The Derivative - Miami Hedge Fund week Panel 2024 Part II: Increasing Accessibility of Alternative Investments

Episode Date: February 29, 2024

Join us for the second half of our panel discussions during this year's Hedge Fund week in Miami as we explore increasing accessibility of alternative investments through new ETF products and strategies. We’ve got Rodrigo Gordillo taking reigns from the quantitative perspective, Jerry Parker talking trend following, Bob Elliot on replication and Jay Pestrichelli,  options guru, guiding us through hedge fund strategies, discussing their day-to-day responsibilities and tasks, highlighting differences in their approaches despite operating under the broad financial services umbrella. We dive into challenges around educating investors on sophisticated strategies as well as recent regulatory changes that allow new product structures that are making alternative approaches more accessible to a wider range of investors. Topics discussed include quant fund management processes, trend following across 400 markets including single stocks, and harnessing options decay in a new ETF. Challenges of communicating performance during periods of potential underperformance are being addressed such as election year impacts and whether strategies position based on outcomes, capacity constraints of highest Sharpe strategies and limitations of full replication, along with democratizing diversification strategies through return stacking ETFs. Sit back and gain knowledge on the expanding opportunities and accessibility in the alternatives space, with room for continued advances as innovation progresses, SEND IT! Chapters: 00:00-01:48=Intro  01:49-14:42= Intros & the Day-to-Day work ethic 14:43-28:45= Hedge fund replication, ETFs for retail investors & financial accessibility 28:46-45:22= Democratizing diversification through ETFs, market trends & election year impact 45:23-55:53= Hedge funds generating alpha, investments strategies & ETF operations 55:54-01:08:01= Managing expectations, Innovations & the future of investing From the episode: Miami Hedge Fund week 2024 Part 1: Commodities Follow along with this panel on Twitter & LinkedIn: @rjparkerjr09 , @RodGordilloP, @BobEUnlimited, & @ZEGAFinancial And remember to check out their company profiles on LinkedIn: Jerry Parker Rodrigo Gordillo Bob Elliott Jay Pestrichelli

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Yes, we're back on the Star Wars line and off the Star Trek after the brief one-week hiatus. And speaking of hiatuses or hi-atey, hey-tey? How do you say that?

Anyway, we're back this week with the second panel we're in down in Miami around hedge fund week. You can go back and hear the first one on this channel two weeks ago talking commodities. This panel was a great one with trend-following legend Jerry Parker of Chesapeake, return-stacking quant Rodrigo Gordillo of Resolve, hedge fund replicator Bob Elliott of Unlimited, and options guru Jay Petrichele from Zega, which was hosted by our friend Kevin Davitt of NASDAQ. The panel dives into increasing accessibility and bringing sophisticated investment strategies to more investors. The panelists talk through their day-to-day work, how the market's changing, and how regulatory

changes have allowed new products to make alternative approaches more accessible. The panelists talk through their day-to-day work, how the market's changing, and how regulatory changes have allowed new products to make alternative approaches more accessible. Go get them. They also get into election year impacts, benchmarking alternatives, and challenges of educating investors. So screw your AirPods in tight and hear how innovation is broadening investor opportunities

and helping more people access tools to diversify their portfolios. Send it. This episode is brought to you by RCM's Clearing and Execution Group, which helps mutual funds and ETFs like the ones run by today's guests efficiently access and trade exchange traded futures and options markets. Visit rcmalts.com to learn more. And now back to the show. Thank you all very much for joining us this afternoon for this panel discussion. I look forward to it.

Thank you to RCM for putting this on and all the sponsors, including NASDAQ, who I work for. I'm here to help support the NASDAQ 100 ecosystem. Our primary focus is the NASDAQ 100 index options. That about covers my promotional push but if you do have questions any interest on index options we're going to talk a bit about that, at least in some part, with Jay later. Let myself or John Black know. I am Kevin Davitt, and I'm super excited. I like how I've worked with Matt Bradbard, who's at RCM for years, and kind of the rapper was sort of a pun intended that he put around this conversation was ease of access. And I think there has been tremendous outgrowth in derivatives where they have become increasingly accessible to a much broader audience. And I think the topics that we're going to touch on today

are going to include in some way that accessibility and particularly the ETF wrapper that we'll talk a lot about today. But I want to come back to that. And what I'd like to start with is a little bit different to sort of kick off this conversation. I'd like to focus on something that sounds a little bit cliche, like kind of a day in the life. But I want to know a bit more about the day-to-day grind for our panelists. And I know that everybody in the room is kind of broadly interested in capital markets, and we all kind of work under this finance umbrella, but that sort of catch-all term doesn't necessarily shine a light on what gets done day to day, week to week, and how that might apply to you as an advisor or to your clients. So I also think it's a good way to sort

of close that mental gap that we have when you hear something like a quant fund manager for Rodrigo, right? You have some picture of that, a trend trader like Jerry next to me, a hedge fund replicator. I don't even know if replicator is a word, but I'm going to go with it. Or a longtime options guru like Jay. What does that mean day to day? And I think we have a tendency to romanticize ideas or terms like that. But if you're an advisor, you're an allocator, you need to know what the hell does that mean for me or for my clients. So we're going to do brief introductions.

And what I want to do is focus on what you do at the firm and how that kind of distinguishes your practice. This is not a point of competition. I want to give the listeners a better understanding of how different the emphasis can be despite working under this broader financial services umbrella. So let's start, like I mentioned, with a quant fund manager. I'm going to take a guess, right, like the romanticized. I assume you have junior colleagues running data all day. You're banging out Bloomberg messages, and you're a scratch golfer. How close am I? No, no, no. I mean, I have five psychologists on the roster to help emotionally with my quant. Just like billions. More than anything, the fact that my data scientists spend 90% of the time scrubbing data and actually 10% of the

time doing work with it right like it is a it is a least sexy job you can imagine but there is a a nugget at the end of it that that means that differentiated return streams that can help advisors and and allocators across the world and yeah we have a lot of developers we have a lot of developers. We have a lot of, we have a PhD on the docket. You know, my background is in statistics and finance. My father was a math professor at the University of Lima and one of the first software developers in Peru.

