The Derivative - Set Phasers to Stocks+Discretionary Global Macro – with Dynamic Alpha

Episode Date: February 22, 2024

From NASA to Star Trek, Brad Barrie and David Johnson of Dynamic Wealth Group discuss how their shared interests inspired the development of their diversified mutual fund, which blends equity exposure with discretionary global macro allocations. They explain how this approach seeks to provide smoother returns through non-correlated exposures. Brad and David also delve into their backgrounds in aerospace, finance, and alternative investments. Tune in to learn how discretionary macro strategies can offer unique diversification benefits compared to systematic trend following. This episode discusses portfolio construction techniques including dynamic rebalancing models for mutual funds. Throughout, analogies from Star Trek, NASA, and other aeronautical aspects provide entertaining parallels for investment concepts, even attending and speaking at a Star Trek “con” (not in costume)to connect with individual investors! Jump on the starship enterprise with us, as we move from orbit to warp speed. Engage! Chapters: 00:00-01:32= Intro 01:33-05:02= Las Vegas: a place for peace & tranquility 05:03-21:44= Diversified portfolios for Mutual funds, NASA, minimizing the downside and correlation to everything 21:45-36:28= 60/40 Bonds – Bring on Managed Futures and direct exposure 36:29-49:03= Global macro commodities, offense, the alternative to alternatives & driving the return 49:04-57:21= Star Trek, a blossoming career incentive – meeting Shatner, Sci-fi language and investing for Trekys 57:22-01:02:50= Treky favorites From the episode: Blog post – It may be a slow news day, but… Blog post – The picture from space that shows why commodities are non-correlated to the stock market Blog post – Set Phasers to ‘Systematic’ Dynamic Blog post: What Star Trek can teach you about investing & financial planning Follow along with Dynamic Wealth on Twitter @DynamicAlphaSol and also Brad & David's LinkedIn Brad Barrie, David Johnson Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

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. Greetings, humans. Yes, we're bypassing the normal Star Wars hello there, because our guests today are Trekkies, and not just casual fans. They actually spoke on the similarities between sci-fi and investing at a Star Trek convention once. That's a new one.

It's Brad Barry and David Johnson of Dynamic Alpha Solutions, who run an outsourced CIO business and started a mutual fund that's a bit of a twist on the latest trend of marrying traditional stock exposure with a non-correlated alternative investment. We've seen that done with long volatility. We've seen it done with managed futures and trend following. But Dynamic Alpha is pairing discretionary global macro with their stock side. How does that work? Can it still provide the crisis period performance?

What can discretionary managers do that systematic can't? We dig into it all, concluding with some of those Star Trek and investing correlators, such as when you should put shields up in your portfolio. Engage! This episode is brought to you by RCM's Clearing and Execution Group, which helps mutual funds like the one Dynamic Alva runs efficiently access and trade exchange traded futures and derivatives markets. Visit rcmalts.com to learn more.

And now, back to the show. All right, everyone, we got Brad Barry here and David Johnson. Brad, you got a lot of letters after your name there. What are all those letters for? Certified financial planner. Yeah, certified financial planner, chartered financial consultant. I was a financial advisor for about 20 years, working with some wonderful people in the Chicagoland area. And then you left Chicago, right? You went to Vegas? Yeah, I left Chicago, kind of transitioned my practice to my partners, and I moved to Vegas for peace and tranquility, which is not where normal people go for peace and tranquility

but uh uh where i'm at beautiful mountain views and sunset behind the mountains and uh it's uh better weather uh than chicago most of the time and if you're living there like draw parallels with chicago for me so you're in like evanston of las vegas or what's your chicago equivalent yeah funny because i used to live in evanston um when i was in chicago and lived in a few other areas there but uh yep so i'm in henderson nevada which is just south of uh south of las vegas it's definitely considered a suburb um with uh again wonderful people uh It's a wonderful place to live. How often are you down on the strip seeing a show or doing stuff like that? Not very often.

Which, it's funny, as a money manager, sometimes I'd have clients back in Chicago, and I would visit Vegas. And they're like, oh, you're visiting Vegas, huh? Are you taking my money with you? And those that know me know I'm not a gambler. I don't drink, I don't smoke. I'm kind of boring. But it's nice because it's there when you want to get to it, if you want to get to it with ease. I'll put it in the show notes but i wrote a blog post once uh michael geismar i think is his name uh anyway this hedge fund manager guy he won like 240 grand playing blackjack during salt i think and so someone got a hold of it and wrote this article of like this guy's risking all this money blah blah blah and i just the blog post did some quick math of like he's making call it one percent on 1.8 billion and even if he gets x percent of that like he was risking a even if

he was risking a thousand dollars per bet it was basically like the rest of us risking five dollars a bet so let the man have some fun absolutely um and david where are you at i'm in the tampa bay area all right right across route 70 50 it's been too long 70 what gets me over to bureau 75 yeah no that's straight across the uh clear water yeah i4 goes to orlando yeah i'm saying i'm gonna go right from tampa over to vero there's like that little uh state route 70 i think it is 60 maybe yes yeah it's that's highway 60 yes yes all right it's like a road you want to avoid at all costs exactly let's get into a little uh what you guys doing, what the firm is doing, and then I want to get into some sci-fi. Absolutely. First, tell us about the firm, the background, and how you founded it.

