Animal Spirits Podcast - Talk Your Book: How to Eliminate Negative Alpha

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Longboard Funds. Go to longboardfunds.com. To learn more about the Longboard Fund, which is a trend-fowing strategy we were talking about in the show today. That's longboardfunds.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Starting point is 00:00:42 Welcome to Animal Spirits with Michael and Ben. On today's show, we are joined by one of the OGs in trend following, Cole Wilcox. Ben, I love the idea of systematic investing, trend following, removing the emotion. If only I could follow it. I mentioned this on the show that I sold Netflix and meta, I don't know, both 50% ago. Why? Because I doubled my money and I was out. That is obviously not the right way to invest.

Starting point is 00:01:13 But I guess I need to learn that less than 10,000 more times before I finally follow the trend. But what I'm attracted to about what they do is there's no emotion. They don't get scared that the profits are going to go away. There's a trend. There's a system and they follow it. It's also probably one of the reasons that trend following. is not in concentrated positions either, right? Most trend following strategies are diversified because they don't want to be in the position of holding a handful of stocks. And then if one

Starting point is 00:01:37 or two of them goes right or wrong, it totally screws everything else up, right? Like, you'd have to have a more of a bigger basket of stocks of Netflix's and Facebooks to do that strategy. My favorite part, my favorite point that he made in the conversation today, not to step on too much of it was, listen, it's not that like the trends are necessarily predictive. It's that they're systematic so that you don't have to decide is now the right time to sell because obviously that's impossible. And again, now that there's anything magical about trend following, but you're not going to shoot yourself in the foot. And so we, Cole works for longboard funds. And it's a company that we've mentioned on our podcast and

Starting point is 00:02:13 our blog, I don't know, eight, nine, 10 years ago. And their work looked into the distribution of stock market returns that it sounds like it kind of was a motivation for Hendrick Bessonbinder, who we've also mentioned before that shows like the top 4% of stocks that counts for the large majority of the gains. It is not a bell curve. No, not at all. And so we get a little into that research

Starting point is 00:02:33 and he's got a new fund out. So very interesting strategy. And plus the trend itself, there's so many different ways that you can take it and ways that you can think, put it on this or that asset class or this security or that, it's very interesting.

Starting point is 00:02:48 So we get in all that with Cole Wilcox, founder and chief investment officer at Longboard Asset Management. So, Cole, you've been doing this for a long time on your website, Longboard Funds. It says optimizing alternative investments for financial advisors. Alternative investments are like all the rage these days. So I'm curious, what does alternative investing mean to you? Like, when you hear that word, what do you think about?

Starting point is 00:03:12 It's a big category. For us, we think about it's really anything that can be that third leg of the portfolio outside of stocks and bonds that is designed to provide additional diversification, lower the risk, correlation, et cetera. So you have a more balanced portfolio. And obviously, there's a lot of ways to access that, whether it's public vehicles, private vehicles, it's quite a big category to kind of dissect with ALTS. You're an OG trend follower.

Starting point is 00:03:45 You've been, like I said, you've been in the game for a while. I'm curious because we've never spoken before, just like a, I don't know, 30 seconds. background how do you go or you can take 60 how do you get to here what what's your background uh background is we've been doing this 25 years uh now originally i i started um as a private um asset manager we ran a hedge fund fund of funds that specialized in uh allocating money to trend following managers managed futures whatever you want to call it and like macro uh hedge funds and that was kind of how we got into the space originally. And through that process, started to do our own research and development on our own internal strategies, which kind of started in 2005 and led to the

Starting point is 00:04:34 publication of a lot of pioneering research that we did in that 2005 to 2007 publication time. So one of the research pieces that Michael and I have used, I think in our blogs over the years, we might use it in the firm too. You did this distribution of returns for the stock market. just to show that it's just a very small number of stocks that account for the majority of the games from a market cap perspective, which I think when it came out was kind of mind-blowing to a lot of people, you'd think, well, half the stocks do good and half the stocks do bad. What did that research in conclusion tell you about trend following? Like, what was it about that stuff that made its way into your work?

