SI320: Bonds: The Voldemort of Asset Allocation ft. Andrew Beer
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You're about to join news cost of larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy. Welcome to the systematic investor series.

Looking back to the latest addition of top leaders unloved for each week, we take the pulse of the markets from the perspective of a rule space investor. Or is Allan done here sitting in for new, whose on these troubles again to like to be joined by Andrew beer handle w how are you?

I'm great. Thank you. Thanks for you. Beyond not at all.

No, delighted to chah. Uh, was interested to hear your perspective. How are you? I think I saw, I inten you've been out of travel of late.

Well, actually was in the copenhagen a month ago and then stock home in a week ago. And then I go back to copenhagen in in, in a couple of weeks. So not actually I have to stop in miami next week, but by my standard's actually hasn't been too bad. I figure home more.

So you're back on homeostatic the for the election, I guess.

So a lot of excitement around us. Yeah, it's to be interesting .

to absolutely well, we will get to all of the market moving stuff in this. I mean, we always kick off by ask him guests of anything particular on your radar. So what have you been focus on on at the last few weeks? Been interested .

well I mean I think will talk about the you know the ugly websites are going on in in the manner your face um but now look that we have the election coming up next week and I I went him optimistic about IT um but i'm not i'm definitely not I don't have the sense of history that a lot of other people are around me around me half about IT and and I think that no I think whatever happens next week and it's likely to be um not first and only you can end on tuesday, but because we could be we can talk about the stuff for a year basically.

But but if if you just take a step back, I mean, we are a democracy, right? People are, people are fighting over votes and counting votes. We are not there are not taking on the streets. And so when people get hysterically about, you know, the end of democracy, I I know a lot of people who gone to serve this country in the military.

I don't know a single one of them who for for political reasons would consider appending the constitution um and so you know at at at the core, we are a prosperous country where people have a lot to lose. So I think I think greater comes to OK and then editorials been written by body street journal who I find incredibly thought ful um basically saying that yeah like we've we've been through a civil war now. We've been through vietnam. We've been through you know many, many, many, many very difficult um and what's being sort of lost in this is is the comment and the general goodness and that because it's just being drowned out by these kind of two lunar to granges on other side um but I think will be good .

self a well, that's an optimistic perspective. So well see how that .

all plays out so yeah but by the way, if I do this I do if I do this a twitter post that means like ah all health going to break this tomorrow because I have an almost almost perfect record of of calling things the wrong way when I do something.

We can far the worse if you are truly a contrarian indicator that's working time, but we'll see. Um so we do have put a question, but maybe before we get the question, I mean, you touched down hip sales and market.

So just to recap C, G, A performance IT has been energy month, sadly so um as of the third ot october, so that of excluding the last day of the month, the sock N C G N X was in one point nine seven percent sock and trend was then two point eight percent and near to the sock anc t was up zero point five and location train was down zero point six but said yesterday was a tough day for train followers and as is always the case, the last day of the month comes to to by many managers and I was at the a negative day. So we will see and more downside on the index. So when the final numbers come through and observe, he puts us IT will probably push the city and the trend in x into a negative number year today.

So IT is turning into A A difficult year. I mean, particular when you considering there is the cushion of interest rates, uh, h built in there. So and he told, I guess, from in terms of attribution, obviously, I lasted them.

That was equity reversals. But earlier in the month, we had you know hip soles and fixed income. What's your prospect of being on under last months and last few months?

I would like I would actually back a little that father, which is that I think the so so you I always interest in the shifts in narrative, in this, in the space and often IT kind of evolves around. It's been working. And so i've talked about a little bit with nails on this podcast.

You when I when we first looked at replicating the space back in two thousand and fifty thousand and it's that trend was dead. But but people that there were commoditized products coming into trend. And so people tend to do to one emphasize things that we're non trend. Um and yes, we ve talked about winton and they are pushed into other areas.

We talked about popular things like melbourne, and they are learning and counter trend things like fort um and you know then kind of the unexpected happened, which is in march of twenty twenty actually trend best and that you take a fun like pim cos mutual fund in the U S. And a may been also the rates side of the as well make some duration and but can go as well in march. And then the trend guides by the end of twenty twenty and the end of twenty twenty one, the trend guys are out performing again and uh and then twenty two, obviously, that's good, really good market for them trying guys do Better in twenty twenty two.

So but the other twenty twenty two, I think the of the general view was okay. Role, the real drive for the real source of alpha generation. I and I believe this over time for reasons we can talk about, is medium to long term track.

If you had to I dif y the the beta, the driver returns in the space that that's kind of the sweets. But and then if you look at the past eighteen months or twenty four months, IT has been it's as though the market gods designed a market regime to to annoy the crap. And if anybody doing beating the longer term trend, because the isolations are, are, are timed almost perfectly, that by the time you start to love a trade, there is a know the poll opens his mouth of the baggage.

Japan does something or you know the democrats do their pate switch with with errors. And IT also is working. And so um so I did.

I mean, what I think this year is just has to rank among the most trust reading years and that was working. Things are working so well for a number of months. And then I think god, the the the industry had gains to give back.

But I think look, I think this is going to provide a lot of thought for the know. Just tons of investors were broadly critical of and have the sort of deep seated dislike of the C. T.

A space and friend following. And for four reasons, I think we we can talk about. So I look, I think it's gonna certain cause it's just in living through is unbelievably frustrating.