Give us a little teaser of leaving the advisor space. Yeah, so our firm is Dynamic Wealth Group. We run two main businesses. We run Dynamic Alpha Solutions, which is an outsourced chief investment officer business where we support financial advisors, helping them build truly diversified portfolios and helping them provide solutions to their end client. And we also run Dynamic Alpha Funds, where we manage a mutual fund, the Dynamic Alpha Macro Fund. The ticker symbol is DIMIX, D-Y-M-I-X. It's an interesting background on where we got to where we are. Being in Vegas, one of the nice things is I do go to a lot of conferences and

conventions. So I'll go to the Strip not to gamble, but to go to investment conferences. Again, I mentioned I'm kind of a boring person, but I'd rather go to an investment conference than go to the casinos to gamble. And I met David at an AAII conference about six years ago, the American Association of Individual Investors, and met David there and befriended him. And David was representing a number of alternative investments. And I invested with him, befriended him. And again, we'll dovetail into the science fiction conversation in a little bit, but we learned that we're both avid Star Trek fans. And kind of through the relationship developed.

And at the time, I was consulting financial advisors kind of as an OCIO and an overall practice consultant. And I had invested in one of the hedge funds David represented. And David kind of mentioned to me like, do you think other financial advisors would be interested in this strategy? And I'm like, I think so. I was interested in it.

I've invested in it. It's unique. It's differentiated. Let's talk to some financial advisors. And we presented at some conferences and got amazing feedback. Financial advisors were like, we love this. We love this strategy. It's non-correlated. It performs extremely well. What's the ticker? And that was the issue because it was a private

placement, accredited status, two and 20 fee structure, you know, and financial advisors like more turnkey, easy to implement solutions and products. So through connections and research, we worked on launching a mutual fund. And it's a, you know, we'll dive into the mutual fund as the conversation goes, but it's an innovative solution that combines a global macro fundamental approach with equities. So yeah, and I think as the conversation goes, we'll dive a little bit deeper into that on how and why we did it, you know, did it and it's managed, but yeah, that's kind of a. We'll now fact check you with David's recollection of the events. Is that how it went down, David?

Absolutely. And I, and what were you doing at the AA AI? What is it? Yeah. Yeah. I, you know, I spoke there and this was back in like 2018 this is before covid yeah some of those give me like uh the a lot of a lot of tire kickers a lot of right do you feel that or you felt it's worthwhile for like a money manager or an advisor it was for me because uh at that time you know my main my main business was, I was actually an IB. Yeah, yeah.

And so I represented a lot of CTAs. Yeah. And I, I basically went there to educate people on, you know, how managed futures works,

how it can differentiate your portfolio because it's uncorrelated by the stock market. You know all this stuff. Mm-hmm. And they weren't getting any of that. They were just getting this stock guy, that stock guy, this stock guy, you know? And so, you know, I had,

I saw, you know, I did that for probably, you know, seven or eight years, at least, you know, in the main state, met a lot of people and educated a lot of people. So it was fun. I got to know a lot of CTAs, got to know how they did what they did. I used to design trading systems back years ago when I was working in FX after I left aerospace, but this was a little different. And give us that little left aerospace.

What were you doing in aerospace? Well, my first career was at NASA. And I was there for a short time. The NASA. NASA, yeah, Marshall Space Flight Center in Huntsville, Alabama. Yeah. It's where they built the Apollo rocket. Right.

Is that where they send the kids now to space camp and all that yep exactly awesome yeah it's where they always had space camp oh and what was your were you designing rockets designing flight plans what were you doing i was a i was a space shuttle engineer i was working on the shuttle on some subsystems in the shuttle and that was you know i was a junior engineer then. I was, you know, very green. But I figured out very, very quickly that NASA didn't really design things anymore. Like after Apollo, it's also, it's all contractors, you know, you know, space and defense contractors, the Lockheeds, the Northrop Grumman's,

you know, they, they do, they do all the fun work. Yeah. And that scare you a little bit. Like if there's right, how many subcontractors are putting all their stuff into this one? Hundreds, thousands. Right. That scares me of like, how do they all know those systems are going to work together? Yes. Single point failures. Yeah. That's one of our favorite subjects.

I was actually, so I became a systems engineer. I went to work for a Honeywell Space Systems here in Clearwater. And I worked there for about 22 years and had a wonderful career there. It was a lot of fun. Worked at JASA Space Center for five years and on the space station program. And to talk about a complicated project the most complicated thing ever put in space and now they're talking about they might scrap it

right? I know and they don't have anything to take its place like the shuttle they scrapped the shuttle didn't have anything to take its place this is our government at work that's a separate podcast so the shows so I basically left that and i got into

you know just basically took early retirement you know i want to do something different and got into you know got into uh basically crazy in space futures right yeah exactly uh and then it was a natural maybe maybe Well, options maybe. Maybe options are. So Brad, you're saying, hey, I know this stock side, this. And David, I know this alternative side. Let's marry them together. Yeah. Yeah, and there's definitely the linkage.

One of the things that David said that resonates with me is the education component. David loved educating folks on the alternatives and what they are and how they use. And as a financial advisor, I always viewed part of my role as to help educate investors and my clients on different financial planning aspects. So, you know, there's definitely a lot of the similar thinking. David actually tells a story about when he was at NASA. I love this story because it talks about defining the right problem. And David, I'll paraphrase it, but feel free to jump in. But when you think back to, was it the Apollo program when they were originally trying to send astronauts up to space? Yeah. Yeah.

So basically, one of the lessons I learned from my emeritus engineer who was mentoring me when I first got there was the whole idea is that you know the first 50 percent of solving a problem is properly defining the problem up front yeah and most people skip that part so they wind up with a solution to some problem just not the one they're trying to solve. And that's basically what happened. The reason you told me that story is that's what happened with the space program early on. They tried to figure out a way to get this capsule and the person in the capsule back down to Earth without burning the capsule up. So they tried to create an indestructible material. There is no indestructible material.