So I had no choice. I was never going to be a Warren Buffett looking for value investing and hope for the best. I was trying to figure out the market with numbers. And so the way we do it is we just, everything that we do, everything, every anomaly that we try to find doesn't have a big edge. It's like 52, 53% win rate. And so what we try to do every day and we go through, all we do is really long cycles of research. When there's a new idea, it takes about 12 months to 18 months to work through the process of, hey, this is an idea, let's start work on it, let's start programming, let's get the right data, let's clean the data,

and then six months later we have clean data that we can work on, see what the effects are, is it different, does it correlate to everything else, what are the trading costs, What are the transaction costs? These are the small minutiae that actually, does it survive transaction costs? Is it non-correlative to the rest of the things that we do or is it the same strategy we discovered five years ago? Did we already do research on this? Is there some data that we looked at five years ago that we already spent five months on?

So that's how a quant's life is. And then slowly but surely you start eking out a little bit of magic that you tack on to other non-correlated return streams over time in hopes of doing a good job and then making sure that you're not screwing it up along the way. And so the other side of the coin is trading but uh i don't know so what what's the last idea that made it through that gauntlet just to give some sense of kind of the hit rate for ideas um so yeah that's a good question i'm not going to tell you what it is yeah um but it's like how long ago but it started i would have started three years ago okay and it's... But like how long ago? But it started, it would have started three years ago. Okay. And it's gone through different iterations, different cycles, different markets.

You know, we were going through a period of trading end of date and then having to rewrite the whole infrastructure to do more intraday trading. Right. Some of the magic actually, as you get bigger as we have, is less about trying to find signals that tell you where the market's going to go but rather how do you get in and out of those markets without the market feeling it and so you can use your same alpha signals in today not to eke out alpha but to get the price that you wanted originally and so that's some of the work that has taken a ton of writing a ton of infrastructure development a ton of writing ton of infrastructure development a ton of back and forth and arguments and dealing with service providers in

our trading floor to help us do better right so that's that's how long it actually takes if it were we're putting out one a week we yeah I wouldn't be here and I I want to make this interactive too so if people have questions that that are specific to some some point one of the panelists may please feel free to to bring them up I'm gonna move on now to Jerry who's next to me you're a trend trader you were one of the original turtles which if anybody's read about Richard Dennis and the the trading legends he sort of germinated. It's fun to be sitting next to one of those. From what I understand, you follow or the company follows

400 markets and it includes a bunch of single name equities, which to me is unusual. So one, how the hell do you follow 400 markets and why are you including single name equities? Well, you know, obviously you have to follow the 400 markets with computers and programs and their global markets, 200 futures, 200 stocks all around the world, foreign exchange as well. We took that route to try to put the best foot forward for trend following, make trend following as successful as it can be because it's pretty much all we do is just trend follow. The stocks are really a good addition.

They offer quite a bit of diversification to the portfolio in general. It's not that difficult to find 200 stocks around the world that offer some diversification and don't act like the S&P. And the stocks need trend following as much as the other markets do. The stocks need a trailing stop and a stop loss. And so this is our sort of niche where we wanted to combine all those great futures markets and add the 200 stocks as well and create a... The trend following has a little bumpy performance sometimes and big drawdowns

and volatility so our route was let's go the diverse, let's go crazy on this diversification route in order to, in a real robust way, keep the smoothness without getting rid of the letting the profits run. So you hinted at it already, and I work for an exchange where things like tickers matter, or at least there's a belief that they do. And what is your tick do and and what is your ticker and what's that stand for it's funny yeah yeah well no it's not funny you asked that I'm probably gave you these questions to ask me but you know I thought you were gonna ask me the name of the ETF which I can't think of what the name of it is it's a long as long it's blueprint Chesapeake yeah yeah but I do know the symbol and that's probably why I forgot the name but I

came up with the symbol and it's TFP and trend following plus nothing I like that yeah I'm curious how like like, what is the criteria? You sort of alluded to it for the equity names, like not correlated to the basket, not behaving like the S&Ps without giving it away. Do they change? Like, a little bit more on the equity side if you don't mind I believe that we've always chosen the markets that we trade and you know the trend following markets for diversification only we don't really go back and optimize the

past you know if we would have optimized the markets we would have never included cocoa because it probably hasn't made money in ten years and but it's one of the biggest trends going now and that can be said for all the markets commodities as well until let's say 2020 they were in the doldrums so it's really just seeking that diversification so we we want we want to mark us a trend but we don't really believe that trying to optimize over the past and choose this the stocks or the futures that have trended the best are going to be a good way to go forward. So we're just strictly choosing the stocks based upon their ability to add diversification.

And if there were 5,000 commodities, we'd trade half the portfolio would be commodities. But there's not. And within those thousands of stocks, we think we can find some that truly add diversification. The stocks deserve to be 30%, 40%, 50% of a portfolio. But it's not, unfortunately, most of the time, it's not going to look a lot like the S&P. That's good from sort of a trend following philosophical point of view, but not as great when the S&P is doing really great. If you feel like comparing some of these things to the NASDAQ 100,

that would be perfect. I imagine this varies, but trend following from what I've read, I'm curious what a typical holding period is. That's a tough question because it's pretty long. That's what I heard and that sort of surprised me. Yeah well look everything is subject to the back test to the computer research analysis back test whatever you want to call it. So if we could trade shorter term and make the same amount of money we would really

like to do that. You should trade as short term as you possibly can, as long as you can maintain the required profitability. And so we trade fairly long term because that's what the computer tells us to do. And we don't really have any desire for pain and suffering and all this psychological torment when you have these big drawdowns. But a lot of the times the drawdowns you have them and then they markets go right back to the highs again. So if that wasn't the case, the computer wouldn't say to do it. So I'm trying to delay the answer to this question, which is our holding period, I would say, is about a year. I'm going to move on to Bob now and I'll get to you, Jay, shortly.

Bob, we talked about it a little bit before this started, but you worked with Ray Dalio at Bridgewater. You probably get this a lot. So what we expect, or what I expect here, is radical transparency. All right? Let's get weird um i need to know what what what your day at unlimited fun looks like you and then i want to know more about like ai particularly nasdaq 100 has been a huge focus for 18 months how are you using ai to to replicate portfolios?