Starting point is 00:05:11 Well, that concept of, you know, the vast, we're not an equally distributed world. It's not a bell curve the way that it may be with indexes. At the individual stock level, most companies and most stocks are actually very, very bad. Investments and a small minority are driving all of the markets, you know, cumulative returns. So another way of saying is that power law kind of concept is very, very real and as a fundamental law of the stock market and capital markets, you know, sort of like it is in venture capital returns. You know, a small minority of deals end up generating all of the returns. it's the exact same outcome in public markets when you when you dissect this. What we saw was that, you know, being able to predict winners and losers, you know,

Starting point is 00:05:59 after the fact, it's easy to say, oh, this 7% of stocks made all the returns, everything else was garbage. But, you know, being able to predict which is going to be that 7%, which ones is going to be the winners, I mean, if we knew how to do that, we'd all be billionaires pretty quick. trend following doesn't have a predictive advantage. It doesn't know which companies are going to be winners and losers, but it does have the advantage of systematic process of holding your winners and folding your losers as markets kind of evolve and play out. So it's very, very naturally positioned and predisposed to be able to benefit from that

Starting point is 00:06:36 power law distribution that exists in markets. So, Cole, I blame you. I blame Hendrik Bessendor, who was who you inspired, and I blame J.P. Morgan's The Agony and the Excessy of Stock Picking. What do I blame you for? Showing me the light and making it so that I can't hold my winners because I know the math of how most stocks are not worth holding for the long run. So, but I also, I should have taken your advice and do a better job of riding my winners. So, for example, like I sold Netflix. I don't know a couple months ago. I sold meta last year. After I make a double in a stock, I'm out.

Starting point is 00:07:11 Like, that's like my upper bound. I can't get a 10x because I'm afraid that the gains are going to be ripped away from me. But instead of being driven by my emotions, I should just follow the damn trend. But it's so easy to say. And it's so hard to do, which is why I am really drawn to the idea of systematic. To your point, it's not that it's going to know for sure, but it eliminates the emotional aspect of riding winners. it's hard, right? Because a lot of these winners have big drawdowns. And so you want to stay invested, but you also don't want your gains to be ripped away. So I'm rambling here. But it's important. The systematic part of it, I think resonates with a lot of listeners. Yeah, I mean, I would not be able to do what we do and capture the kinds of gains that we capture on individual positions if this was a discretionary strategy. I'm a human. I understand my natural biases just like everybody does and the desire to book winners and hold on to losers. and kind of all of the psychology that exists out there,

Starting point is 00:08:12 I'm not immune from that. But by being aware of it and then designing strategies and systems that can eliminate the negative alpha that comes from your human failures and put it into a process like this and allow this insight around what is the real distribution of the markets

Starting point is 00:08:30 and what is the real human psychological flaws that we end up screwing things up and put it into a process that can hold your winners, cut your losers, and have that repeat kind of over time to successful outcomes in a very disciplined way is why we do what we do in our strategies. From a 10,000-foot view, trend following seems relatively simple. It's cut your losers short and let your winners run, right? But if you get into the weeds and the details, there's a lot of different ways that people interpret trend following. Some manage futures funds will invest in

Starting point is 00:09:04 dozens, if not hundreds of different futures, you know, commodities and rates and foreign exchange and all this stuff. Some people use trend following to do an asset allocation switch. They'll go from owning stocks to owning bonds or cash or something like that. Other people will use trend following on individual names. Where do you fall in terms of trend following and how you implement your strategy? So in our strategy, we do something unique and different where we specialize on trend following on individual securities. So our investment universe is quite broad. It's the entire Russell 2,500 index of U.S. companies.

Starting point is 00:09:44 So there's 2,500 companies that we start with, and we're analyzing the long-term trend and performance behavior of every stock that is within the side of that index. And then we're going to bottom up, build that portfolio, by whatever the breakouts are that are making new highs, we're going to own every single one of those securities in our portfolio, and every stock that is breaking down in trend to new lows is going to be eliminated from the portfolio.

Starting point is 00:10:12 So we constantly just own the cream of the market through every evolutionary cycle, and we're constantly eliminating tax loss harvesting and exiting the majority of stocks that are ultimately a big drag on performance at the index level. So this is basically like a mid-cap strategy. It's a Russell 3,000 minus the S&P 500. Correct me if I'm wrong.