Yeah no, absolutely. I mean, that is interesting. And I think about myself, if we were to go back two years more less to the day, you know, end of october twenty twenty two or even end of the september, you know what I did a five year returns on the index were probably as good as to be a and you look at the macro o environment and you say, no inflation is back, more volatile inflation, more volatile matter conditions, rising rates. Perfect backdrop for city among the features you would say. But I just shows yet how hard IT is to translate A A macro o picture into into performance is just that that performance to have come when he comes and look one .

one of the great things about the space they get out, right? They don't hold things with a White local group and and and there's there's a holders and a rationality tunit. If it's not working, you know don't pretend the markets are wrong, just listen to the markets. But because of the nature of the isolation is, you know so I was writing about, you know how we were positioned in july about being long the trump trade and you and you get to kind of the middle of july. And the guy survived in association attempt that people lives could be a red wave.

And they think it's going to have three impact on the market, is to be good for equities, is going to be bad for bonds because you know because of uh, terrible since you know and the deficit and everything else un go for the dollar um are taking the other and god, I wish we hold those positions looking at the market at a you like, uh, you were so right, right? You had IT IT was the market was tell you exactly what was gonna en. And then there were these like no crazy macron ic variables like you know nobody on planned or thought after that they thought biden was gonna stay in the race because you have this White a group on the race and then and then they swapped out hero nobody thinks that's going to work well and then IT works Better than anybody expected.

And the back japan comes and decides this is great to quote on zero hedge, which um we talk about the back of japan, they said, if you know whatever is the worst possible decision that you can make at the worst possible time, they're gonna IT. So yeah so they basically like set the macro world on fire for couple of weeks and then the economic data cave in winter. So just like IT was just in all of those were turned up to be headwaiter. But but as you know, but you went you're on the market and you're on the wrong side of IT is just IT is so frustrating.

Yeah no, it's a head, has you right? IT has been choppy. Suppose as you say, if you went back to july, had a tray, we went and you had fears recession one and longer, you so you that of in in the number, you know.

But I just out one thing to that, which is that you know we're all very narrow ly focused on how annoyed IT is in the neuter space and the city space. Imagine if you have made big bets on box, right? I mean, may talk about guys there who went early twenty two.

I mean IT was early twenty twenty three. IT was this is going to be the year the bond you know, rates are going to go down here. The then rates to go up for a period of time.

S V, P happens and rates go down before the wrong reasons because we think of a lobo bank crises, then rates climbing, then climbing back up again. You're under performing cash again. So it's not it's not isolated to the space um but IT but but you know we feel we feel the thing in our cheeks and a little more than than other people certainly do.

I mean, I mean, that is as we've said many times, it's not the easier strategy to hold. And this is another year that is that he proved and that to be the case. So move IT on. I know I mean, you did mention you are on your travels in europe, uh in top and egan and the sweet, I think you said and I know you participated in in in in an interesting round table with all the the Grace pinker is in the manager future space. So tell us about about that was any any notable inside coming out of that sh.

what they look for I was was incredible grateful to be invited because .

for our audience said IT was the .

hedge org event is right, so apparent. I was learning this as I went because I always of, you know, try to catch up with everybody else. But but apparently every year, hedge nordic has done these great round tables where they assemble all these luminaries of the industry, and they talk about things that are going on.

And brother is three trends and you know, being as typically uninformed and out of the loop as I am. I I, I you know I I got invited to this and I was interesting in that so you did have a illumination there from uh, links the the local hometown hero in stockings. Kd committee was there for out of complex you know aspect that was there, trend was there.

And then also you you had to some etf people like so I was there and and Jerry Parker was there and and and a couple of other people and was just, he was really interesting result. Everyone was incredibly nice and incredibly gracious. I felt a little bit like I had making good jokes about, like having my back to the wall and stop like that.

And I think good. Like, please stop. But IT confirmed a lot of the research that i've done about the architecture of the space, which is that that that the big players in this space are a very, very privileged position and that they have great long standing relationships. Was very serious, very sophisticated investors um and and their businesses and somebody I mean is no one for man group was there. But I thought I was very senior van and and he was describing to be about a year ago, he said you cannot believe how much of our business solutions based you know that we have because and I think like I think is the reality.

If you sit back coldly and you say, you know what's going to work well over the next three years as is that alternative markets or traditional markets short members as long term um you know are there other statical things you can you can layer into IT? It's really impossible to make to feel like you ve have an an edge in making that call. So what I think the industry has has largely evolved to is that we have these opposites investors who see the value of the strategy, and ultimately, they want to work with people who are both asset managers, but also solutions survives to help them to that.

They have ideas in terms of the exposure that they want to get, the research that they want to. I use an example actually of in IT about bridge water, and that you know, in one of the ways that bridge water was able to develop such strong relationships with cio s of penchant planes all over the U. S.

And south wealth and sea, was they had a huge part of their business that was purely about providing research supporting this view. And so you know so so going into IT, my my view was that there is this loyal, stable core of institutions, al allocators. And now in hedge fund world due to about three regarded billion in assets.

And and maybe you get into more of IT. You you there are things into IT, but but there's a very, very powerful relationship in dynamic that often goes back a decade or more. And that's really and I said that's really valuable because the person sitting on the other side, the table, the person is making the allocation decision and they have their own job to do, they have their own committee to serve their own messaging around IT.

And in a sense there is this very um sibiu tic relationship about IT. Um you know on my part I tried to do the same thing but to the rest of the world um and in that you know what i'm talking about, what we're doing on the replication side, it's very specific around the feedback that i've gotten for people about things that they're trying to solve in their portfolios. Now we're we're not trying to solve for people necessarily on a investor by investor basis.

But if thirty percent of model allocators say I can get them to open up and talk about what they want and they say, I really wish we had something that could do this then that gives me somewhat of a window that given the the the heart gate of the investor base, everybody got different straining different that um you know that to try to be very targeted about how we can build something that meets the need of a particular constituent within IT. Um and and that's why like all the disgusting about like canvas zone and everyone knows that these questions like you know what if you take over the industry and like there's no induces the replicated, whatever that is always kind of an absurd questioned to me because if if the whole metric was is IT Better to only asp five hundred years eight, taking a shot at picking a one on the active managers, you would have ick the us, if I fired twenty years ago. But but people don't right.