Yeah, unlimited, what we're focused on is replicating how hedge fund managers develop their strategies and position and then put that in a much more friendly package for the everyday investor in an ETF, a lot lower cost, tax efficient, etc. What that looks like day-to-day, in a lot of ways, is not that much different from, you know, what it looks like for a quant. The way that we do it is we have a systematic technology, essentially, which is a systematic investment process that uses machine learning to infer that positioning. And so sort of the day in the life in terms of what we're doing is a combination of um you know running the money in the day-to-day making sure that our systematic approaches are are kicking out things that make sense and are consistent with with our understanding looking at that and continuing to do research and evolution on the process with an appreciation of how hard that is to do, to consistently be improving the way that we're doing it.

And then the reality is a lot of what we're also doing at Unlimited and what I spend my day-to-day doing is working with advisors of all kinds to think about, you know, what are the best assets in their portfolio, what are the best ways that they can improve their portfolio outcomes for their clients, and really sort of partnering with them to think about it. You know, people who might have just tiny starter positions in our products who, you know, where 85% of the conversation is not about our product. It's about thinking through what are the biggest challenges they have in their portfolio. How do they think about solving those?

Maybe our product is the right thing for them. Maybe it's not. But, you know, really just partnering with them on that. So that's actually, if I think about it, it's actually, you know, a fair amount of the day-to-day. If you want to know the reality, a fair amount of the day-to-day if you if you want to know the reality a fair amount of it is that is that partnership so probably totally what what are the pain points that they bring to you what is the thinking process on kind of the other side of the table for lack of a better term yeah I mean I think I think

there's a couple different challenges I think a lot of advisors that I talked to face the classic challenge of peer risk being a big issue for them. I think those particularly with longer time horizons or experiences in the market are not necessarily as as into you know YOLO, NASDAQ 100, as maybe retail folks and have trailed the market as a function of that. And so thinking through how do they think about that problem, how do they structure portfolios, how do they... And a lot of times it's a process of also helping them see and understand that maybe in the last few years, maybe in the last year, being highly concentrated in the most volatile stocks has been the winner. But if you really want to start to think about there's a wide range of different macroeconomic outcomes

that could exist when it comes to portfolios, and that they see their job as a fiduciary is to help put investors in a position, their clients in a position, to be able to handle a wide range of different outcomes. And so strategizing about that and where are the incremental portfolio elements that can help improve that. I think you've got something that I think is beneficial along that lines, but there's a lot of different things that can be done. Awesome. I want to come back to everybody after we talk to Jay about where in your conversations advisors feel like they can bucket your product. We'll talk more about that. But before we do, for a product like yours, what sort of benchmark would be appropriate for a hedge fund replicating ETF?

Yeah, I mean, what we're trying to do is at some level relatively straightforward, which is there are hedge fund indices. You know, our probably best benchmark is the HFRI AUM weighted basket of hedge fund performance is basically what we're trying to do. We're trying to do better than that because hedge funds charge $2 20 and we charge a lot less than 2 and 20 and so that's what we're trying to do is to beat them, you know, is to basically bring fee alpha to the market as essentially like an index product, just charging a lot lower fees. So that's what we're focused on and hedge funds have been a lot more conservative than you know all in on the Nasdaq over the last you know since we launched 15 months ago but that's okay if we were if we were vastly outperforming what the hedge funds were doing that would be that would reflect

that we would not be meeting our mandate right and that's one of the things that is always so important to understand as an issuer you have a mandate I mean you have a prospectus and you have a mandate. And the question is not, you know, did you make a whole bunch of money? It's a question from what you're trying to do is you outlined a mandate. Are you fulfilling your mandate as effectively as possible? And is that mandate, do you expect that mandate to deliver high-quality returns that are beneficial for investors over time?

I think if you look at hedge funds that, you know, over a 25-year time frame have returned better than stocks with half the monthly volatility and a third of the drawdowns, that's a good return stream that if we can, you know, deliver that on a consistent basis at lower cost, I feel, you know, it's a good compelling part of the overall that, you know, the overall portfolio of any client. But you got to think about what's your mandate and stick into your mandate. So that's, that's what we do. Cool. Um, last but certainly not least, we're going to go down, talk to Jay. So you've been running Zega, you do a handful of different things and, and you could kind of take this a couple of different ways, but you've been running Zega for like 13 plus years, something like that.

You have a handful of products with longer track records. They've been in existence much longer. Recently launched, I have to focus a little bit of attention on QQQY, an ETF that does use NASDAQ 100 index options. We like that. So I'd like to know more about your kind of day-to-day grind and with some emphasis on that newer product. Yeah, thanks, Kevin.

So, yeah, the day at Zega really revolves around who our clients are, which are ultimately retail clients, right? So we are a registered investment advisor. Actually, show of hands, how many RAs in the audience? Like four? Not many, right? Five? So for us, most of the products that we put out are designed for the retail investor, which means you could be right for a long time and get fired for being right in the long run, right? It could be a very touchy business. And so the products that we manage, whether it's the newer product, QQQY, or even longer term products are designed to kind of around options in a way to kind of capture like

ever present trends, right? Some things that we know Selling time decay is usually a pretty good thing until the day that it's not. Markets generally go up, right? Large cap has been the trade of the decade, so it's a safe thing to be stuck in there. You ask why nobody's talking about the NASDAQ 100. Does anybody want to compare to 50% last year? I don't think so. So most people say the S&P. But generally speaking, right, these these longer term trends help you communicate to the end advisor, sorry, the end investor, which gives you kind of the ability to keep them involved because philosophically you can give them something to believe in. The longer based strategies that we've run can have a longer term time horizon, one, two,

three years out based on creating you know, creating synthetic stock, right, creating synthetic markets with protection, or even, you know, capturing the most rapid time decay of options like the QQQY product. So that, let's talk about that one for a second, because you brought it up. This is a newly released ETF. We use zero DTE options in an ETF wrapper. I mean, I guess technically they are because we put them on at 4.01 p.m. and they go to the next day at 4.00. We're in the market for 24 hours. And we're just harvesting time value.