Starting point is 00:10:38 Why no love for the large caps? It's not that we don't have a love for large caps. If you think about the, on average, most stocks are small and mid-cap companies. So we do own some large cap in our portfolio, but it's the minority part. 90% of the portfolio is small and mid-cap exposure or it's 10% is large-cap. It's really just due to the fact that we like to have the whole universe and catch those big winners. There is more 10 baggers and 50 baggers that come out of the small and mid-cap universe relative to a mega-cap universe. It's hard for Facebook today at its current market cap to become a 50-bagger from where it's at today.

Starting point is 00:11:26 But a stock like Sprouts Farmer's Market, right, is an example of a company. we made a lot of money in over the last, you know, a few years, you know, maybe it becomes as big as Walmart someday, but it still have a lot of runway and a lot of growth in front of it. So you see those growth opportunities and these big opportunities for huge multi-bagger winners that are naturally predisposed to trend following that come out of that small and mid-cap space. It's interesting, too, to look at the opposite of that, because the stat we always hear is, I don't know, 40% of Russell 2000 stocks have no profits.

Starting point is 00:12:00 Is it just as important to avoid the losers in this space too because there are probably so many smaller and mid-cap companies that don't make it or languish or potentially go out of business? So is taking off that side of the tail just as important as funding the winners? It's more important than anything. I would say the biggest source of alpha is taking out the losers. But how do you take out the losers is what's important? There's a huge amount of performance drag and a huge amount of opportunity cost

Starting point is 00:12:30 in owning those, you know, junk stocks, right, that exist inside of the Russell. But just because a lot of companies are junk, that doesn't mean that every company is junk. You know, it cuts both ways. And so being able to sift through that and only own the top performing companies that are with inside of that, you have to do both, but a huge part of the alpha is eliminating the performance drag of just garbage that's in the Russell. So the 50 beggars or the 20 beggars, whatever, correct me if I'm wrong, they don't go up in a straight line. Like they have drawdowns.

Starting point is 00:13:09 And some of them, you know, a lot of them have severe drawdown. So how do you, how do you, I guess it's like a push pull, how do you ride the wave and avoid the 35% drawdown or whatever it is? That's like almost inevitable. How do you do that? Well, one, you kind of understand that those drawdowns are natural. kind of ebbs and flows. I mean, Bessam Binder did another paper where he analyzed the average drawdown of the biggest winning stocks over a decade period of time in the previous decade.

Starting point is 00:13:40 So if Amazon was the biggest winner and this decade, you went back the previous decade and said, what kind of volatility did you have to suffer to hold? I think the average drawdown was like 50%. So big winning stocks have huge enormous drawdowns in their life cycle, and that's just kind of a reality. For us, it's also the recognition that these big trends, they play out over multiple years. You know, we are not talking about capturing, you know, short-term momentum and something. Our average hold time in a position is going to be measured in years, in a highly profitable position that's going to be measured in multiple, multiple years. So by being, you know, patient, giving these positions room to run and not being overly aggressive in how you calculate

Starting point is 00:14:29 your stop loss levels is kind of where our focus is at, more of a very long-term approach versus the kind of the short-term trend speeds that we don't focus on. So if you have a stock that you've held for three years, that's up, you know, 4,500 percent or whatever, do you give that more room to run or more room to draw down? because if you were to zoom out, a stock that's up 30x could have a 40% drawdown and the long-term uptrend can still be very much intact. So do you have a different set of criteria for different stocks or is it universal? No, our criteria, you know, is universal. And, you know, it's not rocket science or necessarily even like proprietary. We just published a paper this week on SSRN called

Starting point is 00:15:17 Does Trend Following still work on stocks where pretty much. fully disclose the entire logic of what we do, how we get in, how we get out, you know, the calculations kind of around that. But it's a universal entry-exit kind of criteria that self-adapts to the volatility of each individual stock. So a stock that has a lot of volatility, you're going to give it more room. A stock that has less volatility, you're going to give it kind of less room. But their volatility kind of like neutral between one another, if that makes sense. So I guess the hardest thing about most trend-fowing strategies is the pivot and the turn, right? Going from an up trend to a downtrend. And no strategy is perfect in catching those

Starting point is 00:16:01 turns. If it was, as you mentioned, we'd all be billionaires. If you could get out of the top, get right back into the bottom. Most trend-fowing strategies, you know, obviously are going to miss like the exact peak in the exact bottom. But you have this table in your presentation that shows the five worst quarters for the Russell 2000 since inception of your fund, which is kind of funny because it only goes back to 2018 and there's been some really nasty Russell 2000 quarters, right? It was down 30% plus for that first quarter of 2020 or that first two months or whatever. And you show your performance in there for your fund, and it outperforms by a ton in those quarters. So how quickly is going from an uptrend to a downtrend turn in your stocks and how quickly can you get out?

