge fund replication, they think, oh, hedge

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Speaker 3: funds are buying a lot of Nvidia, so Andrew's buying

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Speaker 3: a lot of Nvidia. We're not talking about imitating their positions.

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Speaker 3: We're talking about applying their strategies aside from managed futures.

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Speaker 3: Tell us about the other strategies. Get that get layered

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Speaker 3: into dbi's exchange traded funds.

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Speaker 2: So there's only the other strategy. So we replicate the

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Speaker 2: manager future space, and we synthesize their portfolios into a

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Speaker 2: simple portfolio, and and it turns out. It's just much

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Speaker 2: more efficient. It does better over time. We also replicate

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Speaker 2: what I would call the broad hedge fund industry, which

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Speaker 2: will include the kind of funds you read about equity

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Speaker 2: long short, relative value, event driven. But in that we're

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Speaker 2: not trying to figure out who owns Nvidia. We've looked

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Speaker 2: at that. It's not a terribly useful exercise. Goldman actually

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Speaker 2: has it has a business doing that. Rather, what we're

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Speaker 2: trying to pick up on are there big themes? So

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Speaker 2: are they migrating their equity exposure from US equities to

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Speaker 2: non US equities? Is it going from develop markets to

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Speaker 2: emerging markets? Is it? Do they have hedges in place

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Speaker 2: on the view that inflation may or may not come back.

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Speaker 2: So our whole business is based upon the idea that

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Speaker 2: if you can identify the big trades, the most important trades,

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Speaker 2: that's really what's going to be the big driver of performance.

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Speaker 2: And everybody's read about the subprime crisis and what happened there,

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Speaker 2: Just like, what don't people say about the subprime crisis? Oh,

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Speaker 2: that guy got it right, but short of the wrong bonds, No,

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Speaker 2: you shorted any bonds? You did well if you were

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Speaker 2: a hedge fund, that moved into tech stocks over the

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Speaker 2: past fifteen years, you've done well. It hasn't mattered which

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Speaker 2: tex stocks you own. That and by the way, this

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Speaker 2: only works in very limited circumstances. So back to your

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Speaker 2: first point is the thing you don't want to do

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Speaker 2: is you don't want to do stupid things, which is

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Speaker 2: to launch products because you hope they're going to work,

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Speaker 2: or if they happen to work, your investors won't figure

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Speaker 2: it out until they've given you a lot of money.

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Speaker 2: That's not how we roll.

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Speaker 3: Huh. Really interesting. I've read a line of yours that

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Speaker 3: I really like. Diversification is a protection against bad luck.

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Speaker 3: Unpack what that means specifically in context of things like

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Speaker 3: economic shocks or policy mistakes. We're in an era of

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Speaker 3: tariffs and trading by tweets as well as inflation surprises.

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Speaker 2: So the standard playbook from an asset allocation perspective is

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Speaker 2: to diversifying and assume just take it as a given

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Speaker 2: that there won't be any really catastrophic things that happen.

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Speaker 2: You know, one of the great advantages that hedge funds

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Speaker 2: as an asset class. That drew me to the asset

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Speaker 2: class as they're not tied to a benchmark. They're not

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Speaker 2: tied to the decisions that they made year before. This

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Speaker 2: is people with very very smart, talented people with their

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Speaker 2: own money who are trying to find ways to make

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Speaker 2: money in good and bad environments, you know, and so

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Speaker 2: so bad luck is the return of inflation. You know,

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Speaker 2: it's something that affects your portfolio across the board that

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Speaker 2: wasn't part of your playbook. And the thing I find

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Speaker 2: incredible about last year was that nothing broke right. I mean,

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Speaker 2: we have the system is being tested at every level. Right,

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Speaker 2: there are garaulics who are lighting matches and throwing them

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Speaker 2: on the carpets and the drapes have not caught fire.

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Speaker 2: Right that we had an attack on that. You know,

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Speaker 2: we had the Deep Seek scare, we had Liberation Day,

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Speaker 2: we had a frontal assault on the independence of the FED.

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Speaker 2: We've had various geopolitical skirmishes. You've had pockets of bond

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Speaker 2: market tantrums around the world. And yet if you had

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Speaker 2: gone to bed on December thirty one, twenty twenty four,

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Speaker 2: and woken up a year later, you think, great, everything worked.

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Speaker 2: So so I think the world is changing, right, And

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Speaker 2: I think what you're seeing, what you're seeing in gold

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Speaker 2: and silver. It's not normal, right, You don't get these

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Speaker 2: major asset classes melting up eighty percent in a year,

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Speaker 2: going up another twenty percent, dropping ten percent, you know,

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Speaker 2: silver dropping thirty percent in a day. The you know,

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Speaker 2: I hear from international investors that their fear of something

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Speaker 2: policywide happening in the US is causing them to look

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Speaker 2: at international markets in a way, even though the business

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Speaker 2: environment in the US is still the best in the world.

