Investing Billions - E316: How Family Offices Design Portfolios for 30-Year Outcomes

Episode Date: March 3, 2026

What if the easiest alpha in public markets isn’t stock picking… but taxes? In this episode, I sit down with Zach Wainwright, Founder of Twin Oak ETF Company, to break down structural alpha, ETF tax efficiency, and how high-net-worth investors can compound capital more intelligently. Zach shares lessons from his time at Wellington, TIFF, and inside a single-family office — and why long time horizons, incentive alignment, and tax awareness may be more powerful than traditional stock-picking alpha. We also dive into tail-risk hedging inside an ETF wrapper and how families can design portfolios to survive extreme drawdowns without sacrificing long-term compounding.

So you've worked out some of the top investment firms in the world, Wellington, TIF, at a top single family office. What are some principles that you learn that you apply to your day-to-day investing career? The starting point is have a long-time horizon. When you start your investing journey, everyone tells you think long-term. And for someone who's 21 years old, that's never had a job before, like, that's very hard to really put that into effect. But I think as I roll forward and I worked at TIF and I worked at, with family offices, long term means a different thing. And I now have a true appreciation for what that means. Taking an investment for a quarter or four quarters, even if that could be long

term in the public equity investing world, means something very different when you're investing for the next generation. And why is that so important? It gets back to the idea of, like, are you an asset owner or just an investor? And I think you can great investors can be both. But the idea is you deploying your capital and letting it compound and continue to drive value for you for you. for a very long time. And when I think about my investment philosophy, it's how can you unlock the potential inside of a portfolio?

And I think there's different levers you can pull, but it's really about aligning it with the time horizon that you have. What were your lessons from your time at Wellington? It's a great place to start your investing career because you see so many different disciplines. You see growth, large cap, small cap, international. You see a lot of different tools being deployed.

And I think for me, what that taught me was you have to figure out what's true to yourself. What is it that you believe that you can kind of have a repeatable, sustainable competitive edge on? And for me, I was very clearly a value investor and I was looking for high quality businesses that had something that caused price and value to diverge. And you went from Wellington, you went to TIF, almost the opposite end of the market. You went from the public markets to investing into early state. FAAG fund managers. What were your lessons at TIF? And what is something that you learned that was very counterintuitive? I thought I was long term before I got there. And then when you're forced to make a commitment to something that has potentially a 15 year lockup and no path to exit,

that's really being long term. And I think that brings with it a level of rigor into diligence that was pleasantly surprising. And at TIF, you focused on funds one through fund three, why take the risk investing early in a manager's career? What's the upside? The statistics are a fund one to fund three are a manager's best performing funds. And so if you miss those, you lose two different ways. One, you miss those funds, but you also miss the chance to access those managers later because once they're identified, it can be hard to get into. By the time that the manager has been de-risk, everybody sees us, the LP alpha is no longer there. So you have to go in earlier where there's high risk, higher return. And you want to align your incentives with the

manager, right? So those early fund managers, the funds are typically smaller. They're not making a lot of money off of the management fee. They make their money off the carry dollars, you know, whereas a KKR is going to make a great return just from the management fee. And so you just have different incentives. And if you think of alpha as extremely scarce, you have to think upstream of that, what generates alpha. It's typically really difficult things. It's looking for companies. It's looking for companies in the middle of nowhere. It's doing that extra work. It's working 100 hours a week and somebody that's making millions of dollars or in

some cases, tens of millions of dollars a year in management fees on the incremental deal, they may not actually pursue it. They might not pursue that alpha because it's too costly from a, from a personal standpoint. If a fund one doesn't go well, there is not a fund too. And so they're going to work out the companies in their portfolio when things aren't going well. They're going to maintain a high bar.

when they're deploying new capital because their sustainability is on the line. And so that that's actually phenomenal incentive alignment. And as an allocator, you really need to try and assess that, right? You need to try and calculate that risk return trade off for making that. And I actually think that's like a skill set that direct investors really capture well. There's no perfect investment out there. If someone finds one, I'd love to hear about it. But there's something wrong with almost every investment that you make.

and it's calculating that risk return framework. And emerging managers, that's kind of the same thing. There's something wrong with it. It could be a short track record. It could be a small team. And you have to kind of look through that. And the people who have done that really well, they get into early managers.