Starting point is 00:16:44 And then do you just go to cash or what happens in those events? I mean, how quickly is very much dependent upon, like, the market cycle and what happens? I mean, in COVID environment, we de-risk the portfolio in a matter of weeks because, but that was also the macro environment was that was the fastest decline, like, on record, you know, kind of that we had had. And our strategy is going to naturally self-adap to that massive increase in volatility. Your stops all get hit. And what we do is, you know, unlike a lot of other people that are trying to move money into gold or some other kind of low correlated asset, we want absolute stability in a moment of crisis.

Starting point is 00:17:25 And what we have found in our research is that the most reliable source of non-correlation in a market crisis is short-term treasury bills to provide stability, capital preservation, and a source of non-to-negative correlation. So that's the asset that we go to in a risk-off environment is to hold more treasury bills and weather the storm until the next kind of trend bull market cycle emerges in the future. Is there anything inside the structure of the market that you've seen a noticeable change on over the years where trend following used to work really great in, I don't know, the 04 to 06 range and it's a little bit trickier now given whatever, XYZ, or, Or have you noticed no change at all? When it comes to trend following on individual stocks, we have not seen any change at all. There's actually in the paper that we just published at like a stability of alpha section where we answer that question. Has there been any change or any kind of stuff? And there hasn't.

Starting point is 00:18:31 In fact, last year was actually one of the most successful alpha producing years for trend following on stocks. What I have seen, but it has nothing to do with trend following, is obviously the huge performance dispersion between small and mid-cap stocks and large-cap stocks, right? So everybody kind of knows that, you know, the S&P 500 has been driven by, you know, a handful of companies, and they've really substantially outperformed their small and mid-cap cousins by a wide margin relative to history over the last decade. So, obviously, a strategy like ours, that, you know, if you benchmark it against our, you know, the Russell, which is our universe, we produce a lot of positive alpha and it looks great in terms of the raw returns and the risk adjusted returns. But if you looked at it against the S&P, you're like, eh, S&P outperformed you, right? But it's like, well, the S&P has outperformed everything. Everything and everyone. Yeah.

Starting point is 00:19:31 So, you know, if we had been running trend and it was only on those S&P, And S&P stocks, right? Well, then we would have much better performance because you'd have more trend, you know, in these stocks that had turned out to be these, you know, huge winners. But I have not seen anything there in the individual stock side of it that there's any deterioration that is specifically trend related. In the multi-asset trend, you know, stuff, I would say, you know, probably for sure you started not, it's come back in the last few years. But there was a, you know, that period of time from, like, like 2016, 17, 18, you know, 19, all that pre-COVID thing, government intervention. You know, there was a, there was a, it was hard to make money and currencies and other kinds of. Managed futures had a really rough 2010, right? Managed features had a very, very rough, difficult period of time because you just didn't, you know, you didn't, the macro environment of what was going on, central banks and the rest stuff just didn't in the compression and interest rates. eventually it blew up, right? Like post-COVID, now you saw commodity, huge moves, and that's been very, very beneficial, and there's

Starting point is 00:20:42 been a resurgence in the performance of those multi-asset managed futures kind of stuff. But like there was a period, a minute there where it was, you would have been a very, very unhappy investor in those kinds of strategies for quite a while. So for setting expectations for a strategy like this, if you're like a financial advisor and you want to put your clients in this strategy as an alternative, are you setting expectations of hey, you should expect the Russell 2,500 returns, but with much less volatility in lower drawdowns, or are you saying, no, this is positioned to outperformer? How do you position this in terms of setting

