[00:00:00] Pierre Daillie: Hello, and welcome to Raise Your Average. I’m Pierre Daillie, Managing Editor at AdvisorAnalyst.com. My co-host is Mike Philbrick, CEO at ReSolve Asset Management Global. Our very special guest today is Andrew Beer, Managing Member at Dynamic Beta Investments, one of the oldest firms doing liquid alts. His firm’s mission is to roll out ETFs that look like hedge funds, except with full transparency, liquidity, and none of the high fees.
What he and his colleagues do is, in a unique and fascinating dimension, bringing Jack Bogle’s philosophy to the hedge fund space. If you’re looking at all at liquid alts or managed futures and want to learn more about how these things work, stay tuned. You’ll find this to be an enlightening and insightful conversation.
[00:00:45] Andrew Beer: The views and opinions expressed in this podcast are those of the individual guests and do not necessarily reflect the official policy or position of adviserenlist.com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this podcast is intended to be considered as advice.
[00:01:05] Pierre Daillie: Andrew, it’s terrific to have you on the show. Thank you so much for joining us.
[00:01:09] Andrew Beer: Thank you both very much for having me. It’s a pleasure to be here today.
[00:01:12] Pierre Daillie: So Andrew, to kick things off, tell us about the arc of your career, how you wound up in the investment management business.
[00:01:18] Andrew Beer: I- it wasn’t obvious at all, actually. I I went into I graduated from college and I wasn’t sure what I wanted to do and ended up going to work for, as an M&A investment banker in New York. And then I went back to business school. And I started to get interested in… Actually, I thought it was going to go into the LBO business. Back then to all the cool smart kids ended up going into the LBO business and I wanted to be part of that. And then in my second year at Harvard Business School, I ended up meeting this guy. I got re- actually recruited to go on an interview with this guy named Seth Klarman. And he was one of the early generation of hedge fund guys.
And I walked in not knowing what a hedge fund was, but these guys, just drilled me with questions for about an hour and they seemed incredibly smart and they were doing, all the things that they were doing seemed to really esoteric and interesting. And I was hooked. And I went there. I was ended up being a generalist portfolio manager for about three years and then ended up leaving. And since the late 1990s I’ve been starting and running my own businesses in different areas of, originally the hedge fund space, and then more recently in, as you mentioned, the liquid alternative space.
[00:02:35] Pierre Daillie: So Seth Klarman, wow. Let’s talk about your time at Baupost a little bit. Seth Klarman, author of Margin of Safety the little book that costs $2,000 [laughs] on Amazon?
[00:02:47] Andrew Beer: I think I still have mine with with bona fide fingerprints on it. So I could get a premium for it, absolutely. Yeah look, Se- Seth is absolutely brilliant…
… And it was a privilege to work for him. I think, I think it, even though he’s considered a hedge fund manager, his firm was not so much a hedge fund as it was more of a multifamily office. That he wasn’t… This was the early days of hedge funds. When I joined, they had 600 million in assets and they were probably one of the 10 largest hedge funds out there. Three years later when I left it had a billion eight…
… and, again, I had zero to do with that growth. It was all about people realizing that hedge funds were doing things that were really unique and arcane and interesting. And what I got, had an opportunity to do, was to walk into the office every day and, with a blank sheet of paper and say, “What do we do now? How do we find things that are cheap?” And, in retrospect, looking back on it it’s just incredible how much the markets have changed since then.
The things that, that we were doing back then, I did some of the first purchases of limited partnership interests and secondary transactions. There was no developed market for it. And we were buying them at 25 cents on the dollar. But you’d have to do months and months of work with not a whole lot of information available and negotiate and go out and find them. It was always… But, and you could put a couple of million dollars to work, but the discounts were huge.
And then, I think one of the great lessons is here we are nearly 30 years later and just everything is more efficient. Then that, the idea that you can find things that are just utterly obvious investments it’s, much, much harder, much more competitive today.
[00:04:33] Mike Philbrick: I would agree with that. But, a- and on what dimensions do you look at that? How have you looked at that dimensionality of competitiveness and the efficiency of the markets, the efficiency of the information, the, just the absolutely massive amount of IQ that’s being put at these problems to solve them? Is it all of those things about, am I missing a couple? Wh- what’s been your experience?
[00:04:54] Andrew Beer: Yeah, so I think it’s across the board. I think yeah, I got asked a couple of years ago to write a book about what’s changed in the past 25 years. And when I sit down to do that, I will be able to articulate it much more clearly than I can right now. But take, the value factor, right? So I, I joined in 1994. Fama had published his paper, I think, two years earlier so I was aware of it. And I almost went into the doctoral program at Harvard Business School. Actually the guy who convinced me not to go into the doctoral program was the head of the doctoral program who said, “You’ll hate it.”
So he kicked me back into the private sector and I’m very glad that he did. But I knew about the value factor and I’d go when I worked for Seth. And the first thing I do is I try to do screens of publicly traded companie. It wasn’t easy to do then, where do you get the information from? You could get it from FactSet. But the FactSet data was lousy. You could, Bloomberg was in the, in its infancy relative to what you can do today.
The whole idea of even factors was very novel. These are papers that had just been published. And, but in terms of, just, and I would actually compare 1994 to the late 60s through 1990, which was the period that Fama studied. But the kinds of stocks that he was talking about were gone. They’d all been bought, LBO’d, recapped. And in an attempt what he had described was a period of time that had passed.
That, the idea that there was some company that was, had some lousy mi- manufacturing business, but happened to own a third of downtown Atlanta that was priced at cost because they don’t it since 1901, that company didn’t exist. And the really interesting question is why that factor did what it did for so long. And again, so my job was relatively easy compared to imagine trying to do it in 1978. You’re picking up your dialing and your rotary phone to call information in Boise, Idaho, to get the number of a company. You call the company, you ask for investor relations. They put an annual report in 10K in the mail, you get it two weeks later.
You’re using the Wall Street journal to get recent price information, and you’re doing everything on the back of an envelope. This is why, when you hear about Warren Buffet sitting in his attic and reading annual reports all day long. It’s because there was no other way to get that information.
And so when you compare that period, and then now you fast forward it today, what I see in the market is, when an idea becomes popular it gets adopted very quickly. People pile into it, the dissemination of information is almost instantaneous. That makes it harder.
[00:07:45] Mike Philbrick: And y-yeah, so you’ve got the dissemination of information across all of these users of the information and then the implementation of that more quickly. So where can an investor find an edge? Where is it that what are the top places that those edges have gone away or been attenuated to some degree? And whether we’re systematic with in, in some of the things that we do, you’re systematic or not systematic, you’re laying the, the expertise of an individual human and their wetware to make decisions. So what are the edges that are left for the investor to pursue.