We're just selling basically in the money puts, slightly in the money. They have some extrinsic. And it lets us communicate that, hey hey we know options will decay over time and you get the most rapid amount of time decay with one day to go for out the money options and so in those scenarios this fund itself is designed not to beat the equity markets but to be kind of an alternative income product right where we can harvest this time decay each day and then kick it out in the form of a dividend each month now for anybody that follows the volatility

markets right options are always a reflection of that right now we're in a low of all environment but in the past there's high of all environments this product is selling on average about 25 basis points of time decay each day so what that does to a yield right times, times 250 days a year, like the actual time decay we're earning in that fund is like 60 plus percent. So it looks very, very attractive to the retail client. Ultimately, you know, you're capped on the upside and then the money put is like a covered call strategy where you can only earn so much on the way up, but you have full exposure on the way down. That kind of product is meant to kind of hit a different niche, right? Again, the retail,

I think it's pretty much mostly retail at this point that's investing in that kind of a product because they see these, you know, if my compliance guy was here, he would say, don't say this, but they see these nosebleed yields of 40, 50, 60% because that's what that time decay ends up kicking out. And so education is such a big deal for us. I think today, on the way here, I had three calls with investors, right? I was driving down from, we're in West Palm, driving down, and it's just people need to understand the pluses and minuses of this. So for us, it's not only coming up with those products that, you know, kind of give you the philosophical long-term, explainable, repeatable characteristics, but then it's also the education around options.

Options always require education, and so it's something that we talk about fairly frequently. 20% of my week just talking to people about how to use these kind of products. Just because it's in an ETF wrapper doesn't mean everybody should buy this kind of a product. It means you should know when to use it, how to use it, and what to expect out of it. Your compliance person likes that part. I like it too. Nobody wants to get that phone call from an investor who goes, explain to me why this thing goes down once a month by 5%. That's the next dividend.

That's the X date, right? And it's just not seen, right? So these are kind of new products out there that I'm not sure the world is used to yet, but we're doing our best to get people ready for it. So a lot of our day is talking to retail clients, talking to a retail investor, and then hopefully advisors will start to incorporate this into their overall mix. So I feel like what we're doing today is starting that evolution. We're going to talk more about that ease of access because everything you guys are touching on has been, a handful of years ago, would have been inaccessible, at least to my knowledge, to the retail community. And I think that is a huge benefit. Access broadens

opportunity. We're not getting super philosophical, but the education component is critical. Just really quickly, if it is a relatively quick answer, how do you get fired for being right? Yeah, you could be fired for taking risk off when they asked you to take risk off. And then let's talk about the beginning of last year. Everyone was scared, right? 27 out of 28 economists predicted the recession. But when you say, okay, we're bullish generally, right? Longer term investing.

But okay, we'll take off risk for you. And then the year comes by and you're like, great, you made 12%. But the market made 24%. But you would have made five if we rolled you to treasuries at the beginning of the year, right? That's kind of the challenge you have with kind of a moving target with people that could be handsy with their investments, right? Touching the retail investor can absolutely do that. Harder to communicate a philosophy of, look, long term, you want to be invested. You're 65.

You can't handle a 2008 scenario, so we got to hedge you. That's what you're solving for. But you're constantly in competition. We all are with the indexes, including the NASDAQ 100. And they go, well, why didn't I just buy those seven stocks? Because not everybody knew to buy those seven stocks, right? Like, I don't know which seven to pick for next right and had you done that in 2022 would have been a very painful

year right that you would have been early early language matters tickers and language compliance sort of back to this ease of access and how how different and exciting it is now to have these types of products available when when they're well understood um i i think i get a little bit so i'm into history and i i like the philosophical side of these conversations um and i think there's so many examples of how uh accessibility leads to success i think the u.s economy has transformed a handful of times because of access whether you think about originally by sea then the railroad railroad, automobiles, airplanes, maybe space is next. So I know I'm getting a little philosophical here, but historically, it was access to resources. And I think that certainly still plays a role. But in the,

you know, the here and now, the 21st century, it's often access to capital. And that is to sort of plug where I get paid, a spot where NASDAQ is a critical part of that system. I think about Southeast Asia in the 90s. I think about Ireland, where my dad came from. I heard you in a previous talk, talk about sort of your roots in Lima and seeing that evolution. It is amazing what happens when sort of the spigots of capital get turned on and people have access. So products, I think industries and economies at a grand scale succeed when they're accessible. If you think just about in consumer terms, the most valuable space on the grocery floor is at eye level for the average person. Those are the most accessible products. If you think about soccer, it's the most popular sport in the world

because it's pretty accessible. All you need is a ball. If we take it back to capital markets, this group around us today has made a whole bunch of different markets, different little slices, widely accessible to RAs, to retail investors, to everyone. So just a handful of years ago, I think it's fair to say none of these would have been nearly as accessible as they are now you guys can elaborate on the the how and why um some of that so there's been a confluence of events you can talk about them much better than i could but we're talking about non-vanilla approaches and i'm not an expert on the regulatory side of things but there have been

changes beyond that i'm going back to just consumer behavior at a broad level i think vanilla is perfectly fine in some situations there's broad appeal but like to make a sort of corny uh analogy there's room for rocky road or mint chocolate chip or what have you and your products right i'm not i'm not trying to be dilutive but could sort of be viewed that way they're like new flavors of ice cream becoming more broadly available where historically retail had access to like chocolate and vanilla right but you got to understand what's in that butter pecan to go back to your your compliance point um on this on this one i want to start with bob because we're talking about hedge funds which is kind of like the the least accessible uh mentally i think for for most people um and

looking at your your firm's mission to bring sophisticated investment strategies to every investor what what led you to do this what changed two years ago or whatever before you kick this off and give us a little lay of the land for how this access point has sort of changed and where you see it gone yeah yeah I I think I'd probably start my time at Bridgewater, a lot of what I did was work with some of Bridgewater's biggest clients, big soccer ball funds and endowments and stuff like that. And what you'd see from most of those folks, particularly the most sophisticated ones, is that they put, I don't know, let's say 20% of their capital in hedge fund strategies.