Starting point is 00:21:13 expectations? Setting expectations and just performance, we, you know, we've been fortunate to be able to match or exceed the returns of like the Russell successfully, like net of all fees. So I think that's a reasonable, you know, expectation. I certainly don't expect to outperform the S&P 500 because it's not the appropriate benchmark for us. But, against the Russell, you know, it is. And to do it with substantially less volatility and substantially less drawdown and meaningfully lower correlation and meaningfully lower, you know, beta. But the way that we, the fund is, and the strategy is best used, and this is kind of what we focus on, is not so much providing a fund, but providing optimizing alternative sleeves

Starting point is 00:22:00 for financial advisors and how our fund fits into that sleeve. and like the right use case for it, because we have incredibly low correlation to any other alt strategy that's in the market. But we also happen to have, right now, I think, of the top 20 old funds, like the third highest nominal rate of return. So we can add returns into an alt sleeve

Starting point is 00:22:24 without blowing up the diversification value or the risk profile of that sleeve. And, you know, that's where we find kind of the most, you know, success is helping advisors dial in and optimize the performance of the overall alt-sleeve and how our strategy kind of fits with inside of that. We don't position this as like you should replace your small-cap, you know, exposure in your small-cap beta, you know, with this. I don't think that's the right use case. I like how you talked about the potential upside here because one of my, I came from the institutional space where one of my biggest problems with, hedge funds that all these large endowments and foundations were in is that they were never set up to keep up at all in a bull market, right? And trend following, to me, seems like a much more

Starting point is 00:23:13 logical way to hedge because you have the ability when things are going down to get out or to go short or whatever you're going to do. But then when things are going up, you're going to ride that wave. I'm curious what you think about like the hedge fund structure and how that space has performed versus just a simple trend following model. For us, we're in the hedge deck category, and that's kind of where people put us. A lot of I don't like a lot of the products in that category for long-term

Starting point is 00:23:40 holds because they tend to be look more like buffered strategies where you're giving up a lot of your upside. You know, if it's some covered call type thing, you know, it'll reduce volatility. Like, I think the largest fund in that category is the JPMorgan Hitched Equity strategy.

Starting point is 00:23:57 And, you know, the issue with it is that over the long term, you know, it's not going to give you anywhere and near the rate of return of the S&P 500 because every time there is an up move that's outside of the option caller that they have on, you're giving up that upside. And that upside is incredibly important to the long-term distribution and return of like being an equity investor. In our case, we want our cake and eat it too, right? The ability to have trend following hedge on the downside and reduce volatility and reduce drawdowns, but still be able to be fully

Starting point is 00:24:30 invested and capture your full upswing when the trend, you know, kind of is there, is what we prefer about kind of this approach. And then relative to hedge funds, what you said is like, you know, you also need to be in a structure or something where the fees are fair, right? Like if you're taking, you know, management fees and performance incentive fees and, you know, maybe taxes on top of that, if you have an inefficient kind of structure of what you're doing, those things really start to eat into the returns that the end. investor actually ends up receiving, you know, in their, in their wallet and what they can kind of eat from. And that's something that we're very, you know, kind of sensitive to is making

Starting point is 00:25:10 sure that our fees, our taxes, and the net of everything that we're delivering is actually really adding value to our shareholders. What's the worst market environment for a strategy like yours? Like, what are some things that investors need to be aware of as they consider allocating to us? Well, I mean, the average person, I would say probably over the last 10 years, that's like the worst environment for us because our universe sucks so bad compared to what everybody thinks is the general market, right? Like, oh, you look at us versus the S&P and we're like, oh, you're not very good. And I'm like, well, we're actually great, but it's the wrong frame that you're looking at it through. the other part of it that's worst would be incredibly like markets that go to new highs and then go to new lows and then go to new lows and then go to new lows.

Starting point is 00:26:04 But I'm talking about maybe like the 1970s kind of period of time where you have these big wide channels of ups and downs can potentially be challenging for the absolute returns. The relative returns maybe still be better, right, than less volatility and whatever. but for actually just making net money, if the market truly just goes nowhere for an extended period of time, and not the market, but like the underlying components of the market, right? Because that can be, you know, difficult.

Starting point is 00:26:36 But the truth is, because we have such a wide universe and recovering everything, we generally usually can find something somewhere, you know, that's working. Like an example of that was in 2000, 2002, you would have said, oh, you were in a bad bear market.