[00:08:28] Andrew Beer: Sure. I think the two big ones are are constraint and heuristic biases. That, a typical investor does not want to stray too far from the pack. And when I talked to a pension plan that, it feels like they’re over their, going over their skis into EM, they’re going from five to 7%. If hedge funds do it they’ll go from five to 35%. The absence of constraints is one of the you, you cannot take an incredibly talented investor, tell them that, then great, take a great mixed martial artist and tell them they can’t use, one of their fist and both of their feet and expect them to do very well in the ring.
And then the other is your heuristic biases. And the reason I got really interested in managed futures as a space is because I think it solves one of the problems that people have in their portfolios. Is that there was a common heuristic bias that permeates most investment decisions. And managed futures, because these are robots strategies that have no emotions, they tend to not have those same biases and therefore add a really compelling element of returns.
[00:09:50] Mike Philbrick: So that systematic or rules-based approach where you’re looking at the data through specific lenses and it doesn’t matter how you feel or how you woke up this morning or whether your mom, wife yelled at you and your kids are crying and everybody’s sick. You’re still gonna make the decisions over and over again.
And you’re, you hope to have some sort of edge. Now, what do you think about, from the perspective of over the last 10 years, save the last six months? The other thing that’s been fairly difficult for those who are in the multi-asset space. Not, so not just CTAs, but those considering large swaths of assets beyond just technology or U.S. equities. This lack of dispersion seems to me to have been a particularly challenging environment to produce differentiated returns. That seems to be attenuating, but what are your thoughts there?
[00:10:43] Andrew Beer: I think, as a guy who lived in factor land I think there’s been tremendous dispersion. It’s just been the worst kind of dispersion. When the S&P 500 becomes dominated by tech stock and that dominate every other market. And that everyone’s essentially the equivalent of their home currency or their home investment. Again, I’m dealing with, pre- predominantly U.S. investors, but then if you deal with the MSCI world it’s 55 or 60% effectively the S&P 500 anyway. I think the problem hasn’t been dispersion, it’s that nothing has worked as well as the basic trade.
And so what I think is interesting now, when you think about the 2020s given the fact that we thought the rubber band between the U.S. and other markets expanded, and we thought it couldn’t possibly go any further and then it expanded further. It couldn’t possibly go… And then we get COVID and, and now it feels like all these expensive tech stocks were going to, finally get their come up and send value would come back and then it just went completely in the other direction. But I think all these things do, there is a, an element of reversion to it.
Now we’ve had these really painful head fakes. About two months ago, or about a month ago, you started to hear p- people talking about the, the revival of emerging markets. Finally, we have emerging markets and then they’ve just been run over over the past couple of weeks.
But I do think I do think that a lot of these things, when other asset classes outside of those basic building blocks that, that dominate 60:40 portfolios do better over time then a lot of the willingness to look at other things starts to to play off. And I think that will, I think that will characterize the
[00:12:32] Mike Philbrick: 2020s.
The dispersion has been one of losses negative dispersion.
Or, whether it’s been trend or it’s been small cap or it’s been international, things that would normally diversify the portfolio have diversified the portfolio, but they’ve diversified it from the standpoint of holding it back.
And then you have that loop cycling for a decade, which then leads to, an overconfidence bias in investors and them seeking more and more of what’s worked over the last decade. And finally getting so concentrated in one particular area that one area goes through a decade of loss returns. Or the loss decade, which happens often. It’s happened in us equities a couple of times…
… Over the last cycles. And it’s a strange thing. Urge investors as we’re seeing this initial surge and inflation volatility and inflation to start think about, thinking about broadening the scope of investors that they’re considering in their portfolio. Potentially we’re going to print a 10% CPI this year. And what is in a 60:40 domestic equity portfolio based in the U.S.? What’s in that portfolio to offset an inflation spike of that nature. And the answer is not very much. I mean
[00:13:50] Andrew Beer: in no way… Go ahead.
Yeah. Yeah.[laughs] and look, I think the 2020s will be a loss decade for 60:40 portfolios.
We had, that was the problem with the 2010s. Was any people were paid to procrastinate. People were paid to concentrate and, let me look at it from like GMO, which made a call into EM in 2014 and it’s been paying for it for eight years. But a lot of this is, a lot of this is… The reason I like replicating hedge funds, to get to, why do I replicate hedge funds is because there’s always this tension between long-term asset allocation model and and current market environment. Like it would be the ideal thing if we could say we have 100 year capital markets assumptions. We just put together a portfolio and everybody goes home and, four generations later somebody is happy with the outcome.
Going back to the question about where I think you can make money, it’s the ability to pivot and change what you do depending upon market environments. Which is not to say it’s not hard. But, when we were replicating hedge funds in, and by the way, what I mean by replicating hedge fund is we try to figure out what they’re doing broadly across their portfolios and just copy it cheaply. It’s not, we’re not trying to copy this stock or that stock, but if they are in May of 2020, we see that they’re increasing equity risk. Okay. That’s interesting because in May of 2020, a lot of people thought the world was, we were never going to reemerge from lockdowns.
The world is going to go to hell and stay awful despite what the fed was doing. They were increasing equity risk. And then by the fall, it was apparent that the equity risk that they were adding was not going back into Facebook and Microsoft and Apple. They were buying stuff that had been crushed like oil and gas companies. When oil had gone negative, they were buying retailers, they were buying.
And so for us, outside of this kind of paradigm of how you specifically define value, these work cheaper things. And hedge funds that had been very growthy, during a very good time for growth stocks were now becoming very valued at a very different time. And I think actually, so I’m optimistic about active management, i- if a particular kind of active management in this world that we’re going into, or that we are in right now because, I think, there is no five-year playbook that anybody has, that anybody should have, could be confident that it’s going to work out the way
[00:16:35] Mike Philbrick: you think.
I think that the people are positioned generally for what’s happened, not what is happening or about to happen, potentially.
And and then this comes back to, my point about dispersion. You now have very differentiated returns across the spectrum of asset returns, which you are now able to consider that are very different than, the current zeitgeists. So I wonder if you could, we can dig into that.
What’s the process o- of going through, and I think this is where you were headed Pier too, right?
What’s the process? You’ve decided it’s either, maybe it’s long short, maybe it’s market neutral, maybe it’s the CTA space and, global macro. And as you said, you like to be systematic. How do you go through deciding on what factors to emphasize? Or are you just trying to look through the portfolios and duplicate what they hold? How do you go through that process? And maybe, take us through an example that you have found is good at giving us an analogy that we can all understand best.