And remember, these are folks who could essentially invest in any asset they wanted. You know, they could open any door, right? You know, Future Fund of Australia, $350 billion, literally talk to anyone in the world. And what they did when they were constructing, so they put about 20% of their capital at the hedge fund strategies and what they did when they did that is they didn't just pick five didn't pick one or five or ten what they did is they build a portfolio of something like 60 strategies 60

different managers and what they did with that and they did it with all sorts of different this is true across both ones that are publicly reporting and not I just use Future Fund for Australia because it's public and it's known. And what they did was that they basically said, look, I'm going to invest in a wide range of different strategies because some do well during some times and some do well during other times. And because they had so much capital, they could go to each one of the managers and say, $2.20, uh-uh, that's not what I'm doing.'m doing i'm doing one in ten i mean they you know on the last dollar in they were doing a lot less than one in ten so that what do they do they basically built a diversified low cost index of hedge fund strategies to run

their portfolio i looked at that and i said well heck that's that makes a lot of sense right the alpha strategies have good returns the fees are due MI. What they do is beat down the fees, increase the diversification, and boom, they've got a product that is, they've got a portfolio that is hugely complementary to their overall portfolio. And I said, well, why don't we just do that, but just make it available to everyone? But, you know, the challenge with that, and I could go on and on about hedge fund replication, is that, to be frank with you, there weren't a lot of the techniques. The techniques had not evolved sufficiently to be able to do that effectively until relatively recently, the machine learning techniques.

And also, the infrastructure, the regulatory infrastructure to be able to put that into an ETF wrapper had also not really been in place until relatively recently. And so we've got sort of this confluence of things that I think is very, you know, that really emerged really over the course of the last, you know, couple of years, where the combination of the ability to apply more rigorous machine learning approaches, because the computational capacity has improved with the flexibility that's increased in the ETF wrapper post the variety of different regulatory changes that happened a few years ago basically now makes for an environment where you can take sophisticated strategies and package them into that ETF wrapper much lower cost much more tax

efficient etc and make those things widely available so that, you know, the thing that Future Fund for Australia and all these other sound wealth funds were doing can now, you know, you can, you know, you don't need $300 billion to do it. You can have 20 bucks and you can get the same thing. So that's really the idea and the vision and the evolution that's occurred. So where are advisors, clients kind of bucketing you, or where would money be coming out of to go into your hedge fund replication? Yeah, I mean, I think if you think about how basically many sophisticated portfolios

are mostly beta in one form or another, like 80% beta, and I'm including private equity and venture capital as betas, not alphas. That's basically 80% of the portfolio, about 20% of the portfolio from these big institutional asset managers or allocators are sort of alpha strategies, actively managed alpha strategies. And there's a lot of different ways you can allocate that alpha strategy set. There's lots of good different ways to do it. But in general, you know, that's sort of how we see the world is you should be putting about 20% of your capital or risk in alpha strategies.

And we're one solution. There's lots of other great solutions that are out there that you can also use that slice for. If you have particular managers you like or strategies that an advisor is excited about at any point in time. We're meant to be like the NASDAQ 100 of hedge fund strategies, you know, an index fund. Very good. I like that comparison. Rod, it looked like you were nodding your head. I saw a filing.

I think Resolve is bringing a couple new ETFs to market very soon. What flavor, what slice are you making available to clients, or what are the ones that are most in demand today? Yeah, I think I need to kind of put a little bit of background in terms of ETFs, because like Bob Bob said a couple years ago you weren't able to do what this the ETF family is called the return stacked ETFs family and return stacking came from the frustration of speaking to advisor after advisor corporation after corporation foundation after foundation and saying hey listen make some room in your 604040 for us. You're going to want

it. And I can speak from experience because, you know, the reason I got into the business in the alt side of the business is because I emigrated from Peru after my family lost all their money after a 7,200% inflationary thrust that lasted six months. And then I got to Canada and we put basically zero money down in real estate right before a 50% housing crash and then we did it again during the tech crisis and my father's a mathematician by the way, he's not a dumb guy he's just not a very good investor and when you look at the history of markets you recognize that equities and bonds going up together and being non-correlated while they are doing that is very rare in fact things like what happened to Peru happens a lot everywhere in the world.

It happens more to third world countries, but it does happen in North America. It just hasn't happened in our careers. And so we've been conditioned for 40 years almost that, you know, if equities aren't working bonds, they'll pick up the slack and we'll be fine. And so it's really tough to grab a group of individuals whose experience, whose lived experience has been, I can do no wrong with the cheapest portfolio I can get, to say, maybe I should have some of these alts that can protect me in inflationary environments

and bear markets. And so I did try, though, for 10 years. Built a decent business off of it, and at the time also it was a decent business in very complicated structures on the offer memorandums you know you had to be a credit investor and so on but when the derivatives rule came around there was an opportunity to say yes and to the problem. Instead of taking away from your equities and bonds we wrote a paper called return stacked return stacking strategies for overcoming a low return environment in 2021 when yields were at

zero and valuations were at the highest they've ever been and people were buying more and more equities and just leaning away from bonds just to get more yield and so the solution here was the derivative rule allowed us to provide public product that stacked the alpha right so instead of you saying i want to sell my bonds and sell my equities to add my diversifier, that has done low single digits for a decade when the 6040s had a too sharp and returned to 12% annualized for a decade.