They want to talk to people who are picking socks. They want to understand what they're doing. They like, they like like the insights that they like. Um it's often part of their job description is defined that so I was I thought I thought that I thought IT unbelievably interesting. And and then of course, I was going all over stock home meeting investors, which which was you seen the other side this as well.

If I mean, what you talk about in terms of those deep relationships of that, I mean, you're alluding to a largely the institutional space and A C. I mean, I guess a lot of people allocating to E, G P either in the model portfolios face or they might be in private words. So I I guess you do have that market segmentation not for to say that different cgs might be serving difference at least stronger in in serving different partial segments of of the investor base.

Again, have you gone around and seen a number of institutional wealth management investors like like everybody is really different, right? I mean, if you invested in a manager, you've got a bad experience with IT three years ago and and the decision was to get out of the space entirely, your view is going to be completely different than the guys, I mean, who have taken that like the strategy, but internists, ed IT who or people who have go on about the doing Q I S and other, other kinds of products.

So I think the I think the at least from my perspective, and we know we got to talk about how the the whole narrative side of IT is over the years, and you've got a clear sense as to who is the potential constituent for IT. And the bottom line is not about incremental sharper tio. It's often not even really but like there there are things that people are thought about but it's it's do I make your life Better and and actually I use this example where one of the firms in the room um in charge investor with them had come in to see us and and I got to have the meeting with them I said, honestly.

Y I think you have the right pic for you the way you're set up like i'd whether these guys have a the sharp pressure point one higher or point to higher or they goes to draw up or something in the comics, the way you guys are set up the the messaging that you've received from them is totally consistent with how you're trying to build build your portfolio. And at the of the minute actually said, like I don't think we help you. Like I don't I don't think you're going to look back and say I don't think in your particular job configuration that you're going to come back and say that you're going to be rewarded because fifty basis points or one percent of your portfolio was a little bit cheaper, a little but easier to invest in what I do like, like whatever the things that, that might down in and that might get a guy who is managing a wealth, managing porfolio in the U. S. You under certain regular torture exit, that might get him very excited.

So it's and I think I mean, I guess such as reflects how the the industry involved and will talk a bit more bit to later. But I would see we have now you know you have at the one extreme, you have solutions and then you have standardized head und products and you have mutual fund products. They have E, G, F products. So they are all different representations of transfering manual strategies aimed different segments of the market and serving different needs. And I guess differences are are driven by by the requirements of of the end ambassage, which is, I guess, fair enough now be sure.

But I but I mean, no one would care if the space is growing. The elephant in the room is the space, as in grown on on the hedged fund side in the mutual fun side in a decade, basically. And so i've described as so it's a create sort of a hunger gams mentality that there is a finite pool of assets out there.

We know who's got money and so how do we, you know, will go in smiling, but we're trying to bump on somebody else. And my broader thing is I think that self destructive to grow in the space, it's the right thing to do when you're sitting in front of the client because that's a your only chance is to convinced you're doing something Better than the next guy. But I think what he does is IT gets people to focus at least outside of that group.

IT gets people to focus on the relatively slight differences between these portfolios over time compared to the underline drivers as opposed to help people understand what how would you visualize a good experience of owning this five years from now? It's where everybody's energy is right now, you know is is, you know how do we get onto that even in in the mutual fund space? You know how do we get a fund onto that platform? And then how do we unleash my and for going to a period about performance? How do we kind of pigeons sell that I don't find a terribly effective um because because ultimately the decisions that people are going to make about IT is, is you don't know if what decisions they are going to make unless you really understand they're really thinking.

And I suppose to what people say when like and you people walk room to say, I want the best manager with the lowest fees, the highest sharp ratio that does the best in a crisis that does well during other periods of time and the end. Not only does that not exist, but it's also not really what makes a difference. Then you know what what's going to make a much bigger difference is no people talk about and somewhat causes denly interns like career risk and other things like that.

It's it's that I mean, people have there's always this expectations from the outside that a fund manager is pulling the wall over the eyes of their investors, you know and and so what example is, is private equity. And so when twenty twenty two happens, a lot of private city funds that really mark down B, B, C funds were marking down their portfolios and a lot of journalists were in an upper about, you know ah you know there this is a they are deceiving their investors and and I kind of grew up with people that world so I called some senior guys in IT and I said, guys like helps me out here like, you know, like how do you feel? I mean, you feel like you are not being sufficiently aggressive and marking things down. And they said it's a thing clients love most about IT .

because because they're walking .

in they're getting off the photos and walking into a meeting with their investment, who sees you know fire fire spreading in other parts of their portfolio. And they're not really in a mood to ask really hard questions about whether we're not marking this done sufficiently or not. Um and so so I think I think it's that I think it's it's it's just started starting with appreciation that allegation ors and and and people who run funds.

If you have relationships that are in sort of open and candid, you can have a much more, I think, efficient and productive relationship um and and at your ends up working Better for anybody. I think the problem is that a lot of the distribution business is designed to um in particularly in in like marketing miniatures funds at torts. It's often designed around slipping a fast one by the investor.