Right. So let's let's figure it the other way. I think Einstein has a, if you give me an hour to figure out a problem, I'll spend, if you give me an hour for a problem, I'll 55 minutes figuring out the problem in five minutes on the solution. Exactly. So finally an engineer one day said, hey, guess what? We're solving the wrong problem. The problem is to get the astronaut back alive, not to create an indestructible capsule. So they came up with the ablative heat shield. It's going to get uncomfortable in there. Yeah, it's going to get uncomfortable, but it's going to get you down.

It's going to last just long enough. I love it. That's a great example. And taking a step back brad on the ocio side do you see that as are more rea shifting to that or more rea separating like hey i'm a your golf buddy i'll take you out to golf i know how to get relationships and then it seems so old-fashioned that we thought that the same person could be the person head down solving complex financial metrics and figuring out the right portfolio. It's the same guy who wants to go have beers and golf and do all this. And I'm sure they're out there, right? They exist, but it seems like we're moving towards a point in the advisor industry

where those two have become decidedly separate. Yeah. I mean, again, having been an advisor myself for 20 years, advisors are pulled in many, many different directions. And whether it's understanding whether a client should do a Roth IRA conversion or not, or should they retire at 65 or 67? What about Medicare? What about estate planning? What about their insurance needs?

What about cash flow management, debt management, generational? I mean, there's so much that a really good financial advisor should be doing and is doing that they don't have the time to do what we do. I like to say we continuously scour the investment universe looking for new and better investment ideas. Again, that's how I found David, going to a conference and uncovering new investment ideas. We still do that to this day.

So financial advisors that really want to build differentiated portfolios, because look, if you're just going to do a standard 60-40 stock bond portfolio, you don't need an OCIO. You don't need, I dare say, even a money manager. You buy two or three ETFs or index funds and you call it a day. But if you do that, you're not diversified and you're going to take more risk than you think you are. And you'll have a bumpier ride than you should. And at the end of the day, that's the problem. Again, talk about defining the problem. That's the problem we think advisors should be solving for their clients on an investment

standpoint. How do you build a smoother investment experience? And that's what we specialize in, is building a smoother investment experience. And that's what we specialize in, is building a smoother investment experience through model portfolios that allow the advisor to grow to scale, that allows the advisor to spend more time with their clients, be it in marketing, be it in research, be it in planning, knowing their clients, whatever. We help the advisor do an even better job and be kind of that financial planning hero for their clients. And what do you mean by smoother? I think I know what you mean, but define what you mean by smoother. Yeah. So smoother to us is less downside volatility,

right? And that's one of our mantras too is, having been in this industry as long as I have, it has always presented to me that standard deviation is risk. And standard deviation is not risk. My degree is in mathematics and economics. And if you look at what standard deviation is, it's the deviation on the up and on the down, right? And in 20 years of sitting across the table from individual clients, I never once met a client that didn't want deviation on the upside, right? People want deviation on the upside. They just don't want it on the downside. So we try to build portfolios that minimize that downside experience, right? While still having the necessary returns investors need to meet their goals.

I'm 100% on your side, but I'd argue briefly on the other side, it's an easy way to say, hey, what tends to have the most downside deviation? Stuff with a lot of upside deviation, right? So it's kind of a lazy way to get there, but that's the support of standard deviation as the metric sometimes sometimes but yeah excluding managed futures

right which is which lumpy and yeah and and look in a perfect theoretical world it is a bell shape right you think a perfect bell-shaped curve that you know it's it's 50 50 on both bell-shaped curve that it's 50-50 on both bell-shaped curves, but we don't live in a perfect world last time I checked. There is skewness to a bell-shaped curve and you can have greater gain deviation and lower loss deviation with different asset classes and different strategies. That's one of the ways that we do it is, and as simple as this sounds, we diversify. But when we diversify, we're not just diversifying with asset classes, right? That's the way it's always been done. You have your stocks, you have your bonds, you have your alternatives. We diversify with different asset classes, but also with different approaches and with different strategies, right? So,

you know, sometimes we're asked what's better quant or fundamental or technical analysis, you know, should you buy and hold? Should you be tactical? Our answer is yes, all of the above. Yeah. Because that is diversification, right? We diversify by having tactical managers that maybe use technical analysis and having managers that use fundamentals or quant or algo. Right. And the diversification is we actually call our portfolios in our OCIO model multidimensional portfolios, which, again, is maybe a testament to the science fiction that we'll talk about. But we believe in multidimensional diversification. It's funny, we had this conversation with an advisor just this last week about non-correlation is not just binary. It's not just the correlation to stocks that should be measured. It's the correlation to everything in the portfolio. So it's not,

oh, I have an alternative I used and it's non-correlated to stocks and that's good. But what about another alternative? You can have multiple alternatives, investments, and they can be non-correlated to stocks, but also non-correlated to each other. Right? So it's that multifaceted, multidimensional portfolios that we build in the OCIO that truly help an advisor differentiate their practice as well, so that they can help to get new clients, and most importantly, help them meet their goals. And just as you mentioned, the 60-40 in bonds in a portfolio, what are your thoughts of, right, we had this unbelievable 30-year run rates from whatever, 8 to 0 or 19 to 0, whatever you want to quote. Surely, who knows, but surely that's not going to look the same

over the next 30 years, right? So does that break 60-40? Does that just make the path look different? What are your thoughts there? Yeah. I mean, it's a great question. And we've written about 60-40. Is 60-40 dead? Is it not dead? Look, in our model portfolios, our OCIO portfolios, we have a sleeve that is in essence 60-40, right? That is in essence, maybe it's 80-20, 20-80, that is beta weighted stocks, beta weighted bonds. But that's just a sleeve of the portfolio, right? It's certainly not everything. Are bonds going to look the way they did over the last 30 years? Absolutely not. I mean, you stated the reason yourself. But we're also believers in not trying to predict the future. Look, the market is predicting what six or seven rate cuts this year. I don't think the Fed is predicting that,

right? And the Feds are the one that are going to do it. So, and I think the bond market may have priced a lot of that in already. If you look at bonds, last year, somebody would look at the full year of bond performance and said, oh, last year was a good year for bonds. I would look at last year's return experience. And last year was not a good return experience for bonds. You look at it month to month, day to day. Bonds volatility, I think, I forget what the metric is for bond volatility. Move index. Yeah, the move index. Very high. And I have a chart that looks at what bonds did month to month. It went up 4%, down 4%, up 3%.