I'm saying, hey, listen, sell some of your equities, for example, and one of our ETFs is 100% equities and 100% managed futures trend replication. And say, sell your equities, for example, and one of our ETFs is 100% equities and 100% managed futures trend replication, and say, sell your equities, and then slice in that ETF, that two-for-one ETF, where you're getting back your equities, but you're stacking the non-diversified trend following strategy on top, right? So that allows you to say, hey, I'm not going to miss out on my equity returns that I want, and I'm going to

get to add this diversifier that stacks returns on top, even if they were middling returns. Stacking them on top is pretty good, but because it's so non-correlated, it actually doesn't necessarily stack the risk. And that was all due, in the last few years, that we've been able to do this. And we did that for one dollar goes to equities, one dollar goes to trend, another dollar, another ETF is a dollar per bonds and a dollar per trend. The last one we launched is a dollar of bonds and a dollar of global equities so that then you can choose to stack whatever you want. It doesn't need to be our trend replication strategies. It could be anybody in this panel. Now you can go to a client

and say, listen, sell some equities and bonds, put this in, half of the position that you sold, and now you have an extra cash buffer that you can buy anything you want. And in essence, stack it on top, right? The last one that we're launching is going to be similar equity base, and then 100% futures yield or carry strategy, diversified carry strategy in the future space and then one's going to be bonds and diversified carry and to continue to add help investors add diversifies without sacrificing their core stock and bond portfolios and I think part of it has to do with the language is this is

anything new by the way this is portable alpha overlay strategies it's been around for decades. Institutions, you know, Bob talks about the 80-20. You know, in Canada, teacher's pension plan, case depot, teacher's pension plan. Oftentimes, they don't sell their equities and bonds to get their alpha sleeves. They want a hedge fund.

They're going to go and borrow some money and stack that hedge fund return on top. They're not going to sacrifice that return that they want from their private equity, private credit, regular equities, and regular bonds. That's how they get outsized returns. And they're not necessarily taking more risk for it because the things they're stacking on top are not correlated. So this is our attempt, and finally we have the tools to do it, to democratize diversification, help investors protect against inflation, help investors protect against bear markets, and not necessarily have to use our alpha stacks or trend stacks.

You can use whomever you want. So that's the language innovation, I think, and then what we've been able to do based on the new derivatives rule. And I'm super excited about that. Anything either of you two potentially have to add on the what's accessible that wasn't? Or maybe what you see as the risk now that these sort of strategies are accessible. Like what's opening up? What could be the, oh boy, you know, what did we unleash here? Yeah, I'll take a swing at that, if you don't mind.

So for options-based products, you're right, the derivatives rule opened up a lot of doors. We launched 20 funds last year. They brought in $2 billion. So when you talk about accessibility on new products that are 100% options-based, that really, I haven't seen that in the past, right? It's kind of opening up new doors. But again, it goes back to the uh-oh, what could be the next, you know, you look at leverage that's starting to come out, right? Inverses and leverage there and things that happen with Navarose and like all of those things I think are viable that money managers deal with, right? And manage around.

And then when retail investors end up using them, they might not understand all of the ins and outs of a structured product, right? I do think that's one of the pitfalls of all of this. But they are, to me, they're catching fire. We're scheduled to launch another 20 over the next six months, all options based. Again, all of this is around what else can you do now with the new structure that's available that before you'd have to open up an individual account and a money manager would have to manage it. Just one more example. We see advisors and clients all the time that have Apple with a cost basis of $20, right? And a client walks in the door and the advisor goes, I can't really do anything with this, right? Like, it's here.

I can't sell it. I can't diversify them. So in the past, an options manager then could do things like hedge it, overlay, you know, calls for income, that kind of stuff. Now, you could replicate that in an ETF format where you're running a, we run a covered call strategy on Apple, just Apple, right? So that while it makes the accessibility much easier, there's also, we didn't get to have the conversation that, you know, Apple may get assigned at, you know, 195 next week, right? It's just one of those things that you miss that manage the expectations so that people understand performance. Inflation year, and I'm going to tout some of my colleagues on our economic research team.

So I don't know if this applies to trend following, if it gets factored in, but I'd like to know. So according to them, on average, election years produce lower returns, higher vol. They point that average vol picks up by about 25% between July and November during presidential election years. There can also be impact on, like, raw material outlooks, so oil and gas under GOP or maybe alternatives under Democratic administration. So it's going to get a ton of coverage, whether we like it or not this year. To what extent, if at all, can you factor in or can there be signals that are unique to an election year? Or is that a total afterthought? I don't think it's much of a thought at all, honestly, for sort of classic trend following. I think that there are other firms out there who are trying to add some of those to improve the trend following.

I think we would just go on and talk about how people predict all kinds of things, and they're wrong, and everyone thought that out of the election, you know, when Trump won, that the market crashed, and then, wait a second, rallied. And so all of these things are not predictable. It's better just to follow the price. Fair. Any dissent there? Is there any potentially unique opportunities in an election year, whether it is on the volatility front? Do you expect there to be higher vol moving in later in the year or more of the same?

No, no. For sure more vol going into the end of the year. But I agree. It doesn't matter long term who's in the White House, right, who controls Congress. But you still need to be able to talk to it, right? It's interesting. Seventy percent of the time on that election year the markets are up, which is about average, right? So there's nothing particularly, you know, differentiating, whereas, say, the third year of a presidential cycle is by far the best.

We saw that last year, obviously. But I think it's more of an interesting, again, sorry to pound this, but talking 100% of my client reviews this month have brought up the election. What are we going to see? What are we going to see? And it's your point of, it's okay. It doesn't really matter. Yeah, we'll be watching for this and we'll take advantage of opportunities, but overall it doesn't matter. To what extent to hedge funds position based on outcomes or after? I mean, I think having sat in the seat of trying to figure out what was going on, I actually very distinctly remember that night of Trump getting elected

and the intraday volatility that came with it, for sure, watching the P&L move like that. I think hedge funds in particular are, you know, they have, there's tens of thousands of hedge fund analysts that are carefully trying to figure out what the different policy stances mean for the macro economy, what they mean for the stock market, what they mean for individual equities or sectors or things like that. seat and seeing what it takes to have edge in that space and recognize just like the vast vast majority of people don't have the time the resources the capability structure the data to do any of that in a way that you would expect to generate alpha over time and so I think the thing at least from my

perspective that I think is is is compelling about what we're trying to do is instead of trying to do that yourself, which is very, very hard, very hard to do on your own, just hire the people who are spending all the money doing it and just don't pay them. Just don't tell them that you've hired them. I like to joke I've hired 30,000 hedge fund analysts, but none of them know that they're on the dole. I don't have to pay them um and that