[00:17:34] Andrew Beer: Sure. So maybe I’ll go back to the beginning cause I kinda, I fell into this space. So I was super active in my early i- in my 30s. I had started two different hedge fund businesses that were growing a lot. And then I was known as the guy who got in really… I had been very early in, in China. And I got in very early in the commodity markets book starting hedge funds in those areas. And I got a call and he said, I want you to come be the quant friend of mine. And I go and I sit down, I’m not a quant, I’m a history major, I’m just, allegedly I’m decent with numbers i- it, I don’t program, I don’t run my own statistical analysis.
So I go and meet with the quant and he talked about what he does. I said I don’t know how to make sense of that. And then he said, there’s this thing called hedge fund replication. And I said, I have no idea what that means, but tell me. And he said, basically you can use what’s potentially a risk model a, a version of [inaudible 00:18:31] speed dial analysis to figure out the maker positions among hedge funds and you can invest them directly.
And I said of course.” And he said what do you mean of course? I said, because that’s how hedge funds have always made money, right? It’s not about, which value doc they owned in 2000 and with large Cap, tech stock that they’ve ordered against it. What mattered was that they were in things that went down, they went down 40, not 50, but they were for things that went down 80, not 50. That’s how they preserved capital. And I said let me just ask you. Just in terms of to see if it works or not. What do you see today in the model?”
And he ran it and he said he said, oh, it looks like there must be something wrong. It’s about 35% emerging markets. And I said, then it’s right, it’s working. And he said why do you say that? It’s because I said two years ago, three years ago, everyone got obsessed with this brick trades. When Jim O’Neill at Goldman Sachs, coined the term bricks everybody wanted to be involved in emerging markets. Everybody jumped on planes to go to Be- Beijing and Shanghai to see what was going on.
People were talking about co- the growth of commodities, the growth of middle class. Every hedge fund that I knew, if they didn’t own fertilizer companies to play on, they owned the cements companies. If they didn’t own cement companies, they owned grain manufacturers. It was all around an EM growth theme.
And here was an industry that had gone from one very distinct bet a few years before and it pivoted what they’d done. They had, packed off the value versus growth trade and gone into and going into a long break trade. And then, so what are these kind of rotations and pivots over time. And they’re driven not by, generally, by somebody at the macro level thing, like BMO thing. I think, value stocks are histori- emerging market stocks will keep on a PE basis.
Rather it’s because, when I talk to hedge funds about it, they’re like, “look we look at the footnotes of these companies. We interview the management teams. But if we like one company that’s doing things in Argentina, we fly a team down and then probably we’d three or four or five companies and who [inaudible 00:20:46] we’ll probably like in Brazil too. And lo and behold, two years later we’ve got 20% of our assets in it. So that idea of adaptability, fundamental stocks selection, fundamental asset selection leading to these rotations and factors at the portfolio level.
Now, from my perspective, then, you can either hire lots of expensive hedge funds to difficult work. But if you can just use a model to decompose what they’re doing and figure out that their long 35% EM and invest in a futures contract to get the same exposure but for free, and you can charge less to do it. I like that. I prefer, I think that’s a better value proposition.
[00:21:29] Mike Philbrick: And then how does the delay in that impact? Obviously you’re not charging the owner’s performance fees. The fees are a little lower, so it’s not like you have to capture all of the upside in order to match the upside if you’re not charging those things. So how do you find that delay from them positioning your, themselves in order for you to suss out that they positioned themselves that way both on the way in and on the way out? How has that lag in and out been? How do you address it? How’s it affecting?
[00:22:02] Andrew Beer: Sure. Okay so in our space, the first thing, and this goes far, comes back to learning at at the feet of Seth Klarman. Is first thing is don’t do it if you don’t, if you don’t think it’s going to work well. So there are a lot of things you could not try to replicate. It’s better just go home and admit that you can’t do it. We cannot replicate millennials. I wish we could and find a way to deliver a 2.4 [inaudible 00:22:31] with daily liquidity and low fees. Ain’t going to happen.
So there are specific things. We can replicate equity long short, we can replicate managed futures. And then we can replicate very broad portfolios with hedge funds. The delay it do happens, different kinds of portfolios have different speeds associated with them. So another thing you don’t try to replicate and you don’t try to replicate Fred, the hedge fund manager. You don’t try to replicate Ray Dalio over here because they will change their minds-
… and replicate Ray Dalio-
… over here, because they will change their mind faster, and we won’t know it. But 50 of these guys together, while one guy is thinking that we’re on the cusp of World War III, and is dialing down risk across his portfolio, there might be another guy in there who thinks that this is the great buying opportunity, and we’re about to see some really positive news. So you replicate large pools of funds to figure out how on average they’re changing their po- their positions. And in a space like equity long-short, they change their portfolio slowly. How do we know this? Because we know how they invest.
So if I’m an equity long-short guy, and I’ve spent a year researching a company, and talking to management, and made it, it’s now a 7 or 8% position in my portfolio, and I think this stock is gonna double over the next five years, there is not a headline that I can read that is gonna cause me to sell that thing tomorrow. It’s just not the way I think. I may reduce it at the margin, I may stop buying something else, I may have something that’s gone up that I wanna dial back, and I may do some hedging or something at the margin. But going back to your whole thing about puristic biases, that’s a drawback on what these guys do. When, once you own something, and you put all of that work into it, it’s very hard to turn on a dime. And so equity long-short, the portfolios move slowly, broadly across the industry, they move slowly. Managed futures move fast. And so managed futures, we can’t rebalance once a month, we need to rebalance at least once a week. And we’re always looking back at these kind of, really what happened over the past few weeks to guide us as to where we should be positioned today. Doesn’t matter what they were doing six months ago.
[00:24:48] Mike Philbrick: And on the… So a couple of questions.
So for both of these types of, a- approaches, how is it that you think about the risk management along the way? So you’ve got this indicator, you’ve gotta put a trade on, you’ve gotta set some risk mitigation-[affirmative].
… around that, both as you said, trimming it on the upside or eliminating it on the downside. And you, in the equity space, you haven’t really done the work, right? So it’s, you’re mimicking the work from somebody else or the group of people. You’re polling a group of portfolio ma- portfolio managers, and you’re getting a here’s on average what we like.” And so how do you-[affirmative].
How does that, is there set criteria within, in the rules of each portfolio that you’ve systematically managed that you’re going to equal weight? Or do you take some sort of weight based on the percentage weight that you’re getting from the manager? How do you handle that? And I wanna, I have some CTA questions as well.
[00:25:47] Andrew Beer: Sure. The basic framework is we’re inheriting all of their risk management.
I see. Okay.
If you are, if you have 50 equity long-short funds, or 20 managed future funds, you will have a cowboy who will drive off-[affirmative].
… the cliff. I’m making metaphors, but-[laughs].
… You get the idea.[crosstalk 00:26:11]
[00:26:10] Mike Philbrick: metaphor guy.
So they speak to me.
I [laughs], I totally know
[00:26:14] Andrew Beer: what you mean.