It's not the return experience bond investors want. If it wasn't for the last two months of the year, bonds went up 12% in the last two months of last year. If that hadn't happened, bonds would have had their third year in a row of negative returns. And I ask folks, why did bonds go up 12% in two months? Did I miss the big Fed rate cut from Jerome Powell? No, he didn't. But the market is forward looking. The market expects all these rate cuts. Well, guess what happens to bonds if we don't get those rate cuts? Right back down. Yeah. It's going to be problematic. So we implement, again, a lot of alternatives, a lot of bond alternatives into the models that we use, as well as equity-like alternatives, futures, you name it. David, maybe for you also, so all those alternatives which may be uncorrelated with each other, uncorrelated with stock bonds, you found yourselves moving towards managed futures and global macro?

Do you find those have the most unique return profile out of all the quote unquote alternatives? Especially when you get to ones that are more fundamentally managed as opposed to trend following, following a system. Not that they're all the same, but they're all following a formula. And most of the time when there's a fundamental aspect to it, it's more waiting till you see dislocations and things

that are going to create opportunities down the road and knowing how to look for the signs of those things to come about you know and example well you you i think you should do the coco example brad my favorite yeah it's my favorite example so Yeah. So so last year there was a trade by by our futures trading advisor in his program where he went long cocoa and he went long cocoa because of a bad weather pattern heading towards the Ivory Coast. Bad fertilizer utilization by the local farmers, and the crop was already having issues. So those are easily understood, especially by investors, reasons that could drive the price of cocoa higher. And those reasons have nothing to do with Tesla's deliveries this quarter, with the new Apple goggles that are coming out, with Jerome Powell, what he's talking about this month, right? It's totally non-correlated with causation, right? That's one of the key things that we look

for in any investment is, is there a cause for the non-correlation? Otherwise you just have happenstance, right? And if we can identify that there's a reason for the non-correlation, it's more likely that it'll continue to be non-correlated versus the happenstance. But the mispricing in the cocoa is a great example and um it turned out to be a profitable profitable trade and um those types of kind of demand supply imbalances are are what uh what we look for um i'm gonna pitch the blog again there's another post from way back when in my blog days of the picture from space that proves commodities aren't correlated and it was a freak snowstorm in montana in like june or july maybe june could in the um no it was later in the year maybe august

but the cows hadn't grown their winter coats yet so it killed off like 60 of the cattle in the right and and live cattle went limit up for like four or five days in a row and right and that has nothing like you're saying nothing to do with how many cars tesla produced nothing to do with the fed with gdp anything there was a storm and a limited commodity supply that caused issue and the only way to gain exposure the only way to gain exposure is through the direct commodity. Because sometimes we'll have somebody in our audience say, with our cocoa example, or you could use the cow example, the beef, well, I'll just buy Hershey's. If the price is going, I'll just buy Hershey's. And we would say, well, think about it.

Actually, you have to buy that. Yeah, Hershey's has to buy the cocoa from the farmers. I'm sure they're buying it through a few intermediaries first, but they're the ones that have to buy it from the farmers. And, you know, cocoa prices going up actually hurts Hershey's and Nestle's earnings. Not help it. Same thing with beef. You wouldn't want to buy, I don't know, Purdue or whatever the large beef seller is, but you need the direct, and that's the beauty of futures, is it's giving you that direct exposure that most investors do not have. Most advisors do not have that with their investors. And how do you solve the trick is there isn't this beef example and this cocoa example every month like clockwork, and those are relatively smaller markets.

So how do you solve that problem of, cool, if this is uber successful and we have $6 trillion trying to get access to these kind of things, what do we do? Well. $6 trillion might be a little high. Let's go with that. Yeah, $6 trillion is a little much, okay? Let's go with $600 million. It is opportunistic by nature, okay? Because, I mean, there are always going to be trends happening,

but there aren't super big trends all the time, you know? And those wind up being super big trades that, you know, do great. So if you're approaching it from the fundamental side, a lot of times it gets into, you know, we'll just call it, you know, strong conviction ideas and concentrating positions. I mean, you still have to, you know, do risk management, but there's a difference between having a strategy where you cut off the fat tail, you know, the right tail. And because you want to just normalize your returns, you know, but your overall return suffers typically when you do that because you're cutting off that profit and having the conviction to build the position because you think you have fundamental reasons to think it's not done yet. We'll watch it, but it's not done yet. Now it's going to be the second part, right? So a trend follower has

those positions, probably made money, but they're risking so little of the portfolio on just that market or just that sector that it doesn't really move the needle all that much. It's kind of like going back to, I mean, I heard this years and years ago when I first started studying investing, like Warren Buffett, right? And they were saying like, you know, how should you diversify your portfolio? He was like, well, if you have more than 20 stocks, I mean, that's probably too many. Because that's the way he thinks, you know, it, if you have more than 20 stocks, I mean, that's probably too many. Because that's the way he thinks. It's like you concentrate on ideas. I served him pretty well.