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Speaker 2: The companies are still the best in the world, but

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Speaker 2: it's not prudent anymore to be massively overweight the US.

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Speaker 2: So I think, I think we're going to be in

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Speaker 2: for years of big change, and I think that that's

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Speaker 2: going to be really challenging for the standard playbook of

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Speaker 2: of you know, let's just stick to our guns with

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Speaker 2: our current positions and hope things work. It worked wonderfully

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Speaker 2: in a your life last year. I think we're going

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Speaker 2: to go through some tough periods zone interesting.

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Speaker 3: So last question ATFS tend to be used by advisors

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Speaker 3: and other portfolio constructors who often have to explain what's

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Speaker 3: going on to their clients. And a big challenge is

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Speaker 3: a big struggle is dealing with client behavior. Well, I

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Speaker 3: think of selling diversifiers like house insurance. You don't complain

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Speaker 3: if your house doesn't burn down. But when I see

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Speaker 3: things like manage futures and other diversifiers, I just know

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Speaker 3: how clients think. After a few years without a disaster,

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Speaker 3: someone's going to say, Hey, these don't work. I want

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Speaker 3: to sell this. How do you actually work with advisors?

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Speaker 3: So the clients who thought they wanted a diversifier don't

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Speaker 3: get impatient when the house hasn't burnt down.

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Speaker 2: So, for one is in our strategies by reducing fees

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Speaker 2: and making it more efficient, you do better during the

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Speaker 2: other during all those periods you're talking about. So our

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Speaker 2: largest ETF was up fourteen percent last year. No, we

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Speaker 2: weren't up as much as the S and P five hundred,

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Speaker 2: but we're pretty close. And that's a year where nothing

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Speaker 2: terrible happened other than you know, we had a lot

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Speaker 2: of a lot of scary shocks. But I think, and

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Speaker 2: I've loved the past six years of really getting to

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Speaker 2: know people in the wealth management space in that I

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Speaker 2: think the way people often pitch these things to clients

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Speaker 2: is wrong. That I think they they go in. I

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Speaker 2: think a lot of allocators, they fall in love with

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Speaker 2: these funds. They go in and they want to tell people,

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Speaker 2: I've found, you know, Lionel Messy, I've found Lebron James,

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Speaker 2: I've found this person because look look at how they've

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Speaker 2: done over the past five years. They're unbelievable. And I

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Speaker 2: think that is a terrible way to introduce these products

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Speaker 2: to an end client because then they're focused on it

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Speaker 2: all the time and they want to know why they're

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Speaker 2: not scoring every game. And and rather, what we have

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Speaker 2: tried to do is basically say, look, we know this

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Speaker 2: strategy is useful, but we're a boring way of getting

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Speaker 2: exposure to it. We're just like that, no one, no one,

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Speaker 2: And people generally don't panic because GLD is down five

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Speaker 2: percent in a day. It's just part of your asset allocation.

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Speaker 2: And so I think the advisor world needs a will

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Speaker 2: be more successful when they framed these allocations not on

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Speaker 2: a standalone basis based upon star power, and it's okay

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Speaker 2: to pay them two hundred basis points a year because

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Speaker 2: they're never going to be wrong. We know they're going

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Speaker 2: to be wrong, and we know things aren't going to work.

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Speaker 2: So if you frame it in terms of This is

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Speaker 2: just simply incrementally that fills a gap in terms of

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Speaker 2: how we manage your money, and it's priced at a

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Speaker 2: very very attractive price point. No one's getting rich while

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Speaker 2: we're waiting for this to happen. And five years from now,

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Speaker 2: seven years from now, ten years from now, just like

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Speaker 2: when we started to put you into high yield bonds

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Speaker 2: or non US equities or these other asset classes that

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Speaker 2: made your portfolio more robust, this is just one incremental

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Speaker 2: addition to it.

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Speaker 3: So to wrap up, for investors looking to diversify, to

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Speaker 3: avoid the tendency for all asset classes to move in lockstep,

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Speaker 3: they should consider low cost ETFs that try and replicate

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Speaker 3: what big expensive hedge funds do, but in a liquid

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Speaker 3: inexpensive version. DBI has not only managed futures, but liquid

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Speaker 3: alts that try and do this. They've put together a

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Speaker 3: really impressive track record over the past five years. Just

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Speaker 3: keep in mind that you don't want to back up

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Speaker 3: the truck and own twenty thirty percent of it. It's

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Speaker 3: supposed to be an insurance product. Andrew suggests three percent.

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Speaker 3: I don't disagree with that. I'm Barry Ritolts. You've been

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Speaker 3: listening to Bloomberg's At the Money