Yeah [laughs]. So look, you’ll have wild guides, but when you do a like in the managed future space, you’ll have, you might have one guy who’s a 15 vol, but you’ll have-
… other guys who are lower vol. And they all have their own businesses to manage. What you don’t get… When you’re looking at the managed future space, you don’t see, okay, we’re all 190% toward the 10 year treasury, and that’s all-
… that we have. Because each one of them has their own position limits, diversification, criteria, VaR limits, et cetera. When you get into, there are a lot of practical issues when managing things in the context of an ETF in the US, or [inaudible 00:26:51] fund in Europe. We also manage a product in Japan. we manage one in Spain. Each one of these has structural nuances and constraints. And fortunately, I have a partner who is genius caliber at the stock, so I can remain blissfully ignorant, and just see that it works the way we would suspect.
But it alters, that’s where you get into the ignorance. The thing is that most, a bonafide hedge fund strategy that has illiquid asset, illiquid thing, big derivative positions, et cetera, has a very hard time getting jammed into a mutual fund that I assume-
… it’s the same thing-
… in Canada. So you end up losing a lot. I actually wrote a paper about it in 2013 that lower fees relative to hedge funds was actually a red herring, because if you’re losing so much of the privy returns, and then making a little bit back on fee, you are still coming out way, way behind.
And and so what we do basically is we start our whole someone once described us as unique in the liquid alternative space, in that we have consistently done better than actual hedge funds, but with low fees, daily liquidity left downside risk, et cetera, being able to make it work in a [inaudible 00:28:15]. So how do you do that? First, first thing you do is you aim for their pre fee returns. Because in hedge funds, people have been railing about fee for a long time. It’s very uneven across the industry, but they really haven’t come down as much as you would think. If you said there’s an entire space that did, let’s say 4% in the 2010, after 300 basis points in fees, you would’ve thought there might have been more competition around it, but in reality, some people are raising fees, and a lot of some people are lowering fees a lot, but we coined a term back in 2011, that in hedge fund fee reduction is the purest form of alpha.
And what basically meant was that if I invest at one in five, and you invest in two in 20, I’m always going to win. In the US retail space, it would be if I invest in an institutional share class with a hundred basis point expense ratio, and you invest in a retail share class with a 5% upfront load, right? Guess who’s gonna win overtime?
[00:29:12] Mike Philbrick: things being equal, right?
We have to determine that we’re receiving the same value, that we have the same vol count. This is another thing. Fees are, should be subject to some sort of vol filter, because, if I’m manufacturing a 20 vol CTA you only have to buy half as much as if I manufacture a 10 vol CTA. So I have to have half the AUM. So potentially I should be charging a higher fee for that differentiated return source. You get more real estate into your portfolio, and sometimes that’s a benefit. These are all things that individuals have to make as decisions along the way.
[00:29:50] Andrew Beer: Sure. So millennium I’m the only guy, I defend Millennium’s 800 basis point-
… entries. Because if somebody can take a dollar and make it turn into 10, that works-
… without blowing up over 30 years, they deserve-
… 800 basis points. That’s not on a… And when we do things that are essentially leverage we charge
[00:30:11] Mike Philbrick: for.
And so this is, I was just trying to add a little bit of extra-
… light on that. Yeah.
[00:30:16] Andrew Beer: Sure. But when you’re talking about an industry where 80% of the alpha has been paid away in fees, over 10 years for us it’s a pretty low bar. So our goal is generally, if we can replicate 90% of the pre fee returns of a hedge fund portfolio charge less, we’ll do about 200 basis points over time.
And back to your question about what’s the risk-
… characteristic of what we do versus what they do we tend to actually do lower risk over time, because hedge funds, some of those things that people talk about a tout with hedge funds is having great alpha like characteristics, illiquid assets. So in 2019, if you’d said to a big fund upon what’s your favorite area of hedge funds, they probably would’ve said structure credit, because they were getting, 6 or 7% returns with almost no visible volatility.
It turns out that stuff was really illiquid, and really highly leveraged, and in the first quarter of 2020, it went down 20, 25%. Some funds went down 50% and gated investors. So illiquid assets can have huge downside characteristics at the wrong time. Single stock physicians, the same thing can happen. Single stocks, get crowded. And going back to the point about what’s changed, it’s no secret anymore who owns stocks. When Tiger management blew up in 1997, or I think it was the fall of 1997 the hottest piece of paper on Wall Street was a list of their position. The idea that you could pull up 13F filings and find out what Tiger Management do didn’t exist. It was, these were things that were handed underneath the coffee table to your best friend, who was XYZ head fund when you worked at XYZ investment bank.
The but now we, when Bill Ackman owns a stock, there are a million menorah who follow his trade, not menorah, [inaudible 00:32:31], yeah. [inaudible 00:32:31], sorry [laughs]. Waving the menorah, sorry remora are the small fish that, that, that follow a whale. Yeah, and they’ll pile into the trade as well. So when things start to go badly, you get things going down a lot more than you would like. So ironically, when we think about risk in our portfolios we start with the assumption that there’s gonna be another Lehman, that they’re gonna be market dislocations, that some counterparty somewhere is going to blow up that nobody knew. So we don’t do anything on the OTC market. We don’t do anything with counterparty risk. We don’t do anything with [inaudible 00:33:11]. All we create are the D fifth liquid futures contracts and have basically US dollar denominated [inaudible 00:33:19].
[00:33:21] Mike Philbrick: So that’s great. So-
So just going back and summarizing a little bit. So on the long-short side, the position risk sizing is really a combination of all those portfolio managers, and all their risk management.
… actually really cool. I think that’s, so you’ve got somebody who’s got large single stock positions. You’ve got somebody who’s being conservative. You’ve got this bandwidth, you’ll have various different levels of vol. Have you considered the vol sizing of what the output is at all in conveying that back to investors? Or is that sort of, no, we’re gonna let the signals tell us what the vol size should be maybe with a cap or something like that, but has there been, how do you guys think about that particular part of the equation?
[00:34:06] Andrew Beer: So our basic model is we’re gonna follow what they do.[affirmative].
That’s our job. We have numerous different products that have been built for different, generally larger asset management firms who want us to build things for them, and then they do all the heavy lifting on that side, and we manage the portfolios. They sometimes have criteria that they want. So we have a fund that we run in Europe that has a vol overlay, that we try to bring it down to a five vol, because that’s what their investors want. I personally think that, and these things, a lot of those kind of design decisions, I don’t, I would, I don’t view them as adding value, but rather meeting a constraint that’s important to a popular-
… for investors for reasons sometimes that I don’t see.
[00:34:58] Mike Philbrick: They’re bespoke based on their needs, and what their requirements are, and that’s where the tailoring comes in, and that’s why you guys offer that service.