Starting point is 00:26:52 And it was for the NASDAQ and tech. It was just terrible. But underneath the market hood, there was small and mid-cap value was just raging and doing quite well. So if you had a more diversified universe like we do, you were able to find all these positive trends that were working, even though your average investor out there was just getting hammered in the tech wreck. how often does your fund go to cash and then and then maybe what is like an average percentage where the fund is in that like risk off mentality? Well, the question about how often it would go like completely to cash or treasuries is very, very rarely.

Starting point is 00:27:34 The kinds of event that has to happen for those models to trigger that, you know, you're talking about a full-blown financial crisis. So, I mean, we had that happen brief. in COVID. How about like 2022 as an example? How did your fund handle 2022? Obviously, there were some stocks that still ended up doing pretty well that year. Yeah, some stocks that I think that our maximum cash T bill holding in 2022, the market would

Starting point is 00:28:04 have bottomed in September of 2022. And that was probably 50% would have been like the peak cash of stock. So even at the low, we were still half. half invested with quite a broad portfolio of holdings that we had of the relative strength winners that were still there that ultimately then kind of, you know, came back. And as the market bid hire, we reestablish things. 2008, the global financial crisis, that would have, that definitely took us out of all of the, you know, positions and fully, fully de-risk. In 1987, stock market crash is going to kind of trigger a similar type event. So these are, you know,

Starting point is 00:28:44 once a decade type scenarios that you ever see that level of de-risking in the portfolio. And then you'll have other normal ebbs and flows that may range between 25 to 50 percent, you know, kind of risk-off type type thing that happens throughout different market cycles. Did you ever expand to beyond the 2,500? It's impressive that you've remained laser-focused on one area of the market, but I'd like to hear the thought process there. Well, we've done some research on international stocks, you know, there. I mean, it's just as robust and works well internationally. As far as, like, the individual stock, you know, research, I haven't really gone beyond, you know, that. The reason that we don't

Starting point is 00:29:34 do those things in the portfolio, you know, is more of an investor demand, you know, kind of thing, is that, you know, like, if you have a fund and you're mixing kind of everything, it's like you're all things, but it means you're like nothing to know one kind of thing. So sticking to U.S. equities with a specialty kind of in this, you know, small to mid-cap opportunity zone that tends to be underrepresented, it also tends to be an area that is more volatile and more risky, you know, so something that can reduce that volatility, reduce the risk, reduce the drawdowns, and enhance returns, like, and there's limited good options in the market for that. It's kind of why we, you know, stuck to it.

Starting point is 00:30:15 And also, honestly, my philosophy truly is I do have a U.S. bias. I'm like, I figure, like, if you can't make money in stocks in the United States, I don't know, like, why you think you're going to be successful somewhere else. I mean, there are certain legal issues in terms of why I prefer the jurisdiction of investing in U.S. equities and the governance and the court systems, et cetera, that we have here relative to, you know, some other, you know, place. I probably learned that, you know, the hard way. I have my own fair share of personal investments in emerging markets that I thought were some amazing value opportunities, but instead Vladimir Putin just decided to steal all my money.

Starting point is 00:30:52 So it's, you know, there's a long history lesson in, you know, being a minority shareholder, you have to have partners that are treating you fairly. And, you know, I think the best jurisdiction to have your majority partners treat you fairly is in a U.S. jurisdiction. Those Russian assets you owned fell out of a window. Yeah, that gas prom stuff that I thought was the world's cheapest energy company was actually the world's most expensive energy company. So what does it, like, what does your beta end up being to the market? Like, is it like a 0.6, 0.7 kind of deal to the market?

Starting point is 00:31:25 I think our beta long term is about 0.45 on average, so a little less than half. you know, if that's measured against the S&P 500. And, you know, we tend to have a correlation that's about 0.5.5 also. So, you know, this isn't the lowest correlation product in an alt portfolio. It's not designed to do that. It's actually designed to have enough low correlation to be a reasonable diversifier and add value in an alt sleeve, but also to be more of an anchor leg and a very reliable source of return, you know, that you can have there.