They stay with those managers for a very long, successful career. And MIT, Yale, those endowments are kind of core to how they've invested and how they've generated a lot of their outperformance. When you look at early stage managers, you said there's something wrong with everything. manager. What's something good that could be wrong and what's something clearly bad that you don't want a manager to have? The biggest cardinal thing you can make a mistake in as investors partnering with people who are not good people, right, that when there's an ethical concern or some reason why

maybe they were fired from a prior firm because of something. And you really need to try and spend your diligence on packing. Is that just a story or is there something fundamentally flawed there? Because to what I said, like, you're in these investments for 15 plus years. You will likely, that commitment will likely outlast your time at the place where you made that commitment. And you need to, you need to avoid those mistakes. The thing that you can best align yourself with is, is doing whatever you can to increase the alignment. So managers who make a very large, kind of GP commitment to a deal where they're the largest investor in their own deals, right? They're eating their own killing, what they're killing. And so that's a phenomenal way to partner,

right? Someone who's going to put 20% of the capital to work themselves and you're really there to amplify their capacity. After TIF, you went inside a single family office. So you went from a large institution of Wellington to TIF, which is today roughly a $9 billion pool of capital, to a single family office. What changed when you joined that family office? And how did you view your investing mandate there?

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There's one camp that lets us be steady, let's compound and kind of continue to incrementally grow our family's balance sheet to support the future generations. And then there's others where they have a much higher, that manifests as a much higher risk tolerance. They can afford to have a 30% drawdown because they're not taking food off the table. They're not having to make layoffs. And so that can give them kind of a higher risk tolerance and therefore they can make investments that are different from the investments that you and I might make personally. And so I think I put that into kind of the structural edge that can be developed at family offices.

And I think the best family offices try and develop a structural edge in how they deliver their returns. What's one or two examples where family offices can create a structural advantage versus other investors in the market? I mean, I like to always, the one that I like is buckets, right? If you look at a lot of allocators, they have buckets, right? They have a large cat manager. They have a small cat manager. They have their U.S. bucket. They're fixed income, et cetera, et cetera.

Family offices, they don't have buckets. They have a balance sheet. And so they're able to maybe go into things that don't fit into a traditional bucket. That's always been kind of my favorite place to fish as an investor is something that doesn't fit cleanly into something else because there's fewer people looking at it. And so there's more opportunity for mispricing. Oftentimes think about it as going contrarian against certain trends in the market that deserve contrarianism. Right now, everybody needs liquidity.

So being a liquidity provider is a really good business to have. In other cases, other people are very bullish on something. You know, selling into that bullishness could be very lucrative. And the reason why family offices are uniquely able to do that is because it's their money. they don't have this need to raise new funds on hot trends and gain management fees on things are topical. They're just focused on compounding their monies and they're incentivized to take the right action where capital sources with outside money are not incentivized to do. Being contrarian, you know, if people want to sell calls, buying those calls cheaply, people want to buy calls, selling them those calls expensively and just trying to take the other side of some of those flows to kind of incrementally keep adding different returns. streams and levers that you can pull to drive outperformance over time.

Following the single family office, you started your own firm. Tell me about Twin Oak. I like to think of our kind of investment philosophy that we're trying to bear is there's three different ways in which you can create value for clients. There's security selection, which is pretty self-evident. There's asset allocation. So being in the right sectors, sub-asset classes, etc., right? Being international versus U.S., large-cap versus small-cap.

app, you know, single stock versus kind of diversified index. And then there's structural alpha. And so I think the theme that you probably have heard for me throughout this whole interview is being long term. I think time horizon is a structural edge that we try and capture at Twin Oak. And the second is tax aware. I think tax alpha is the easiest way to add alpha for clients. If you can just be smarter in your implementation of something,

you can derive a massive amount of value for clients over time. Give me an example of tax alpha. If you select an investment manager that puts up two points of alpha per year for 20 years, they're a top 1% manager over time. Very hard to do both as an investor and also hard to identify that top 1% manager because 99% are not that. Now, if you had made that investment through a mutual fund, the average mutual fund has about 2% per year of tax drag embedded in it based on just like how mutual funds function.