Now on the CTA side, are you, is it any particular factor, or are you seeing through to their, in order to ga- gather, are you looking at commercial speculators, the positioning? Is it trend? Is it trend carry? Is it what are there any things that you’re imparting? Or you’re trying to sus out the type of factor that they’re using? Or is it just gross positioning?
[00:35:32] Andrew Beer: It’s gross positioning. So basically… And my new, when we looked at this back in 2015, what we were trying to do is, so my take on managed features it’s got two great characteristics. It tends to have zero correlation to equities and bonds over time, but make no mistake, it goes up and down over time.
So you’ve got to have a multiyear outlook otherwise you’ll get whips. You’ll get it’ll get-
… washing go up and down. and the other is it tends to do well in a crisis. Now, that’s a, something that people love to wave around statistically, it, we have two data points, right? We have two 2000 to 2002, we have 2008, and then March of 2020, it was okay, but things happened too fast for it really did board out. But as an investor, having been through a lot of these things going back to the non-emotional part of it what, what I, I do think that managed futures is a huge, competitive advantage-
… in a period like that we’re in right now, because things just move farther than you expect. And every time it moves a little bit farther, a certain group of investors peel off and think it’s gonna reverse. And it just it’s just [inaudible 00:36:46]. Managed futures doesn’t care. They don’t care what intrinsic value is. They don’t care about any of that stuff. The two problems historically from our perspective have been one, when you layer in all of the fees and expenses of a typical managed future strategy. And a head flag to hedge fund strategy, it’s probably 500 basis points.
So when people say, oh, I don’t like to debate because they were doing two, my response is no, you picked a space that was doing seven, right? You just paid way too much for it. And then the second is single manager risk. There’s zero persistence of returns. I believe there is, that, that manager selection and manager future is completely a fitment. And by that no one has an edge. The smartest managed features guy in the world cannot tell you whether medium term trend is gonna do better than short term trend, whether somebody with a commodity bias is gonna do better than somebody with this kind of bias, et cetera. So the only way… And since you have no perspective of returns, and huge [inaudible 00:37:49] I believe that a, anybody who has the constraint of being able to less than, invest in less than six funds as part of their manager [inaudible 00:38:00] allocation could never invest in a single manager fund to build that bucket.
So what we tried to do was basically create a pro-, a product that would reduced risk by diversification, across lots of guys, in this case, it’s 20 hedge funds, and then generate alpha, not by picking who’s gonna do well, but by eating away at that 500 basis points entries. And then the whole exercise was how do you do that? And one of the things I did look, we did look a lot about, I wrote a paper on it was, maybe it’s all being driven by trend. And and it was very passionable in 2015, when we were doing this work for people to say, oh, managed futures it’s just a trend. What do they mean by that? And so as we dug into it, if I built a trend model, and you built a trend model, and Peter built a trend model, then by the time you end up twisting all of these dial, what markets are we gonna use? What, look back a period, what sizing criteria, what vol criteria you described, we all end up with wildly different results, even though we’re all calling a trend.
And so it’s almost if I said, what were the equity returns last year? And you said the Golden Dragon, NASDAQ Golden Dragon Index was up this much. And Peter said are you kidding me? The EMP, midcap EMP were up this much.” And I said, you guys are, the fangs were up that much. Like the, so if we can’t all agree on what the underlying data or factor is in our modeling then what it really is it the average of the people who are employing the active strategies. And so back to so what we really do is we say, if we’ve got lots of really smart guys that manage future funds who are trying to figure out, is Gold gonna keep going up. How would I know that as I build my models? Is it gonna reverse? What about it relative, is oil reversing? or do I care? Is it some part of a longer term trend? What about the 10 year treasury? Its core position that one, they’re all gonna come to somewhat different results, but we’re trying to get the average of it. And like with anything that’s indexed, like the average is much more stable-
… than any of the individual positions. And so I think the other thing that we realized back then was that they’re only about 10 positions that matter in managed futures. That, that, in, at certain period of time, like everyone’s talking about wheat right now, I doubt wheat is adding more than a couple points of returns to a typical managed Future-Fit Fund. On the other hand, Gold does matter. Gold will, sorry, Oil will matter a lot this year because it’ll also be a larger position because the markets are so much more liquid.
[00:40:58] Mike Philbrick: Yeah. I think that there’s a lot, there’s quite a bit to unpack there too. The… So I would add that when you employ, lets say you can employ six CTAs, there’s a significant challenge with that as well, because you have the lack of trade netting. You are paying performance fees-[affirmative].
… in one manager whilst in the other manager, you have the exact opposite of that trade. Potentially, they may have the other trade on. One’s long week, one short week. And so you’re paying one of a performance fee on the long side, but you’re losing on the other side. Eventually you may sell that loser, thereby abandoning that, that asset, which is the high watermark in which to gain some sort of return back. So you have to be very careful here. This has got lots of dimensionality to it. And I do like the idea that if you’re taking all of the trades, this is an interesting way to do the trade netting without having the six different or eight different funds. So that’s very interesting. The way we approach it is we do have quite a number of different features and factors. Obviously, we trade net all of that. If you’re long seasonality and short on trend, then you’re gonna be flat that position. And you don’t want to take both of those positions.
But if you have another manager, who’s got two different buckets, that’s the case then you would have those trades counter on within your portfolio. Nice thing, the way you’ve got it all systematically-[affirmative].
… boiled down. The challenge I would find is that there are some features, and factors that do work better than others, and they are often not necessarily what is used on average. I do think there is still the opportunity for active management certainly to perform differently, and to outperform. The challenge is, can you identify it before the fact, right? And that’s where it gets really hard. Can you find Seth Klarman amongst all the other managers that started in 1982? Probably not. That’s really hard. At some point, though, there’s some expertise that’s identified in the track record, and, that that’s another other ballgame of what the objective function is of the people who are investing in in the strategies. Sometimes it is not to have the best opportunity to make returns, sometimes it’s to gain access to the space that is approved by their
[00:43:22] Andrew Beer: consultant.
I completely agree with you on, on, on… So we don’t solve every problem, right? It’s not, it’s what I could tell you is I think you put us up against fixed managed futures, hedge funds or mutual funds, and I will bet you a tiny nickel that in five years we will have done-
So you’re not trying to be all things-
[00:43:42] Pierre Daillie: But-
… to all people, and you don’t have to be, right? And, and-
[00:43:46] Mike Philbrick: No.
I’m definitely gonna take a nickel bet on our fund versus the… I’m definitely gonna do that. We’re gonna make dinner on that. It’ll be great reason to get together [
[00:43:55] Andrew Beer: laughs].[crosstalk 00:43:59]-
[00:43:57] Pierre Daillie: a nutshell, Andrew, your managed futures ETF basically aggregates the strategies, the multiple strategies of 20 CTAs, and then you managed to get the average outcome of all the CTAs in the ETF, but the most important distinction of all that is that you’re not collecting the management fees of the CTAs. You’re passing on you’re passing on the
[00:44:30] Andrew Beer: bulk of their results-
Yeah. So we-
… minus the high fees, right?