And that's in the stock world, which is to some degree more difficult because there's so much noise. And so the idea is you're finding, sourcing these discretionary I call them, you're calling them fundamental, somewhat similar. And now there's kind of a new thing. We've had a few guys on the podcast, quantum mental, right? They're kind of systematizing those fundamental views so they can run through a bunch of them more quickly. So finding a bunch of those and pairing them with traditional stuff as well as trend following

in some cases? And are you calling those discretionary guys your global macro, so to speak? Yes. The discretionary, the fundamental side is discretionary. The future side is discretionary. Yeah. And there's still all the risk management and everything in there. But the reason that I think that it's it's so additive to what we're doing is because it's it's different than what a lot of people do, because the the process to get the ideas is different because it's all coming from up here. It's not an algorithm. You know, it's all coming from up here. It's not an algorithm. Everybody's unique.

I mean, there's 100 trillion connections up here. Nobody's the same. And I ask this with a lot of discretionary triggers. Why doesn't Citadel or Millennium or whatever, they could analyze the same stuff, come to the same conclusions. Why don't they do what some of these discretionary guys are doing in hogs or cocoa or grain markets?

Well, who's to say they're not doing that some of the time? But you don't really know what they're doing. But they have so much money, they're doing everything that you could possibly do. They have to spread the money around because they'll affect the markets. Right. Or that's, I think the correct answer is it's not worth their time. Right.

If it's a $300 million opportunity, like whatever we need, we have better uses for that in bond world or currencies or whatever. Yeah. And it's different by market too. I mean, you know, the, I mean, the metals market's not that big. Agriculture market's not that big. You know, the financial markets or the indices, they're a little bigger, the bond market, you know, the FX market, you know, they're a little bigger, but. Well, I think you touched on something important, Jeff, with, you know, this is one of the reasons we chose to launch a mutual fund, right?

I had a successful career as a financial advisor. I didn't wake up one day. I'm like, you know, David, let's launch a mutual fund, right? You know, in creating portfolios. I always wanted to do that. The same as saying, let's stab a shark stick in our eye. But when we look at the marketplace for what's available in, call it liquid alternatives or mutual funds or ETFs, there are some amazing products out there in the managed futures world. And we've used some of them in our OCIO solutions for advisors, and we still do,

because it pairs extremely well with our own mutual fund. But there wasn't a single mutual fund that we identified or ETF that was what we call fundamental or you can call discretionary based on the future side. The majority of them were trend following, algorithmic. And again, they're great funds and they provide non-correlation diversification. But again, we like building things with non-correlation diversification. But again, we like building things with a causation for the diversification. And given that our strategy implements a fundamental program where it's discretionary, the correlation between our strategy and others is near zero, even though it's futures-based. Managed futures is many times synonymous with trend following.

That's not what our program does at all. It helps to get that diversification. Is the trade-off there that you may not be there in a classic 08 sell-off or a crisis period? Well, I think if you have something that's happening that's obvious, you're going to be in it. But if you start having a pullback, you might not get out. Especially if you're playing with profits, you know it's got further to go because you've done the research and supply and demand haven't evened out yet. Right. So it's like, well, I kind of consider it's like alpha based diversification instead of structurally beta based. Right.

The trend followers are kind of saying, hey, we're not doing anything special here. We're capturing every breakout. One out of 10 of them is going to be the breakout where it's an 08 sell-off and we're going to be there because we're in we were wrong the nine times before it sounds like you're saying more like hey we're going for we might be wrong one out of the ten times but we're going to have high conviction on the other nine six out of ten probably not nine out of 10, but something along those lines, right. I'd have like kind of flipped that logic of we're looking for greater chance of success and greater conviction on those trades.

Yeah. More, more, more concentrated positions because the research has been done. And even if it doesn't pan out right away, as long as you hadn't hit your risk limits, you just wait it out. I mean, you know, if an idea doesn't look like it's quite ready and it hits the risk limit, it might get stopped out in, you know, two or three weeks. If it starts happening, it might get added to. It could go months.

It could be in the position for months. It could get rolled several times. So it really is global macro when i hear global macro i think back to broke the bank of england what's his name george soros right of like okay i'm taking this big massive bet on this currency and most other historical global macro guys have been kind of global GDP bets or like country currency bets, country rate bets. Well, not necessarily, but I see what you're saying. And then that was kind of more discretionary global macro.

And now systematic global macro has kind of morphed into more trend following. So you're saying this is almost another piece over here of like discretionary more commodity focused global macro we've actually used that example before that you gave okay yeah but the you know the soros example because it was just so he saw all the pieces coming together so he made the bet and it worked out. Now it's historical because it all happened like one time. Yeah. It was like a cascade. It was. Yes.

When it happens. A billion dollars in a day or something, you know, but. But are you saying, are they more commodity focused or no? So, so some of those.

Okay. Yeah. It's, it's, it's across the spectrum. We trade 45 different markets. So there'll be in rates, there'll be in stock indices. Everything. Yeah, it's across the spectrum. We trade 45 different markets. So they'll be in rates. They'll be in stock indices.

Everything. Yes. Yes. And as a matter of fact, in 2020, we were short palladium of all things. Yeah. And, and really had, had to do with, it didn't have to do with COVID, which was kind of strange, but it had to do with,

they were pulling palladium out of catalytic converters. And so it was going to be an oversupply and, you know, and the prices, but the manager saw that, saw it was going to happen, shorted palladium. That was a very good trade.