So congratulations, you pick that top tier manager, but you lost all of that value due to tax drag. And so you took on a lot more risk because you had to identify that top tier manager and most likely is you did not. And so you're almost virtually guaranteed to underperform. Now, if you had made that, you. same investment through an ETF structure instead of a mutual fund structure, you would have kept that tax alpha. So another way to think about it is you would have generated two points of tax alpha in the ETF structure relative to a mutual fund. And so you would have really captured that

investment alpha in that strategy. So explain that difference between holding a position in a mutual fund ETF. Why is there such a dramatic change in tax? In a mutual fund, when people come in and out, the manager has to sell securities to deliver cash to those exiting investors. At the end of the year, that capital gain that was generated from those, you know, tweaking of the portfolios or meeting inflows and outflows, get distributed out to every investor. So you could get hit with kind of a phantom capital gain tax, even though you did nothing. You just bought and held your mutual fund. Now, an ETF is set up as kind of what they call a redeemable security.

So people come in and out of the security at net asset value. And so in theory, no one else entering or exiting the fund impacts you in your investment return. So you don't feel that experience. So when the portfolio manager goes to sell a security, they can do it through this in, they can do it through this in-kind redemption process. And that can be immensely valuable from an after-tax framework. You built something that I think is very interesting, which is essentially a hedge to

S&B 500 in case there's a tail of risk and there's some black swan event tell me about that started with a support for today's episode comes from square the all-in-one way for business owners to take payments book appointments man and staff and keep everything running in one place whether you're selling lattes cutting hair running boutique or managing a service business square helps you run your business without running yourself into the ground i was actually thinking about this the other day when i stopped by a local cafe here they use square and everything just works check out as fast receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together.

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And so we came back to them with this idea of tail hedging. And the starting point for that is, you know, buying puts on the S&P 500 cost, you know, 2 to 5% per year, depending on the period of time, which is really expensive. So no one wants to pay that level of expense. But even if they were willing to pay that level of kind of underperformance, in a way. The ways in which they can access it today are inferior. You'd commit to a tail risk hedge fund that's going to run that put selling strategy for you. But when that pays out, you need to rebalance a way right away. You need to take that source of funds that was generated in March 2020 and go out and

buy equities. That doesn't work in a private fund. There's not, there's illiquidity, there's gates. And so by the time you get your money back to be able to redeploy it, you have to pay taxes, you have to pay fees, and you've given back a lot of the returns. And so we started by saying, can we put that inside of an ETF so that we can do the reallocation for the end client? It's an ETF way to do what hedge funds are doing, but are charging two and 20 and half gates. How exactly do you go about doing that?

There's probably 40 different hedges that you can do at any different time and that hedge funds are looking at any given time. It could be puts, something as vanilla as buying puts on the S&P, or it could be something as complex as buying, you know, forward interest rate volatility, you know, in foreign markets as a way to hedge kind of equity exposure. So at different times, we're going to move between that camp of 40 different potential hedges and put together a balanced book to really solve the pain point of that product in a severe downturn that is very sharp and unexpected. Do you have a source of funds that you can redeploy? And that's kind of what we tried to create. And we want to make it as easy for investors to access as they could, single ticker in a portfolio.

There's no free lunch. What's the cost of having a hedge on S&P 500 portfolio versus just having that S&P 500 portfolio with no hedge? In the simplest terms, like buying puts is expensive, right? It can cost you 2 to 5% per year, as I mentioned. and are you willing to pay that? Most people, the answer to that question is no. And so they keep it on for a period of time where they under hedge. And so then the hedge doesn't deliver what they expect.