Starting point is 00:32:05 Because if you look at the return distributions of most alt funds, you know, they're not very impressive, and most of them certainly aren't worth the fees that they're charging in terms of what it is that they're delivering. So we try to, you know, strike a sweet spot between a high expected rate of return relative to other alt peers, but still being solidly in the camp of legitimately low beta, low correlation. When you say low beta, low correlation, I want to make sure that the listeners don't misunderstand and I don't want to put words in your mouth, but I would assume that if there's a swift drawdown, and you're fully invested, like, there's not going to be any correlation

Starting point is 00:32:43 or there's going to be high correlation there, but over time, not in any given day, but over, like, I hate to use word from market cycles, I hate that phrase, but like, oh, I don't know what else to say, but you know what I mean? Like, it's not going to, if the market's an ultimate high and it's down 4% because of whatever, like you're going to be down as well. Yeah, this is our strategy, you know, like right now, you know, we're invested. I think, well, right now we're like 25% cash, 75% invested, you know, 700 positions or something roughly. The, you know, yeah, big market sell off from here. We're not going to be in lockstep with the market in terms of a market beta, but we would be correlated, you know, if the market were to sell off. I'm giving you an average, you know, kind of number over time because, yes, that has bull markets, bare markets, times. we had more cash, less cash, kind of an average, you know, over time. But, you know, I would say that's no different than really, I don't know, let's pick on

Starting point is 00:33:39 my favorite asset class to pick on managed futures. And, you know, it's sold as a zero correlation strategy. And everybody's like, oh, it has no correlation to the market. And I was like, well, you've got to look at the path traveled and the variance of that correlation because, yes, on average, managed futures has zero correlation. But it could be plus one or minus one within. an annualized volatility of like 80%. So it managed futures, you know, is not a hedge.

Starting point is 00:34:07 It could easily be 100% correlated to the market. It just depends on what trends that it was in at the time at the market blew up and whether or not those were correlated with the market. But on average, it, you know, it's low correlated. So you just, you know, if you're thinking about things long term, those are, you know, correct numbers. If you're looking for a short-term hedge, you know, then a lot of, most of these strategies are would not be reliable sources of a short-term hedge. You're a trend-following guy,

Starting point is 00:34:38 but it sounds like you're not a huge fan of the managed features as a way to implement trend following. No, I'm not a huge fan of how it's sold to a lot of how it's sold to a lot of people. I think the expectations that are presented are mismatch. I think it's overly sold as a hedge and a crisis hedge, and it has had that feature kind of historically. but it's not a rule. There's not like an entitlement to manage futures

Starting point is 00:35:05 that it's always going to kind of deliver that. It is absolutely an uncorrelated strategy. The structural sources of returns that come from managed futures are structurally uncorrelated to other things. And over time, I would expect that to be near zero. So it can be a great source of portfolio diversification. It's just not a reliable short-term hedge.

Starting point is 00:35:28 And I think it's over-emphasized or over-positioned that way. And it leads to investors being disappointed or frustrated, you know, with stuff that's, you know, happening. I think a lot of products that are out there now where they're blending managed futures with other stuff, whether equity beta type things or using it as part of a multi-strategy kind of approach. I, you know, I think that's more of an appropriate way to do it inside of the context of a diversified. multi-strategy alt portfolio. That's my kind of take on stuff. Call, last question for me. So a lot of what you do, or I guess all of what you do inside the portfolio, is systematic, it's rules-based. So I imagine that you spend a lot of your time communicating with advisors and clients, or correct me if I'm wrong. Yeah, no. I mean, the majority of my time is working with financial

Starting point is 00:36:28 advisors and helping them construct and, you know, optimize their alternatives portfolio. And, you know, sometimes our fund is a fit for that portfolio. Sometimes it's not. It really just depends on what goals they have. And that's what we focus on first. It's just trying to be helpful with the consulting side of it. And then maybe our fund makes sense. So if advisors want to learn more about how you work with them and their clients, how do they find you? The website, you know, longboard funds.com is simple website. Easy to get in contact with us there and, you know, we offer kind of, you know, free consulting to analyze our specialty. We're not experts in everything, but when it comes to liquid alternative strategies and

Starting point is 00:37:11 all of the products that are out there in the market, we are. And that's something that we kind of help to just fine-tune and dial in returns, risk, fees, taxes, et cetera, and transfer for free whatever knowledge we can to help advisors make more informed decisions in that area of expertise. Perfect. Thanks about Cole. Okay, thank you to Cole. Remember if you want to learn more about the Longboard Fund. Go to longboardfunds.com and email us Animal Spirits at the Compoundews.com. See you next time.

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