You know like um we've one through six months of our performance. IT wasn't luck. IT was you know that we knew that we should be over way to underway X, Y, Z and and and the discussion of people to kind of push IT to get people into IT because that's how they are going to get paid and then invariably IT does. And then that's when you get this off, investors and space grow. Yeah I an everybody .

has narratives and and I guess people have to think about how they position products. I think you write up to a point to bit. If some if a manager, uh, makes a change to their system and then suddenly has Better performance, you know, obviously, it's probably more likely to be random. But IT, the eras of that they made a change is working, tends to resonate Better with with investors, as I would say. So there's always a temptation to put on dash but said but but that's .

also legitimate as well, right? I mean, it's not it's it's not I mean, like we people think we are very strange for being proud of not changing what we do in eight plus years. Again, just going back to the horizon, the invest base, right?

There are people who even if they buy into IT, i'm not sure they know how to explain IT to people because like something so we have now we managed an etf in the U. S. right? You can have a conversation with an institutional consulting firm about and the first five minutes before we get into IT will be, you know, it's such a painted on the asked to invest in hedge funds.

We wish we could invest in the easier vehicle. We're getting a lot of pressure from our clients on fees that we wish there were lower ways of investing. Our clients really value liquidity and you know and wouldn't be great to integrate.

They can like describe all the things that we tried to solve and they may eventually. But in general, the reason they would never invest in a etf is because they're not going to have hatching, hatching, hatching hedge, one etf hatch hatch one hunt in a category on a on a reporting statement. It's because is a hash fun bucket.

And again, going back to my point is that I don't think they are doing anything wrong, but by with their clients because their clients have hire them because they built tech one bucketts. If if the claim hire them and says, you know, we want a hybrid, find us, you, whatever, do this optimistic timezone around IT. But but that's not I thought they've asked to do and and I saw, I think understanding that and being able to have open conversations about those kinds of constraints like that is it'll make the I think that wants my goal is to make a whole distribution process much more efficient because I don't want to waste other people. I don't want to waste their time. And I don't think, uh, I don't want to waste my time if if, if, if, if we're not going to do something that's going to make their lives Better, how they define .

that's policy. For a second, I did have a question ab, that I should address among the but let me because it's now I mean, IT is related to this topic in the same. So we're talking about different products for um different market segments.

And and one though the question is around the use of capital guaranteed products, which is another segment of the market that used to be very much set of four. So if you go back in time, I guess maybe probably fifteen and twenty years ago, I think man H L. Used to have a big business where the trend program was wrapped in in a capital guaranteed product.

And the way of work was you was you mean took kind of eighty percent of of the value of the of your investment and but you a coupon bond. And then the rest was stand on an option basically to track the performance. I can track anything obvious.

Ly, but I used to be to track performance of C, J. performs. Question is around where have these products gone? Obviously with higher interest, with lower interest rates, they didn't work.

You know, if they were gone for a decade, obviously, rates have shut up again and twenty, twenty two still recently high. So IT would work. But I haven't seen this type of product in the market myself. Have you experience of any reason why we haven't seen a resurgence of this type of the government guarantee product in to the yeah I mean.

you know how much that was in the U. S.

Verses abroad. IT was more in the U. K.

as far as I know. K, O, K, I I don't know the U. K market as relates to this. Um well, to tell you in the us, so we are what we do, as you can imagine, this extremely capital efficient. So I spent maybe two plus years, maybe three years um trying to figure out this is when interest rates were all lower to trying to figure out whether we could basically do something in a principal protected note um and the people that we were talking to, our insurance companies in the U. S.

Um and the argument was that if IT was principal protected, then they could treat IT as a bond and therefore IT would end up in their billion of dollars of bonds as opposed to be being a standard on A H fund. OK, yeah. And so all of these things I usually have, there are some motivation behind why they do IT like i've first of people do principle of things in amErica a to hide out where families.

But there is more of like, don't worry, you can't lose your money and we're going to swing for the fences with the other part. So so, so I don't know all these different markets where I do you know was in this market. Um the regulatory regime shifted in that the self regulatory organizations at some point decided that this wasn't really a bond.

This was a zero coupon bond plus a headphone. And so that had accounting and other treatments and uh like people are going to with private equity. So I once once there is an opportunity, people try to find as many ways to do IT.

So I don't know what happens since the rates of come back up. But but my sense was that there was you know that the the obvious buyer of the insurance company that wants to get a different kind of exposure um was gone for regulatory and accounting reasons. But broader I grew. I haven't seen I haven't seen that as much as well.

I just know from from from U K. Context that they were more than feature in the past and less so lately. I mean, I think some that IT is regularly as well in relation to even though it's a capital guaranteed product in terms of if you want to sell that to retail, not sure is still regarded IT still regarded as complex because the underlying investment is in this complex. So I think that that is one angle to IT.

But I in the wealth manager like I mean, from what little I know, the products in an america, I mean, they are loaded with fees, right? And so you're basically nobody y's spending a lot of time analyzing the old cost of these things so they can charge huge commission on IT. So no I they don't have a wonderful connotation uh, for people who you know who who can care about about about those things like that.

But but no, look, I I haven't seen and I also don't know. There is also just been a huge problem in that. I think after years and years and years of low interest rates, no one wants to give up their coupon like that. Three, four, five, whatever five percent coupon like if you look like that, we also have have products that are in you know what you cause the multistate use its bits and those products you know buy a large of been losing a lot of assets for years because and and even in twenty twenty three, like after having done well in twenty twenty two you think how my god we have given out much bonds went down but by the time really twenty twenty three roll around I mean we just heard from wealth manager after wealth managers why would I do anything but by shorter's gills and um you know I don't want duration risk just is like this is almost like this palpable relief of getting coupons. Es again um so again, maybe we got to zero couple structure.

Yes yes I may do anything in in in structure products world that had been very popular. G tim, rates for low was a little basically selling, selling volatility and betting that you know certain certain stocks are baskets of stocks wouldn't trade below a certain level. But I think those have remained at popular even as rate of come up because then your total return is even higher.