that's kind of the idea is okay in the same way actually i'm i'm i'm with jerry on this basic point which is like how do you introduce flexibility into your investment process without having to do the work yourself without having to without screwing it up without screwing it up right and part of the way that you can do that is by finding folks who bring those sorts of strategies that agility set of agile strategies into a portfolio that you know that have been tested and proven and managed in a in a sophisticated way over time that can can help complement the portfolio to help give yourself a little relief as an advisor, right? That I think is the thing that's quite compelling. I want to make a bigger point here

because obviously we want as advisors, as investors to know what's going to happen next week, next month and act accordingly. But I think the point, the major point here is when we're looking at asset allocation, that is the most important thing for you to do, right? How much of equities you want to have long term? How much bonds you want to have long term? Do you have the right risk metrics between those two? What is your alternative sleeve going to look like and why is it there? It's there to be different than equities and bonds and the ability of that sleeve to mitigate any pain against an election day let alone an election year is going to be totally random but it is over time going to be different now Bob talks a ton about global macro and how the market dynamics are set up

in such a way where we might expect a mispricing here and there but I doubt and correct me if I'm wrong but you're making any direct positioning on your public product on it no no not my personal views have no influence and the key here is the reason that he talks about gold macro and I talk about gold macro is because I'm gonna wake people up to the fact that there are risks that equities and bonds might not cover and that we need to get rid of all of that personal experience that we've had in the last decade especially and recognize that we're in a much more dynamic environment that all of these different factors are going to affect portfolios in ways that

we might not find intuitive over the next decade and that your best Sean is to have a well diversified portfolio of alternative advantages that are truly trying to be different and protect you in different ways and I think that's the key here the key is to say it's we won the lottery though anybody who's been a hundred percent most the equity some bonds has to feels a lot of times that they've hit the signal and they got it they nailed it low cost cts but really most of us just won the lottery we've all won the lottery let's get that winning ticket cash it in and then start taking some money off the table and and helping our future selves a little bit more you know go beyond the 1980s and and see what portfolios that don't have this type

of diversity look like and actually do something about it, maybe even if you're just edging in a little bit. Seems like we have a question back here. It's clear probably to everyone in the room that you guys have the investment part dialed in. Otherwise, you wouldn't be up there. So I have a question, and maybe it's for Jerry or for all of you. Jerry, you're relatively new to the ETF business.

How have you found, or if you could tell us a little about your experience with the operational side? Because the investment side is what you know and what you're good at and you've proven it over many many years, and then you've sort of come into a whole new channel of distribution. And so how did you have to add staff? How have you found that part? Has it been a huge hassle. Is it business smooth as can be? Well the asset raising side we we partnered up with blueprint and so that was a key You know, you've got to the best idea in the world. We've had a lot of the best ideas over the past 20 30 years

You know, we've had a lot of great ideas, but without the distribution and people and creating something people want to buy It's not gonna amount to very much. so that was something you know obviously you have to get right the the day-to-day is a challenge it's a lot of work for the money we first talked about doing an ETF with futures and securities that they told us it had never been done before and you can't do it. And we said, well, we're going to do it with title. And they said, you should not do that. Title should have told you it cannot be done.

And then we did it and we worked with Jane Street. So you got to have a big team of people, the lead market maker and all the administration and marketing and sales. So it's a group effort to pull that off. I can speak. Having great partners like Tidal absolutely is important in this ETF space. But some of the operational things that are new from, you know, we came from the hedge fund side and the mutual fund side, it's educating investors and advisors

that when you're dealing with a strategy that's supposed to be a long-term hold, a lot of what we do is not about trading us intraday. All right, Jerry did well in the elections. Let's get him, let's boot him out. Now he's gonna mean revert, right? Like it doesn't work that way. And so what happens is you're necessarily

gonna have a lower liquidity. And with that lower liquidity, you're going to have some issues if you try to put a block trade in at market. So educating people on putting limit orders on their positions has been a huge lift. And educational, communicating that with advisors, having the right brochures and pamphlets to make sure that they're not screwing it up. And it doesn't really matter. You'll see a hairy bar here and there and sadly oftentimes investors are like well you guys are illiquid no we're in the future space where the most liquid is Niagara Falls it's just that that particular there's someone like

that there's the market makers out there at the edges and you know that are willing to take those big and they're waiting for you to screw up and put in a big order right so that's the the operationally it's very very different um but it does have its advantages and that uh that we need to recognize and that's why we are in the space but i think that's that's the major pain point and in canada we have etfs in canada as well it's different than it is here, and you can do land-of-day trading. So there's a wide variety of things that advisors and investors, if you're doing big trading, should know, get educated on before you put a position in size.

So I think this is a perfect kind of lead-in to, I think, a wrap-up question, and you guys will have access to the panelists after this. But particularly after a year like the NASDAQ 100 had a blowout year last year, just fabulous, 55% returns. This was something, Bob, I think you brought up in our in our conversations before today how are the panelists managing Rodrigo you already you already spoke to that sort of human tendency to not necessarily look too far into the future how do you manage uh messaging and expectations given this period where stocks, and if you stretch it out even longer, have done exceptionally well

and clients have done generally very well, how do you message during periods of what they might consider underperformance? I have to imagine that's a challenge. Who wants to speak to that one? I asked a question to him, so I was trying to get some good ideas. Well, you got liquid as Niagara Falls. Liquid as Niagara Falls, I'm going to use that. I like that. Look, it's, I think that you have to be out there in social media, you have to be out there in social media you have to be out there in video like we do a lot

we all do a lot in interviews in our own uh podcasts in our own um spaces and on twitter i know you do that a lot um you have to get out there and educate people and recognize to help them recognize why it is okay that sometimes we zig when the rest of the things act. Diversification works even when you don't want it to, right? It's taglines like that that actually slowly seep into the subconscious and allow people to invest long term. And I think, again, being able to yes and it with the return stacking concept has helped a ton for people starting to leg in and say, okay, I don't have to sacrifice that and I get that, okay, that's good.