Yeah. So we’ve been able to replicate, [inaudible 00:44:41] been able to replicate a hundred percent of the pre fee, and pre trading cost returns. And so if you look at what we’ve done over for a long period of time, we do 400 basis points better than the, a broad collection of managed futures hedge funds with daily liquidity in an ETF, and 85 basis point expense rate bill, we tend to have equal or better draw down characteristics. But that being said, the, going back to Mike’s point, if where I think we have the best mousetrap is if you decide if you’re a retail advisor, and you say, I believe in managed futures as a category, and I want 5% of my portfolio in managed futures, that, what does that mean? Okay. Managed futures is not someone’s trend model. It is not someone, it is a, that is the average returns of all the guys who do it, right? This is the equivalent of saying I can’t buy the S&P 500. I can’t even buy the individual underlying stocks. My only choice is to buy a collection of guys who track, who broadly invest in US large cap stocks. So that’s the only… So I believe that for those guys what’s been missing in the liquid alternative space is something where they can say, here’s my 5%…
… is something where they can say, “Here’s my 5% allocation. I have manager diversification. I have reasonable fee. It’s in a client-friendly wrapper,” what that then becomes is a benchmark plus product.
By… And the plus is only from cutting out fees; it’s not for taking more risk. But the reason that’s really important for an advisor is because they’re constrained generally is they can’t fill a 5% bucket with six different funds.
It may not be. I don’t know what the Canadian market looks like. There may not be six good managed futures funds, and then you get into all the netting and other problems that- that Mike mentioned. So-
Yeah, you… That-
[00:46:42] Pierre Daillie: can put [crosstalk 00:46:43].
You- you end up basically running back into the same problem that there was before three years ago in Canada where CTAs and- and hedge funds were only really predominantly available to rich investors. But now, that we’ve got this sort of this democratization-
… Of- of liquid alts in Canada and, of course, in the U.S. Now, you- you’re- you’re solving the problem of- of dividing up an allocation that could be if… That’s a fraction of your assets. But if you’re not dealing with a- a, a $10 million portfolio or a $100 million portfolio how are you gonna split 50, how are you gonna split a $100,000 or $50,000
[00:47:26] Andrew Beer: in the six months? On a million dollar portfolio, let’s say, 5%
[00:47:30] Pierre Daillie: is
[00:47:30] Andrew Beer: $50,000.
I think, the… yeah.
If… Peo- people won’t do it. And what- what’s happened in the U.S…. So- so the U.S…. I- I wrote about a… Morningstar has written about this as well that the- the central problem with a liquid alts market is that these are all products that, somewhere, had a good track record somewhere, that generally, at least in the U.S. and in Europe, are locked with- with firms that have a whole multitude of products, which raised the question, if you think you’ve got 15 great liquid alt products, why don’t you tell me which one you think will actually work? But- but really, there’s a whole series of single manager products at- at any given point, which a couple of them are doing well. And you’ve got these marketing teams and then force and go tell people that it wasn’t lock, it was GIL and it’s gonna go on forever. And so the guy who’s deciding what do I do in my 5% managed futures allocation, historically, had said, “I’ll just…,” they would look at the top five managed futures mutual funds, they would maybe throw out the one guy who had, crazy vol, throw out the one guy who’d had bad numbers recently, they’d pick one of the three in the middle.
And so if you look at… Back in 2010 through 2015, the default, the obvious choice was AQR. And 100s of 1000s of- of portfolios ended up having a 5% or more allocation with a single manager fund with AQR because it had decent numbers, it had okay fee, it was big, it was established, it was the easy call. That’s as crazy as saying I wanna be in I wanna, add 5% to value stocks and picking that mid cap EMP producer for a 5% allocation. That’s not diversification. That had the appearance of diversification.
So what- what happened to the advisors now is they’ve got this 5% allocation, they’ve told their clients that it’s not only a great area, but they found the best guy in the area. And then a year later, it’s- it’s 10% below the benchmark. And so now that 5% allocation is a 30% problem in terms of their fund.[affirmative].
And what do you do? Do you get out? Do you replace it with a guy who’s been doing better recently? Do you hold on or essentially doubling down? Then another years later, it’s down another 10% relative to the benchmark. And so the answer for a lot of people was they finally just said, “I’m just gonna get out the whole space ’cause it’s easier to blame the space than my pick.” And- and that’s… and then-
… literally, they were all out by the time 2020 rolled around, and then 2021 where then managed futures picks up again. Our argument is that there have been very few liquid alternative products that are built for a guy with a five or 10-year asset allocation objective. For- for that, you need broad diversification across underlying fund and-
… it actually benchmark- benchmark plus.
[00:50:18] Mike Philbrick: I- I would add… The- the one point I would add there is it- it’s… for me, that- that just a 5% allocation is one of I need to know the vol of the underlying, right? So if I’m buying the market and your vol is lower than the market, I’ve got certain real estate in my portfolio, and maybe a 5% portfo- piece of-
… managed futures isn’t gonna give me the convexity that I want. I agree with all the comments generally, then you have to start getting a little bit more-
… specific as you drill down into what is it that you wanted to achieve? I want a managed futures to provide some bolstering of the portfolio in a credit, in a crisis situation. That’s not 5% or, if it’s 5%, you’re going to be looking for a vol all that’s not- not even reasonable. You’ve- you’ve got to think about how am I gonna get the suite of products that X alternatively, i.e., has correlation to traditional portfolio, maybe point one, point two, point three. But then I’ve got to have the injection of the capital of- of that, of the force of that return be meaningful. And so if you got 5% and five vol-
… and your portfolio is down 50%, and that five vol thing is up 2%, really didn’t do anything. You still have a big headache. And so-
[00:51:30] Andrew Beer: Oh, I-
… I- I- I completely agree, and that’s why… The only reason… From an… when we built the original… our first portfolio and it was… this was designed to be a- a broad kind of hedge fund solution, we have 40% administrators. If I can… If I told you something as a 2% return, goes up 10 to 15% or 10 to 20% in a bear market, and… but you might be waiting seven years at-
… 2% for that to happen or seven years at 1% waiting for it to happen, it’s very hard to hold. If I said I’m gonna get rid of 500 basis points in fees and expenses, you’re sitting in until… you’re paying 6% while you’re waiting for that to happen?
It’s a completely different calculus.
From- from an optimal perspective, you can easily get into 20% or more in a portfolio. I… The- the… Just when I talk to advisors, I’m very aware of what are the realistic-[affirmative].