And now so IT IT is curious. We often seen more of this, but I think regulate issues is one thing. And as you say, interest rates.

But people also done to think the bigger insertions of untactful, they're saying they're going to. The guys was in the room was brazil ably and saying, you know, we want to do three hundred million, but we want to put up hundred billion back now. We want to manage the bonn ortons lio. We wanted manage the collateral. We're going to um and so you you're basically getting to the same place just without the fiction of this .

being a stabled. No, you're right. I mean, a part of the question was that are to return that products kind of delivering this without the guarantee.

I mean, basically all of these kind of products that are using different constituent part. So in some case that it's it's a bond that an option IT or in other cases, it's it's a bond and and future strating. So IT is there are all different representations of combining different financial instruments. So maybe moving on. I know you wanted to talk about E G F performance a little Better and and maybe the chAllenge for for certainty jays of given that you know as the market has evolved now we have mutual funds and E T X competing side by side and and in some cases, some providers have have boat types of products in the market. And what was what was your perspective on this state that .

you wanted to to talk about much? Well, so I think one of the I actually do lincoln post on this the Better week ago um basically like there there is this sell serving assumption that that hetch funds are these magical alpha generation machines that you know you should be more than appetite of the headache like I I look I mean, let's use the most office example like a moni um right think that those guys have done a sharper shape two plus for thirty years.

They have skated through the crazy macro shifts in the past five years and not a scratch on their car. okay? Like I mean, unbelievable.

And they charge you with absolute fortune. And you know if you can give them money, just give them money. And you know the hope some get something, shopping doesn't happen.

So there's there's this kind of perception that, you know, that's what a hedge fund is, right? And then then there was the whole bus, this quid d old world and a liquid. All a lot of the products have been really bad in liquid outland.

I mean, if you look at the broad, look, all space, and I said that basically, if you want to evaluate space, dig up all the dead bodies, right? When people look at the space, they tend to say, you know who's there today with a five b guys, how they've done and we know for is and social validation and career is really epic. One of the five probably not the best because he might be able to crazy about the worst three or four probably.

So a lot of the liquid old's world broadly um as a bad connotation um because they're generally being offered by traditional asset mediation firms who have a they are sitting on this big gigantic melting ice cube of their traditional al active relation business. And if you talk to the monopoly y, they're like the thirty years going away. So what do we do between now then? So they, they but they have these eight existing distribution forces.

And so still starting right after the G, F, C, they start taking hetch fun products and putting them into these things. Not really more about pushing products out the door. And then and there's A A gun ben Johnson morning star was is great expression called the spaghetti right, if you, if you should, enough to get, if the wall, a couple pieces will stick.

And so you are so and morning are our studies as well. Like you know, you might have a firm that got twelve products out there, not their best, not their favorite, not their high conviction. Twelve, great.

And so so and the one of the ways you you you keep you feed your large area of distribution people is there is always a winner in those wealth. There's always something that looks good. And so they are end because they are higher cost products.

There might be two hundred basis points on average. Even then, the men featured spaces are harder than seventy basis points on hours. The for mutual funds um that allows you to pay your sales guys a lot more.

And so so their motivation, this army people, their motivation is this stuff as much of this product as fast as they can during a good period. And you know and again, you're they are usually coming from very big reputable brand informs lots of resources to piment. So they're effect of doing the problem is that they're not that worried about how investors are going to be feeling in three years or five hours.

If that doesn't work. See you look at this broad look at odds world and and i'm got that mutual funds and and use its funds and and wilsher has good date on this. I you're talking like a two percent return over a decade, right? So maybe less than bonds over that period of time and but after like two hundred basis points in fees and generally with the very high correlation equities.

So i've called a failed experiment or or or or a great embarrassment for the accident of indeed. But what IT did is kind of food into the narrative of the reason was because their mutual funds IT was a mistake to go up for liquidity. I supposed to take a step back and saying, no, people who don't really know what they are doing are shopping products into the market to try to make a quick book, which is basic.

What happened? You know, then when you step on the etf, the knock on etf, again in the standard fetch on framework was bill action is not doing an etf. Of course, the moment I said that, of course, is probably a launch tomorrow.

But but, but again, I mean, I was you like if you if you're taken activist position where you cancel your stocks for a period of time, you cannot have a etf, you know actually sell your position because because you're tf, they transparent the position that you could see every day what whether somebody is buying or selling stocks. Um the limitations and there are all sorts of the limitations that you actually you run into um so that standards model hedged fund Better than neutral funds. If I hold my nose, I can invest in the heads, funds the whole medows, invest in the mutual funder or use its version of IT.

Then the option was always in, you could never make IT work in a etf. And look, my intention is that that's wrong ah. As IT relates to the men of future space, multnomah never doing a mutual fund that never doing an etf.

I get IT. But by and large, there's not a lot of evidence that wildly more complexity meaningly improve sharp ratio in the space. You don't have the position level transparency issues of not graduate your man H L.

And you're doing at etf. And somebody can calculate exactly how much of the heating oil market you represent or something okay, that gets a little bit scary for a front run perspective. But so I don't think that relationship polls in C T.

There are specific examples of like there are one off examples. I I wrote a post about fund run by simplify as C, C, T, A. I have no idea what cta does on a daily basis.

All I know is there they see to be killing. They're killing up this year, like everyone goes down one day. They seem to be going up. So doing something is very, very different ideas and craft.

The only point is like, sure, you've got an etf that is doing really, really well relative to the very best guys in the world that bedoya for very long time running big at funds doing that. You know that even in the drawing down recently, a like a uh you know kd community for simply like launch on etf, look at that number since I was launched. It's great, everybody.