And then, you know, you want to cater to all levels. So we write white papers that are 30 pages long, and we have YouTube shorts that are 20 seconds long. And so if you're going to be in the space of BTS, you just have to keep on doing the educational grind, try to be honest about the things that you do, and, yeah, we do brainstorm around what taglines would work language matters language does matter I think 20 was great 21 was great 22 was fantastic I

think a lot of people think the trend following CTAs are back the the Fed stuff of those past 10 years that That's hopefully not coming back, those zero interest rates. People like to talk about inflation now, that's good, that's helpful. Back when I started in the business in the 90s, all the marketing material was here's what happens when you add your CTA to your stocks, but the CTAs had better performance and lower drawdown. And so hopefully we can get back to that level and to where the diversification, the longs

and the shorts, we just come in, we enter the game, we get on the playing field every day with this huge advantage, currencies, commodities, stocks, bonds, longs and shorts. You don't have to have 400 markets but our edge should manifest itself and should get back to those years with less government intervention and policies that they had previously and we may see this going back to the way CTAs and trend following did but another thing too that we said well, let's don't let that happen again. Let's trade those darn stocks. They trend.

They're great. Let's don't let one person, can there be one firm that doesn't care about crisis alpha? Let's have less crisis. Let's put trend following around the stocks and have short stocks as well. And so the crisis is not as bad. You don't need the small little 5% or 10% allocation to manage futures. Let's create this wonderful, beautiful portfolio with all these markets, with all this trend following and many stocks. So if we get into a situation again, like we did for those 10 years, where most of the time stocks were the only

thing trending, the best thing trending, you can be there, but you got to trade the stocks. Anything to add or we wrap on that one? Let's list those ETFs at NASDAQ. I will finish on one point here. For us, for me, as a money manager, as a portfolio manager, the greatest compliment we can get is doing what we said you did. Oh, you did what you said you were going to do. The challenge is getting that information out there.

So it's podcasts, videos, the whole hiring a PR firm anymore to get on Bloomberg and CNBC. Less impactful these days than it used to be be so just get the message out there that's all that's what we're doing today we appreciate your making the time we got time for questions yeah you have rule is about two years old you guys are all very sophisticated your

strategies and I've heard that education is important to each one of your firms to get your products out to the masses. How far into this process do you think we are? Like are we just, we're just starting, we're just starting getting out there educating folks or is it like are we just like in inning two? Because I think I think there's a lot of room to grow and that education could be that 20 second video which seems to be all that people have capacity for and then the 30 page white

paper sometimes not everybody's John it's early right I mean it's I mean if you give you just if you just think about there's ten trillion dollars of actively managed equity mutual funds and there's $300 billion of actively managed ETFs. Yeah, we're very, very early. We're very early. You guys are the edge. Yeah, this's, you know, we're two years into the rule being changed and, you know, we're six months into some really innovative, maybe a year into some really innovative ETFs being out there. And we've been, we've had 40 years of ETF innovation that is focused around picking

better stocks and bonds. And so that's going to take a while. It's going to take a few 2022's going to take a few 20 22s because everybody now it's another v recovery right it's over all right that's how we've been conditioned um the inflation genie doesn't get back into the bottle that quickly and that tends to cause a lot more pain a lot more volatility so that inflation volatility period is here to stay and there's going to be a few more lessons to learn and that will slowly inch people more and more towards the alternative sleeve I think but it'll take about a decade I'm

guessing that. Some job security. Yeah. Is there any aspect of these private strategies that you'll just go out there and say just can't be replicated in an ETF? Yeah, for sure. I mean, just the nature of, if you go to the trade execution side of things, there's a fair amount, you know, you're not going to be able to trade, you know, minute-to-minute tick trades in an ETF wrapper, right? So there's high-frequency trades that are not appropriate for the ETF. You also need to be trading liquid wrapper, right? So there's high frequency trades that are not appropriate for the ETF. You also need to be trading liquid securities, right? So, you know, a lot of hedge funds will,

I can speak from the hedge fund side, will be trading things that are, you know, taking advantage of illiquidity premiums on particular securities, which are not appropriate for the ETF wrapper. And so, so you know there are things that you can't do but i mean just think about it whether you're talking about you know jerry's 400 markets or we're trading 65 of the most liquid markets in the world like that represents the vast majority of assets in the world the vast majority of exposures in the world and so and and so the reality is like no not every strategy but most of the stuff like the vast vast majority of strategies can be put into an etf style wrapper in one form or another the high the really relatively high sharp strategies are capacity

constrained they're either prop traders like we have with employed prop traders that you know they're making ridiculous sharp ratios ridiculous sharp ratios. What are they doing? They're levering up 20 times for the day and trading 28,000 times intraday to capture that 52% edge in a shorter period of time than we can when we're managing hundreds of billions of dollars where we have to make our trades you know we're gonna move the market if we do anything else so if you're dealing and what are they trading to trade two and a half three million dollars for the any particular strategy max right so yes you can get if you can ask if you can get a good prop

trader to let you in on his trades which you won't another and as you go into the 50 million, 100 million, 200 million you'll start getting you will get differentiated returns. You hopefully do get some benefit outside of the performance fees that they charge but you will be capped out and if you're an advisor you know I see it all the time where they get access to a fund and then 20% of the clients get access to it nobody else can and then it becomes a wheelable. So while it is paying rack rate fees and they're paying a lot of fees, right? And so it's not that they don't exist. There's a lot, there's a cottage industry for really good traders that have spent

like even single position traders that have an edge and have been in that seat trading lean hogs their whole life and understand it better than anybody and have all the connections. They tend, there are people like that, right right but it's tough to get an allocation with them and they don't need a lot of money to earn a living so it's just tough to get into really really good private hedge fund managers and the rest of the guys and the billions are providing differentiated returns that are non-correlated and have a short ratio that's similar to a 60-40 portfolio and that's the type of stuff that you can kind of replicate using some sort of

machine learning and get most of the benefit and then cut out the fees. All right, let's network. Let's do it. Thank you all very much. Thank you. Okay, that's it for the show. Thanks to Jerry, Rodrigo, Bob, and Jay. If I'd been hosting, there would have been a Jay and Silent Bob reference, to be sure. But Kevin did a great job. So thanks, Kevin, for running the panel down there.

And thanks to Jeff Berger for producing. We'll see you next week. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments.

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