… considerations of their business. And- and a- a lot of the guys that I talked to… I think the biggest compliment I got last year was when an advisor said he’d never met a PM who tried his hard to understand actually his business. And- and it was really around- around the fact that I could explain to him what we do, but he had to turn around and explain it to somebody. And we had to talk about the circumstances when he would be sitting down explaining, what was going wrong and why it was going wrong, and- and what- what even meant by going wrong. And so- so I think you know, 5%, I think, is just the number that people use. It’s not optimal from an asset allocation perspective. But if in 2008, you had a 5% allocation of managed futures and it was up 15%, and everything else was a sea of red, that- that small allocation can still be a-
… beacon of green for an advisor dealing with clients who want to [crosstalk 00:53:18].
Oh, yeah. No, we- we want more-[affirmative]. [
[00:53:17] Mike Philbrick: laughs]
… 5%. [laughing] As managed futures purveyors of a-
… of a significantly differentiated product that is, in particular, adding-[affirmative].
… value in the last six months, and as I think you’ve mentioned earlier, Andrew, these- these sorts of regimes tend to last a decade and, sometimes multiple decades. We’ve been in the- the 10s, which were-
… Largely very a very large tailwind-[affirmative].
… for more passive products, domestic, U.S. 60-40 being at the 99th percentile of Sharpe ratio is, fairly significant out-performance over a decade. And things do tend to move around. The last time we got to this, oil was at $9 a barrel, gold at 200, and the NASDAQ was at 5,000; and the NASDAQ didn’t hit 5,000 for 14 years. And those other things did very- very well. Part of diversification is, having some stuff in your portfolio that’s always killing it, and then having something that’s killing you, and that’s, part of… Rebalancing is a wonderful tailwind at that point.
Is there anything else that you’re able to share with advisors and with me even on how you get folks across the line on moving towards these more lowly correlated, strategies, and then sticking with them? Is there any- any other kind of stories or analogies that you use that- that can help, the advisor out there introduce managed futures or introduce long-short-[affirmative].
… or introduce these other little bit more? Even though you’re transparent, they are opaque to them. When they hear the NASDAQ, they’re on CNBC and they watch-
… whatever’s going on in the market, they know what their portfolio is doing. But they have no idea what’s going on in their managed futures [laughs] portfolio; could be up a lot, it could be down a lot. Is there… How do you help with all that?
[00:55:11] Andrew Beer: So I- I think, first of all, I- I think the conversation-[affirmative].
… is a lot easier-
… today than it was-[laughs]
… a year ago. I- I wrote a paper in the beginning of 2021 that was basically saying, “Hedge funds [inaudible 00:55:28] really might be coming back, and here’s why managed futures would be a good place for retail portfolios.”[laughs]
… that was a crazy-
Outrageous at the time.
At- at, yeah, at- at the time-[laughs]
… outrageous. And I- I just put it up on LinkedIn again today. And I was like, “Guys-
… this one has aced well.” yeah. I think we’re up 22% and the-
… LQD is 10% over that period of time. And- and then I wrote something last summer about how hedge funds became the new fixed income substitute. I- I think people are being taken-
… by what’s happening with 60-40 portfolios. And what people say about us, hopefully, that they say that our secret weapon is that I’m not a quant, that- that, like when I- I was… I posted a LinkedIn thing on managed futures and all these managed futures luminaries chimed in and they’re all talking about these incredibly technical terms. And I responded, I was like, “Guys, managed futures could be really simple.” if, you ask a question with is it trend-reversal, is it this, is it short term? It’s… Our portfolio, when I look at it, it’s obvious. It’s that, it’s that when interest rates start going up, we start shorting treasuries. It’s not a surprise. We’re not trying to… These guys aren’t trying to catch-[affirmative].
… an inflection point. There are a few guys who taught you to counter trend and things like that. But, what… when gold is going up, we’re gonna be owning gold. If equity [inaudible 00:57:01], we’re now for equity. If equities keep going down, we’re gonna be short equities. It’s not it… People love to take these strategies, and dress them up in incredibly complicated language that I think can undercut the ultimate messaging. What I would tell people about a strategy like managed futures is- is back the way it started, which is that we all have this bias, that, that if- if I think my house is worth, $500,000, and then somebody tells me, it’s worth $400,000, my- my instinct is it’s gonna come back to 500.
Not that it’s gonna go from 400 to 300-[affirmative].
… to 200, to 100. And- and here’s a strategy that is it- it is a robot dog strategy. It looks at what’s going on in the market, and it just jumps into trades, but it does it in an intelligent way. It’s not saying, “Oh, look, Bitcoin is up. I’m gonna go 100% into Bitcoin. Oil is up, I’m gonna go 100%.” it- it is… there’s an intelligent way of saying, “I want some of this. The Euro is going down. I wanna short some of the Euro. I think… Looks like that’s going to keep continuing. Rates are going up, we’re gonna be positioned for different ways with the rates going up for rates going up. If you- if European stocks keep going down, we’ll be short of European stock.”
And I think when you talk about it as a benchmark plus product, you take a lot of the advisor anxiety out of the- the equation because one- one expression we coined is that, basically, the benchmark, your worst, your best friend or your worst enemy. And it’s your best friend because none of us knows whether managed futures will be up 5% a year or down 5% a year over the next five years. But worst case scenario with down 5%, if we’ve cut out all fees and expenses, we don’t have the netting issues that you’ve described. And we’re down one? When they’re down five, the advisor can still frame that as, “Look, this is diversification because if that’s happening, then probably everything else is shooting through the moon.” And on the other hand, if managed features, if your benchmark, when you’re sitting across from the client is up 5%, and you’re going down 10, that’s when… that’s the nightmare scenario because the trigger high of having picked the guy who you thought was the best in the space now turns into the, multi-year hangover of going back and revisiting and what are you doing, what do you do? So the idea of getting people to be longer term investors in this space is a clear narrative about what it’s supposed to do.
Yeah, you know what’s really-[crosstalk 00:59:41]
[00:59:45] Pierre Daillie: I- I… to me, like when we’re like based on what you just said, Andrew, which is that, managed futures should be a very simple discussion. It just struck me that, this is exactly what investors think their advisors should be doing. One day, like this- this last little period, gold is up, and then you get a phone call from your client says, “Oh, gold’s up, should we be buying
[01:00:11] Andrew Beer: some of it?”[affirmative].
And, one way or another, you have
[01:00:15] Pierre Daillie: an opinion on that, either it’s yes or no or maybe-[affirmative].
… I don’t know, and- and or nothing happens. And- and so the client is “Oh, okay [Pure 01:00:25] doesn’t know. [laughs] Right? But- but what… with it… but what I’m hearing, like what I understand from the managed futures discussion that we’re having is that, if you have that in your portfolio, you don’t have to consider the question, and then the decision to do that or not to do it. The managed futures program will do it for you because it’s trend following.