I had the what this I think seems that launch to decide the city. Uh, such an C T. Trend in next eleven, they're down four, right? So again, the perception that always in a etf and therefore doesn't have all maybe doesn't have all the risk controls, you would have other kinds of products.

It's so it's just all about IT. But but people hold on to these things. They hold on to these cannons sometimes because they're self serving as because there's anchor to IT um and it's because they just sort of like the pitch, they like the draft.

Well, I think that seven years, I mean, if you'd take man, for example, as you say, man of a etf under mutual fund and then obviously they have hitch ones and a solution species, the etf trades that A R of all as well as understand yeah decent bit more than their mutual fund. But I mean, their expectation would be up to mutual fund, would have a higher sharp under a and what i'm assuming i'm not speaking under behalf, but i'm assuming based on the fact that it's pure, I mean, D A harsh are because you have trend and other strategies and trading more Marks so that all else being equal, equal higher sharp. That's the general argument.

No one actually I R so I mean, I mean, just for the record, I think they are mutual. One is fantastic c but I mean, it's it's i'd like if people asked me if you could invest in one mutual fund in the space. If i'm not allocate, i'm taking that fund um in part because I think that does.

It's like, first of all, this international who they are, the brand name, the gravitates, uh you there there there the best or you know there at the very top year but also um I think they know what the mission is of that fun. I'm guessing you know this guys Better than I do. I think they know the mission of this find is to provide a single fund, a single line item that's going to be sufficiently diversified, is going to look a lot like the whole industry.

But they're onna dial up their rist controls a little bit more to be a little bit Better of the inflection points. And so I mean, they were was my number and they were through last month. They were down two last month um which and again, they're not having a great year.

But I did look at their etf, but etf is a more of a wild animal, right? And I think they're look I think they're made a conscious decision. They want to have a toe in the etf world, but but they've gotta make IT sufficiently difference that you is elegant and they have outlook.

We've had Better draw on characteristics s and slightly out the etf since I was launched. I would be surprised if that etf became A A, A, A dominant etf over, over the last five years. I don't think he was really designed.

I think if they design something I looked more like the usual und bud put IT in IT into an etf. IT would be more directly competitive with the mutual fund but will also have brought a appeal. but. Again, the moment I say that be wrong.

propose, I mean, one thing to address. I mean, you're talking to my performance and performance.

You know I mean, if we're talking about these subset strategies, which are you know point by point six sharp or something like that, I mean, if you believe that the sharp, say from a mutual fund is point Warner, point two sharp more than say from an to actually prove that I think you needs I don't know these action, but I think it's ten years of data or something like that. It's not one year sounds six months. So nobody has ten years because these products have just been launched.

So I mean, ultimately, I know we talked a bit about narves earlier, but I think that's quite a narves are important because OK i'll received that is important. Performance sets are important, but I think you have to love beyond the the the trip record, given that the randomness in the numbers, in the fact that to prove anything to finish of you need very long time series. So I mean, that's why I think .

that I compare hedge funds and virtual funds, right? You can you can have that right? Had a lot of mutual for .

plus that different .

types of it's never to honey riah .

yeah you if you're lucky.

it's any Christmas. You know grandis is but not likely it's apple versus artist. So what do we know about what obvious we've look a lot of this data because it's it's a source of daily data on head ones.

Um so you know what you see is that you take the morning star U S. Train system ETC you compared to the socket C T, A index, and there were ninety eight percent correlation to each other. They offered nearly identical performance in the vast majority of the time, with the exception of the walls.

In the walls a little bit lower in the mutual fund on there do appear to be on the average mutual funds, a few more constraints into IT. So instead of going up twenty net, which the sugen cy heads said number for identical, up twenty nine, one of twenty six basically. So and the mutual funds, after two one hundred thirty basis points go up fourteen.

So you lost after you lost ten points because of you all controlled of that, Peter. The rest of the time, the almost stingwing shall. So we do actually know that you can run these things, you can deliver really, really comfortable results. But again, you you have to make a calculation how much is losing that ten points of returns in twenty twenty two. That's yeah you spread that over five years is two other business points of a Better performance.

exactly. And I mean, for some investors that is valuable to get that hard and that that justify is going to the more aggressive 的 absolutely。

And that's and that's why and so people, you know, a criticism of what we do since we're trying to replicate tree incentify returns is more volatile. But I believe not to the maybe to the tune of what men is doing with A L T. There etf. But I believe that actually, I think investors can stomach more volatility to a certain point.

Within this, obviously, we've had as you say, we ve had hedged funds and mutual funds and etf. And obviously, within etf, we have replicated etf. So now we more and more replicator e.

So we've got see yourself as probably first and the first and and the most well known. And they manage your facebook, as you say, for simplex, have a product and return stacking, I coi and team kind of very various representations of that. I mean, you think we'll see more replicators to take the replicating space will get competitive. People started saying who's a Better replicator? Is that going to be part of the next evolution .

of the industry? I mean, yeah I mean so so look I mean by I don't limit IT launched a matter trees etf. I don't know what again.

Look, I to be clearer. I'm very good friends of gary seen. I'm very good friends of kid sky. I am not sitting with them at the desk as they are you know, doing what they are doing. So so I have I am always once up.

But so you know, the Better that we made was that again, I I come with us not as a point. I didn't. I didn't.

I got out of business school. I go work for a value based hedge fun guy. I go off and started commodity focus. The fundamental er of commodity focus um you know multiple ager of fund was a relative value is like I thought I didn't come at this is a quality because I I loved the nature that from an invest perspective and this is the way I did linked post on this, I don't link posted the board and lonely and so like but I didn't like to post on this would basically um Roger federal to the great speech about and he started off as a commented piece over the summer and body said something say says I fact I lost forty seven years of the and .

you know that he described .

winning fifty three percent of points translate tes in to sixty seven percent of games. Translate tes that you know eighty percent transits, ninety percent of of of of matches and what I always love about the idea of application is that if you think you're accurate enough with a structural arbitrary sh, and you can win.