And that goes into one of the, I mentioned before, about preparing versus predicting, right? It's like the manager didn't predict that there was going to be a global pandemic. He wasn't having lunch with Fauci one day and all of a sudden, you know, it's like, oh, this is going to happen. You know, there was no inside insight there. It was, he was diversified beyond just stocks and bonds

into palladium for reasons that were not related to global economic growth of equities or corporations. And he was just positioned a certain way in an asset class that moved in the right direction you know regardless of what was going on with with global pandemic issues right so it's it's the you know there's a saying i like to use it says it's the bus that you don't see that hits you right so if everybody's talking about the bus and if everybody's talking about this this is going to happen this is going to happen seldom is's the bus that you don't see that hits you, right? So if everybody's talking about the bus and if everybody's talking about this, this is going to happen, this is going to happen,

seldom is that the bus that hits you. It's the bus that's around the corner that you don't see, right? It's nobody saw a global pandemic. Nobody saw bad things that happened. And sometimes it's a good bus that comes and picks you up, right? And maybe it's the iPhone. Nobody saw the iPhone coming until it launched, right? And that was a huge bus that carried a maybe it's the you know the iphone nobody saw the iphone coming until it launched right and that was a huge bus that carried a lot of people you know or or the

tesla electric vehicle or whatever right um so it's being prepared and truly diversified regardless of of what happens is you know our mantra the uh sorry real quick the add-on to that would be the the bus that you don't see and the most people are unlikely to see it's the one that hits it's all of them yeah sorry david what were you gonna say um i don't know i think i killed it sorry yeah it's all right um and oh yeah so yeah so so uh i think the other thing that's important is the, the idea that the process of coming up with the ideas, you know, there's a process, but after that, it's, it's pretty systematic in terms of position sizing and risk limits and, you know, all those kinds of things that have to be done like everybody else has to do. It's where the ideas are being generated. But because that element is there, I think that if unpredicted things come into the process, the manager has the ability to override the system, so to speak, because it's the system, okay?

Where that really doesn't exist in like system trading. Like there was an example when I was first starting to work with him and I was, you know, going through trades and I looked at a trade and I'm like, well, it's interesting. It's like short and like, like, and all of a sudden now he's reversed and he's long and then it's this huge trade. And so I asked him about it and I said, well, what happened here? And he said he said well we had this strong conviction on this but there was a piece of information we didn't

have and when this piece of information came out it literally flipped the narrative and the whole thing changed and we just reversed our position and these have the flexibility to do that and conviction based on you know based on his on information. And then Brad, talk for a minute about the kind of traditional side of the mutual fund, right? So you're pairing, right, what my friends at Mutiny Fund would call the offense side with this defense side that's not correlated. So talk to us a little bit about the offense side. Yeah. So we invest the equities primarily in US equities. All US equities, for the most part, a large company, we balance it between growth. So we put about 50% of the mutual fund in equities, about 20% is in growth-oriented stocks, about 10% is in what you'd call poor kind of S&P 500-like stocks.

And then another 20% is in more dividend-focused stocks. Call it value, but we prefer more dividend-focused than just pure value per se, just as a way of making sure we're not buying cheap stocks that are cheap for a reason. They have strong, strong dividends. We use ETFs currently as kind of the primary vehicle to get exposure to the equities. And we're active on the ETFs that we pick and rebalancing them and cognizant on any tax loss harvesting that might be necessary. But, you know, it's really designed to get market weighted equity exposure. And because it's non-correlated with the global macro side, it really helps to balance the two together. And sometimes we've been asked like, well, what's the secret sauce of the mutual fund? Is it the

global macro manager or is it, what is it? And it's really defined in the name of the fund. The fund is called the Dynamic Alpha Macro Fund. And we view dynamic alpha as that rebalancing alpha, right? We're able to rebalance between the two sides dynamically at the right time when one gets out of whack versus another, which then in essence allows us that ability to, you know, sell high and buy low. And then things revert, you know, because of the non-correlation that helps to, um, you know, all our, all our, all our analysis has shown that helps to keep returns stronger with minimizing the downside risk. So. And that, that's a model you came up with, the dynamic rebalancing,

or is it done monthly, quarterly? Is it on a time schedule or a... We have thresholds, three thresholds along with kind of some timeframes of quarterly. So it's bands, if it gets outside of a band, reset? Correct.

Correct. How do you feel? Have you done research on bands versus time based? We have. Yeah, we've we've done a lot of that analysis. And, you know, we also try to be cognizant of the tax ramifications of over rebalancing can cost more, can generate more taxes. Investors invest in IRAs, but certainly not everybody does. So we try to be cognizant of balancing all those other costs along with performance. And that's why we kind of settled on threshold-based bands along with kind of a quarterly timeframe as well. And we've been blessed with positive flows into the mutual fund.

And that allows us to kind of rebalance as flows are coming in as well. So we've been able to not have to generate any tax gains on the equity side by rebalancing just from the positive flows that are coming into the mutual fund. And what, real quick, then we're going to get into sci-fi.

What's the limit in your opinion of diversification, right? If you're adding like, would you go so far like we're having life settlements and we're doing cat bonds and we're doing it right? What's the practical limit of what you would consider enough diversification and stuffing things in there? In the fund? Well, yeah, I mean, I know there's regulatory constraints on that. So just pretend you have a vehicle that could do anything. Yeah, I mean, that'll be our entree into sci-fi. The sci-fi world where any investment could be made in any investment vehicle. Yeah, I mean, because that's the thing is sometimes I like to refer to alternatives as the alternative to alternatives, because to a lot

of investors or advisors, alternatives are real estate or gold or silver. And to us, alternatives means a lot, lot more. It means merger arbitrage, dividend capture, managed futures, global macro, buffered, you know, structured notes, you know, you, you name it. Right. Yeah. Life settlement and some of those other things, very esoteric out there. Yeah. It's, it's a matter of getting the right vehicle and, and, you know, there's a, there's a ton of those alternatives litigation financing and, you know, things like that can really stretch the envelope of what's out there. And we love exploring it. You know, we have a long watch list of things that we're always tracking.