We started by saying given kind of our backgrounds at hedge funds and institutional firms, like what's the full toolkit that you can use? Can we use things that are more complicated? Can we trade things on swap? Can we use options? Can we really try and blend to, together what is a institutional level risk hedging book that will evolve over time to capture kind of the different market opportunities that we see in the hedging market. And so that's,

you know, that's what we did. We have a constant allocation to something that gives us convexity in the portfolio. So something when the market tanks, it will outperform. You mentioned two to 500 basis points for a typical put on the SMP. What's the cost of doing it through an ETF? If you just take the same strategy and put it inside of an ETF, there's no difference in the cost. I think for us, what we were trying to sell for is what is the exact vector that we're addressing? Our clients and this fund is not designed to solve the zero to five percent down market, which is where a lot of the hedging happens.

That's very expensive. that's not what keeps families awake at night. It's waking up and seeing the market down 30%. And so it could be as simple as moving to buying cheaper puts on the S&P. And those are, you know, the drag is much less. It's harder to quantify exactly what that drag is over time because we move to different types of hedges, some of which actually can have positive expected value

and positive carrying cost. And when you blend those together, we're trying to offset the drag as much as much as we can so that we can maintain an adequate level of hedging kind of in all scenarios. Set another way, you're really optimizing on the maximum drawdown. So some people might say, I would be comfortable with a 10% drawdown. Some would be with a 20. And then I guess there's this efficient frontier of what percentage of your portfolio, or you're hedging away with what instruments, that's the complicated part.

for this fund, we try and take that onto our, our, our back so you don't have to worry about it. We're trying to deliver an outcome, a solution where you get equity like returns, but with reduced drawdowns and extreme tail environments. I've always been curious about this because probably 90% of institutional investors have what is called diversifiers, which is hedges against the market. So there must be a very solid rationale to that. Has there been research on long only exposure versus long only with with hedged products? and do does long only with hedge products.

Not only maybe is it a smoother ride, which is important, but does it actually outperform and so in what cases? My favorite statistic is if over a 30-year period, you avoid the 10 worst performing days in the market or 10 worst performing weeks in the market, you know, 3x the performance of the market or something like that. Problem with that is the 10 best performing days in the market usually follow the 10 worst performing days, right?

There's two really bad days and then there's a recovery. So if you also miss the 10 best performing days, you are underperforming the market by half. And so those are the problems that I have with like a buffer fund, for instance, right? Like they're really just protecting you against the drawdown, but if the market's down and then back up, you might not capture that recovery period. And that will also cost you in the end.

And so to the conversation we were having, about the ways to access tail hedging that currently exist, doing that in a private fund where you can't rebalance away is a problem. In our fund, on those bad days, we're immediately looking to go out and buy more equity exposure because we need to capture those recovery periods because that's how you sustain your outperformance over time. It's one thing to avoid the downturn,

which I think is a feat in and of itself. But then it's, can you, in those moments, deploy into that pain? And your philosophy is you design with a family office in mind and then you provide that to other family offices. Exactly. So we like to think of ourselves as like client-driven innovators in the product space. Someone comes to us with a problem. We solve that problem and then we can make those strategies accessible to everyone. And so the tickers that we create are available. Anyone can go by them. But we know that it solves a single family's problem or a multifamily office's problem. And while every family might have a different need, eventually they start to rhyme. And so what worked for David's family will also work for, you know, John's family over here.

You're in a unique vantage point where not only were you at these institutional investors in the single family office, but you have single family office is coming to you and helping you solve specific problems. What's your view on the optimal way to build a public portfolio for the long term? The stat I always like to come back to when I sit down with them is if you bought the, S&P 500 30 years ago and just let it compounded and removed all tax friction and fee friction from that access, you 25 extra money. Do you want a 25 extra money over time? Because very few people actually...