Because, again, we are making one week bets that what we designed to be the broad factor positioning of the space on monday afternoon will be sufficient, accurate and IT. Turns out over on using twenty days, about ninety percent correlation is officially accurate over the course. Next week that will be close will get a directly right.

But the structural efficiencies around around trading costs and fees um IT gives us a slight ch right. If you look at the weekly data, we will perform somewhere between fifty three and fifty four years of the time with a very, very slightly positive scheme. So that's a poker player, right, who walks into a casino and knows i'm going to lose a ton of games, I lose a ton of hands.

But if I can stay there on evil, you people say, if you have enough at bats, IT works so that you translated over a month you get into the sixties, you translated over quarter the seventies you tried to over year you're in the eighty, eighty percent, right? So so as an investor, you know as somebody like if you say you know he's a trader who wins fifty five percent of the time, he's an all star, right? It's like your C V coin kind of like, like, like category.

So that's basically what we ended up doing now when people come to and there is, by the way, in other firm who copies us us very, very, very closely. But they add in all sorts of artificial intelligence and other things like that. Um but like in the case of korea, in the case of kt, they looked at IT.

And I think, look, everything gets hard to conclude that IT works, but you you can nitpick at the margin. But IT is in a sense, desire to be this this, this adaptive, repeatable process, right? What are you looking for? You looking for? You're looking for adaptable, repeatable investment process that generates access returns. That's what I am compelling about IT, uh, without writing a light of .

code um so but what yes, the difference the difference that is there just one upset as a couple of ways yeah so what .

they do is they say, okay, well, that's but it's incomplete. You know wouldn't I rather if I know that what most people are doing is looking, you know, hundred and fifty days, where is a twenty day windows and I can add in more instruments that I can do the things like that. Now the process, i'm sure they go through as they say, what if I have been doing for past ten years?

What if I combine that with this replication that are now saying, what if I be doing for the past ten years, the top down replication and I combine IT and IT probably shows them Better results. And so then they implement IT, but there's also probably commercial consideration. You know, it's a little hard to exactly copy the guys who've kind of invented the space.

You know, why would you do that now? Black rock did IT. If then god did IT, there presents their brand name is a would overwhelm anything else who can hear if they do get it's rock, they charge ten cases.

White, who cares? right? But but for most other people, they themselves have to tell a story about different getting from what we're doing otherwise. Because, you know, I always used to say when we gone into to the business, I always like trying to be a first book or so. The first work with the commodity space.

So the first were in in, in greater chat heads funds because when second movers come into the space, they first have to sell you. They sell the idea. They say that was such a good idea we're going to do with ourselves and were going to make a slightly Better in the falling ing way.

And and and again, as I you know always said, the issue here is not relative market share, whether we get x percent, somebody else helps x percent. The issue is can we grow the pie? Twenty ex or fifty ex um and so uh so the guys i've settle that i'm thrilled to have them in in the space.

Um uh there is no again. So I think I think i'm sure they are probably jump in do at some point. And I think what you'll see in five years is that replication will just be a tool in the same way that Q I S products are a tool.

And IT can be delivered in Q I S products. In a sense, the soccer decision launches index is essentially building A Q A S product around what historic have been inactive strategy or careful end is active strategy. But if but again is IT just is as we talk about about the horizon investors, it's trying to figure out what you can have a zillion different products designed to meet a zeeland .

different no, exactly. That's we didn't mention Q A S, but that is part of the representation of transfering that appeals to a different type of investor as well. I guess, institutional investors who can do that kind of the swap a bank in and are happy with to join customers to own requirements.

Yeah, look, anything I would look, a financial engineer, you ise the way, but a principle protected notes. Financial engineering is alive and well, right? You now have etf that are using Q I S products.

You have used its funds that you use that use Q I S products, right? So you know in all of these things, there's the underlying investment and then there's all structural engineering and everything else that goes on top IT. Now when we launched uh, the E T S, we vanish in the U S. Five years ago. IT has a number of the limitations um in terms of the way that had set up and and that are limiting for IT.

Um and you know where we have spent a lot of time of I talking to people in the past year or two about like and I get like this goes again that goes back to the narrative thing is because we go into we want to sell people on our narrative and tell them but you know I can tell you the like the narratives that I tell people about what we do resonates with some people unbelievably well and they're excited to hear about other people. They don't want to hear. Some people .

don't like the reputations. It's not really good.

So so to be the question is, is as much as we love selling our narrative, it's a lot are interesting having .

to tell you what you've love.

You know like what's the ideal product for you if you could know? Okay, you'll throughout the eight percent a year, ten percent a year, never down. You like I can't.

I mean, let's talk about that and that that's like that's what i'm trying to do on even when they take her on the distribution side, distribution people are there to raise money, right? And the people outside know the distribution people are there to raise money. And so IT IT just makes people kind of defensive.

What I try to do when I get in front of people is is to just just, I be going like, just take take shots of a truth serum, bill. what? What would you like, right? What's the product would you say? Wish I had that.

I don't know we can do that, but I can tell you about about why we've done things the way that we've done. I can tell you about stories of talking to people who sound a bit like you. And maybe there's a way to line that up, but there's a very, very high probability that there isn't either.

And so let's save each other a lot of time of running around and pretending that no, that that your you're monitoring IT or you bigger and look, and this gets back to the human side of the business. Is that like one of the great advantages the larger players have with these long term relationship clients? It's hard to fire somebody.