And, you know, it's tough to fit things in a simplified portfolio, which is also one of our objectives. It's one of our taglines of simplifying complexity. It doesn't matter if you have the best space shuttle to borrow from earlier in the conversation if you can't get any people in it if you can't fly it correct right correct uh but and you probably agree with me here the the deeper i go down into those quote unquote alternatives they're more alternative strategies of right of they're just different flavors of stocks bonds credit and they're mostly all they need gdp growth and a great economy they're cool yeah and they do a lot

of cool things and they're non-correlated most of the time i think the problem is back to that concept of fundamental non-correlation like they they don't necessarily have that if things break credit dries up all all this stuff, they're likely going to break as well. We like to ask the question, what's going to drive the return? What's the return driver? So like with our COCO example, there's three identifiable things that are going to drive that return. And it's the key part is what is going to drive the return? Because one of the very popular alternative investments these days is private equity. Yeah. And popular is an understatement, but yeah.

Yeah. And, and it's funny because when I talk to folks or meet folks about, you know, they talk about, Oh, I'm in private equity. I'm like, Oh, you're in equity. And at the end of the day, private equity is equity. It, it, it, it's right there in the name folks. It's right there in the name. And. It's right there in the name. And I think it's Cliff Asness, right, from AQR. He uses the term volatility laundering. Yeah.

And, you know, look, we think anything can work and private equity can have its role. But you just don't want to fool yourself to thinking that it's going to be non-correlated. If it's going to be driven by,related um if it's going to be driven by you know economic growth it's like an equity because it is yeah just private yeah you just can't redeem this quickly right that it used to trade at a discount because of the liquidity and now it trades at a premium because of the right oh i don't have to see the real returns on a daily monthly basis i'll pay you extra for this yeah yeah yeah you can get that with regular equities too you just don't open your statements or log on to your

investment account for three months the old uh rip van winkle approach all right let's get into a little sci-fi So you guys bonded way back when in the first conversation? You're like NASA. I don't remember when it came up. I think we just befriended each other. And I mentioned to David that, oh, I'm going to go to the Star Trek convention this weekend because the largest one is in Vegas every year. At the Hilton.

Used to be, right? Used to be at the Hilton. It's at the Rio now. It's run by Creation Entertainment I don't think it's actually called the Star Trek convention anymore they had some trademark issues so I think it's something called something else but in essence it's a convention full of Star Trek fans and all the actors come to it and uh Creation Entertainment does an amazing job uh putting the the conference on. And I mentioned to David, I was going, like, on David's, and I go, I'm a Star Trek fan.

And then he said, well, why don't you come? And I had a spare ticket, and David came, and he might be looking for something. If he puts on, like, a Klingon forehead, I'm going to love it. Not quite, oh yeah oh nice yeah right yeah captain kirk shatner that should should be worth seven billion or so he had all that um expedia stock but he puked out of it in like 09, I think he sold it all a dollar. Yeah. David, tell them your story about, about kind of William Shatner.

Yeah. So I kind of always wanted to meet him, but it just, you know, it didn't have the opportunity obviously, but he was my inspiration for getting into the space program. So when I was 10 years old, I turned the tv on and it was the just happened to be you know they didn't have reruns back then for the most part it happened to be the first episode of star trek was on tv and first one the assault monster you know the whole nine yards yeah i was enthralled you're 10 years old it's like what is this so I was hooked and right then I decided I'm going to be an astronaut well I want to be an astronaut so after I got older I realized you know the math is I got about a 0.02 chance of getting to be an astronaut so I'm just going to work in the space

program to be an engineer work on spacecraft meet. And I actually did wind up going to Johnson. I was there for five years and worked with astronauts designing the space station. I was in meetings with them all the time and just had a great time. But I always wanted to thank Shatner because he's the guy that set me on that path. It never would have happened, you you know just happenstance yeah so i actually got to meet him and tell him that story and got a photo op with him and of course

oh that's great i'm so happy for you yeah um like you probably did it 10 000 times that day yeah and then you've got a little like my poster behind me me, of sci-fi, not just Star Trek, but sci-fi into investing. What's your take there? Yeah, so we have a blog on our website too. There's a few blogs. There's a blog we have on what Star Trek can teach you about investing. And I love your infographic as well on the Star Wars. I've sent that to a few folks.

And I think it was a few years ago, it was last year, earlier last year, the promoters for the convention here in Vegas sent an email out to everyone who had a ticket and said, if anyone has an interesting topic they'd like to talk about, shoot us an email. And I thought, I asked David, David, do you think the Star Trek fans would like to hear about you shoot us an email and i thought i asked david david do you think you know this the star trek fans would like to hear about investing it's like i mean maybe everybody likes talking about investing everybody needs money right so we shot him an email and said hey not in star trek right there's no need for money but you know the ferengis do with the gold press latinum we brainstormed ideas you know you know, put shields around your portfolio.

And that was one of the keys on why we did it was because, you know, as a financial advisor, I know investing can be scary for investors. And there's a lot of terminology. There's a lot of jargon, people on CNBC moving fast, using scary terms. And as a financial advisor, I always tried to speak plain, understandable English because I wanted my investors, my clients to be comfortable. And if a confused investor is not a comfortable investor, right? So we went there with the goal of let's talk in Star Trek language. Let's talk in terminology that everybody there can relate to. We should have done that the whole time next time. Yeah, we should. But one of the things I've always enjoyed going to these Star Trek conventions is

there's people from all over the world go to these conventions from all different races, creeds, political beliefs, you name it and everybody gets along because everybody looks at what do we all have in common our love for science fiction and star trek let's bond on that put our differences aside and everybody gets along right sort of gene roddenberry's idea in the first place right of like hey exactly in space we're all equal and everyone's cool i mean i mean if klingons and humans can get along, why can't Democrats or Republicans? And so it happened. You spoke

at the convention. We spoke at the convention. We stood on the stage and spoke at the convention and it was individual investors, retail folks. Did you have a costume on? We did not. We did not have costumes on. We did have a few Klingons in the audience. There were some Klingons in the audience actually, which is probably a first for a financial.