Your friends with I I mean, you've got out to dinner, you hung out together. You I don't know who shot vessons s together or whatever whatever people do in in these relationships. And so you know, like IT takes a lot. What are the interesting things of that in etf that actually feels to people easy?

The farm manager.

no, what I mean, you you try to you try to get out of eventually look like, I don't know that you try to get out of a mutual fund, right? You submit your redemption request for fifty dollars. I hide your phone, right? okay? Because they're .

going to be they .

are gna fly in. They're to be all over you once they see that coming, try to get vin to stay in, putting every pressure n one of you know, I mean, I thought people tell me like honestly, one of things I like the most. You can don't fight out about IT for two months.

Yes.

IT is so so and but it's okay.

But so before we wrap up to counter the time, there was an article, which I shared from bloomberg just earlier about financial engineering. And it's about how acadian and a future firms are bringing back certain strategies that had been popular during three global financial crisis. And the article mentioned the like.

So return stacking as well. But there's an interesting line in here somewhere. The lights, if he is just sell an old terms of strategy today, is so hard to get anybody to care because the S.

N. P. Is up twenty three percent so that I mean some them up. So the idea is you know to use where we're increasingly seen one thirty thirty type strategies, so where you left up to hundred and thirty percent long and have a thirty percent short. And the article also mention of sea return stacking as as a little representation of this. So I mean, is that is something you are hearing again, IT was certainly something that I heard a lot, maybe back twenty, twenty or so, that people didn't want to give up on their basis to investing in terms of strategy where the opportunists was deemed to be very high because you're missing out on on the mark of return. Would you say that um an important consideration again in your experience?

Well, I look is is brutal for anybody who's not in the asset P. I honored. When the asset P I honored, it's going up the way that does.

Um but I also look I mentioned before, that is also the flow side of the as bonds, right. And I mean bonds have been 一楼 bonds are like the voltage of asset allocation right now， like nobody wants to talk about them. But but you think about like every portfolio, if you don't have forty percent in bonds, you've got thirty percent in bonds with IT.

But like little, every single portfolio has this as a corner stone allocation. The performance bounds this decade have been um if this was an active manager have been fired, right? I mean you're you zo but remember him bonds for twenty years were the superman of diversifies.

Like if you if you charge the bloomberg egg over twenty years, IT is IT is IT like a ruler. You draw straight line from the left, the right. And as a sharper show point nine, it's liquid as a negative correlation.

Equities IT has does three other tibesti points more than cash and was and had a maxed out three twenty eight percent, literally nothing looked good, realizes that. So I like and the walls like three or something or four, I mean was like ridiculously low. So yes, people always love to focus on their best asset at this time.

But I think the broader issue is, so what if you happened today? So we ve had much larger than instructed ordance bonds, right? And one thing about financial histories that never goes what you can't race IT every asset alligators going to say what's what's my draw down potential in bonds.

And it's always GTA be sixteen percent, not four percent recently, but the volatility has also got up. So that I think and this is i've GTA run this of listing this before me to a call linking post. I think the wall of of like corporate bonds in the U.

S. May be higher than the S C D. A 的。

Like gets its up into the it's got from four to eight or nine or ten or something, i'm not sure right. So but so volatilities got up right now. What does that mean in now?

You're building your models for next ten years. You can't pretend the bonds of a four ball. Um now what's turn expections over cash? You think manager is in a bad year. Bonds are under performing cash again for thirty year hero, not the second year hero.

Um so I think broadly in the broader as of allocation world, I think this shift from the ease of sixty, forty or everything was working for you all the time to something to six, fifty, thirty, twenty is is, is happening not because people know you know oh, now I know what you know my I mean I mean, look, there's a an element of like building models, asset allocation. Everything else is an enormous amount of judgments and theater and art in in narrow ative story telling its a as much as there is science. So i'm so you take thirty asic classes, you've got to make how much is every one of them gonna run over the next ten years over cash.

What's the correlation between each of these asset classes once the volatility of each disaster glasses and run IT through a model, right? And then the models going to be like, oh, give me a bit coin or something. I mean, the model is never going to give you an answer that you want.

So you like, okay, no, let's not do that again against let's really like haircut here, put forever on. Then you add up with something which is basic, where you start with a lot of work that went into IT. So so the sixty, so the transition of something is not correctly do either socks and bonds, I think, is very, very real.

And that then the question is, how do you convince people at least have a project of, how do I convince people to this asset class, you know that eight out of ten people have a bad, bad impression of and know, and the other two have probably had a bad experience. So so like like how you convince them that that this should be there with infrastructure, you know, private credit, uh, uh, private equity and and and that's, uh, you know, I think all i'll either get that right, all die with my that one. I think part of the reason people are doing, people are doing that because bonds were earning anything.

And when bonds are earning war now it's it's little bit like a makes perfect sense. This is a great asset class that cabinet officials make perfect cess to put IT on top of other things. The risk is that when you package IT together, your skies are pointing the same direction. You go through unexpectedly ly large shot out, and that and and that gets people get gets back to people's drought on tolerances, which I think are less than people say that they are, which is why we haven't done IT.

okay. But we're over a time, I think. Um so thanks. We're coming on again. Uh and you always great to get your perspective.

So next week, we're back actually neels us back next week and i'll be speaking to me. So if you have questions, send them in. And but in the same time, stay tuned to for more content. I will be back soon.

Thanks for listening to the systematic investor podcast series. If you enjoy this series, go on over the itunes and leave an honest rating and review, and be sure to listen to all the other pisos from top traders on the questions about system.

Send an email with the word question in the subject line to info at top traders on blog dot com, and we will try to get IT on the show and remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there is a significant risk of financial loss with all investment strategies, and you need to request and understand pacific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us, and we will see you on the next episode of the system matic investor.