A plot. And give us some of the, what were some of the corollaries? Shields around your portfolio to protect yourself, right? I mean, we talked about risk tolerance and understanding yourself we did it we did a cute little quiz like like who who would be you know the biggest risk taker and from a character standpoint right maybe it's wharf maybe it's captain kirk always out there taking risks who would be the most conservative who's the most nervous nelly star trek character you can think of and you know it know, it was, it was Barkley. If you remember Barkley from Next Generation, always nervous and scared. Right. And it's like, until he became super being,

yeah, he became super being in one of those, you know, but, but you can have a portfolio for a risk taker like war for Captain Kirk, and that works great for them. But you put that portfolio for Barkley, who's a nervous Nelly, it's works great for them. But you put that portfolio for Barclay, who's a nervous Nelly, it's not going to work. So it's understanding yourself, understanding your risk tolerance, and then building that portfolio to fit you, right? And I think we ended it with understanding that goals matter, right? And defining the problem. We shared David's story about, you know, the capsule doesn't have to be indestructible. It just has to get people back alive. So are you defining your financial goals correctly? And your financial goal should not be to beat the

S&P 500 every year, right? Your goal should be, as Spock famously said, to live long and prosper, right? And that's the goal is to to retire to send your kids to college to exactly right live long and prosper that's what everybody you know aspires to do and you know that that again lines up with your correct risk tolerance and uh so it was a fun presentation we got great feedback from folks and we'll put the link to the blog in the show notes. I've always wanted to, I would have loved to get in there and be like, hey, they failed. Every series has failed Risk Management 101, right? They're not supposed to send the captain on away missions.

He always goes on the away mission. Correct, correct. And then in later ones, they would even quote it like, Oh, sorry, Captain. I'm going. It took Picard a while. Yeah. It took Picard a while before he got off the ship. And then you could have worked also in like red shirt,

who the guy who's going to die in your portfolio. No, no, who the red shirt is. Awesome. Let's, I just want a few of your favorites while we're on the topic. Favorite series? Star Trek series Voyager for me.

Voyager? Really? I like The Next Generation. Yeah, that would be my choice too. I thought you were going to go with the original since it inspired your early career. It did. It did. And it has a special... It's not in with the other categories got it it's a whole separate thing and then there's a series yeah uh favorite

movie tougher i'm gonna go with rathacon rathacon is a is one I like the one with the whales Voyage Home and then the new ones are pretty good with Christopher Pine JJ Abrams ones are really good yes I really think that Ricardo Mataban should have won the Academy Award

I'm not saying that but I mean the only reason he didn't was because it was Star Trek. He was throwing 100 miles an hour. He was in sports parlor. And favorite character. Oh, it's a tough one.

Well, Captain Kirk. Captain Kirk. I think I'll go Data. Yeah. I would agree with any of those i think the card you name it it depends on the mood right if you yeah true helix to me is one of the most hilarious characters right and yeah you know but depends depends on your mood yeah and then do you guys ever have i've been in meetings where i say data like data data i'm like sorry track star trek fam well it's human yeah and it's it's david and i had a fun experience when we were launching the mutual fund and okay now we have to pick our ticker symbol so what should what should our

ticker symbol be and can we work in a a Star Trek terminology phasers on something P-H-S-O-N and I think we even looked at data or something and I think it was taken or something like that but yeah it's data data we all know

alright we've taken up a lot of your time here so any last thoughts for listeners? No, we appreciate you guys. We appreciate you allowing us to speak and appreciate everything you do to help communicate the message on diversification and alternatives. And we love your analogies too, with, with your blogs and the Star Wars, Star Wars analogy you have with the poster behind you. You know, there. There's some great ones there. We have a blog. We have monthly updates for our fund where we go through details on what's

working and what's not. So feel free to go to our website, Dynamic WG, as in Dynamic Wealth Group, dynamicwg.com. And you can always email us at info at dynamicwg.com. And maybe we'll put in the notes too. But yeah, we appreciate you. Ditto. You going to the Super Bowl or any of the festivities or staying far away from that circus? Yeah, I'm more of the one that stays far away from the circus. You know, God bless the people that come to Vegas and spend their money and keeps my taxes low and keeps the economy and all the wonderful people here employed.

So that was when did the bears were last in it? Oh, five in Miami. And it started raining. It was like 50 and it started raining sideways. And it was just as cold as I've ever been. 50 degrees in Miami because you're soaking wet, and I'm thinking through my mind. Then they started losing.

It's going to be four hours until I'm able to drive myself up. I have to get through the stadium, get on a shuttle, back to this parking lot, back to the car, all the way back to the hotel. Yeah, yeah. So, yeah, it's not all cracked up as soon as your team starts losing you're like what am i doing why did i spend all this money yeah but i'm sure it'll be it'll be fun it'll be good uh great well thank you guys we'll talk soon

and best of luck with everything really enjoyed it thank you okay that's it for the show thanks to brad thanks david thanks rcm for sponsoring thanks Really enjoyed it. Thank you. Okay, that's it for the show. Thanks to Brad. Thanks, David. Thanks, RCM, for sponsoring. Thanks to Jeff Berger for producing. Live long and prosper.

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