[01:00:48] Andrew Beer: I- I like that explanation. I would say a big caveat in that everyone-
… who likes what we do is building models for their clients. And- and the whole point of building models, like there was a whole revolution of- of advisors building model portfolios 50 years ago, if you went an advisor in the U.S., they would wave around an Apple analyst report-
… and tell you they’re gonna buy Apple stock for you and do tax-loss harvesting and buying, these various bonds. After the great financial crisis, everyone every major wealth manager put their advisors to use model portfolios, and it was to get clients-
… focused on the overall portfolio, not the sleeve, and then to get them to focus on client acquisition, client management, et cetera, et cetera, and to make- make them better what they do well, not what they don’t do, and take them away from what they don’t do well.
The… In the model building world, you care about how that managed futures is a bucket, and what you care about is how managed futures as a category does over the next 10 years, and if you do as well or slightly better than that’s very different than… that conversation is very different-
… than the guy who is expecting to be tactical and nimble because it just [crosstalk 01:02:11]-
Yeah, and I’m- I’m just coming at
[01:02:12] Pierre Daillie: it from the perspective of the client themselves, like the- the layperson who says, “Oh, tech stocks are down. Should we get out? Gold is up, should we get in?” and-
… because they’re- they’re reacting to the daily news that they read or CNBC or whatever’s happening. And- and so just… I’m just going back thinking, my- my advisor days when clients would phone up, on- on any given day and ask questions like that and you had to give them an answer, and you have to make a decision
[01:02:40] Andrew Beer: but-
It can be a
[01:02:41] Mike Philbrick: little bit insidious, and- and worse than that, if you look at the model-
… portfolio world, and you look at competing for those clients, if you would have added 5%, 10%, 15% of managed futures, whether it was market-based, the best performer, the worst performer, it doesn’t matter, that shit was a drag-
… on your portfolio. And the guy who did 60-40-
… would look at… would have his model portfolio without any managed futures, probably cut his emerging market. We did a- a piece on emerging markets, the best emerging ma- markets manager has u- underperformed the worst U.S. equity manager by 10%. Why is that? It’s obvious, right?[affirmative].
When I say it, it’s that’s been a wasteland in one area, and it’s been, great in the other. How could you even keep up?” You can’t based on your benchmark constraints. Now we extend this to the world of model building. And the world of competing for clients as advisors go out and talk to people.[affirmative].
And the thoughtful advisors are saying you should have a little bit of this managed futures or these other-
… diversifiers in your portfolio have paid and that diversification has dwindled. And we are now at… maybe it’s… we’ve- we’ve reached peak 60-40, I’m not sure but we can see, as Andrew points out, in the hedge fund positioning that hedge fund positioning towards inflationary assets happened a while ago. Maybe we should just give a little knock on the door for the advisers, “Hey, it’s time to start to embrace this diversity in your portfolio.” If you don’t have any exposure to these other unique strategies that could perform for a decade, now’s the time to really start giving this some serious consideration, regardless of how you want to do it, Andrew’s products, my products the- the whole field competitive product [crosstalk 01:04:41]-
And you- and you shouldn’t
[01:04:41] Andrew Beer: be
[01:04:41] Pierre Daillie: holding out for peak 60-40. You shouldn’t be, [
[01:04:45] Andrew Beer: laughs] shouldn’t be [crosstalk 01:04:46]-
[01:04:46] Mike Philbrick: not at all, and you should always be diversified.
[01:04:49] Pierre Daillie: That’s the whole point.[crosstalk 01:04:51] that, “Oh, it’s not over, yet.
[01:04:54] Mike Philbrick: It’s so tough.
The firm’s themselves have changed their model portfolios. In 2007, I don’t think that I saw a mo- a- a model portfolio at a firm that didn’t include emerging markets or quality value stocks-
… or even commodity ETFs. Fast forward to this past year-
… I don’t see very many of those things in there. We… We’ve gone from minus $35 in oil to $130 just to… Andrew’s point earlier, that commodities can go a lot further than you might think [laughs] they can go in any direction.
[01:05:31] Andrew Beer: think- I think the other thing that’s- that’s really interesting in- in… Curious and see if it’s affecting you in Canada as well is that… yeah, the- the [inaudible 01:05:40] industry is incredibly weird industry. And I- I actually started to work on- on curricular material for Harvard Business School around how weird it is because you have an industry that was a phenomenally profitable industry without a lot to go for it in terms of adding value for multiple decades, and then Vanguard comes out of the blue; and Vanguard’s essentially a nonprofit. And so you have Vanguard pricing things at zero and iShares is gonna compete with- with Vanguard essentially at zero, but at, but every time Vanguard raises the dollar, they just lower all their fees. Meanwhile, you’ve got the rest of the industry here and still 10s of trillions of dollars, resisting and fighting, as they get dragged down to it. Where- where these guys can be cheapest-
… is around 60-40 portfolios, the deepest, most liquid most easily indexable market. And those guys, in turn, were also competing. I- I remember getting asked by a large insurer in the U.S. to see if we could build a product for them for their target date fund portfolios, and they were losing mandates over two base points of expenses. And so I think, there is that kind of point where you’re like, “Great I’ve saved lots and lots on management fees and I have the cheapest portfolio-[affirmative].
… in the world. Take robo advisors in the U.S. Talk about the growth of 60-40 portfolios, and they’re all just variants of the same thing. And- and, part of our whole business thesis is that, in the next 10 years, it’s all gonna change. And when it starts to change-
… it’s, it’ll be the pylon effect. I- I wrote a- a joking post on social media where I said, I’m just I’m waiting the moment-
Yeah, I mean-
… Where- where we have [inaudible 01:07:29] in,
… in [inaudible 01:07:30].[laughs] yes. [laughs] Like [inaudible 01:07:33]. Andrew- Andrew, you’ve- you’ve
[01:07:34] Pierre Daillie: recently, in the last, I- I guess in the last year or so, you’ve- you’ve been quoted as saying that we’re… You- you foresee us entering in a new sort of golden era for hedge funds.
[01:07:47] Andrew Beer: Yeah.
I- I was right on 2020 and wrong on 2021.
No, yeah, era.
Okay. [inaudible 01:07:55] decade. How about that? [laughing] Era, yes, okay.
[01:07:59] Mike Philbrick: What’s giving you the confidence in that?
Like I think the-
What- what is it that you’re…
[01:08:02] Andrew Beer: yeah.
I- it- it’s every, it’s everything that you’re saying. It’s that emerging markets have been, bad, even worse. Look at it last year, who expected China to step on the neck of the tech industry and the real estate industry, and then have a COVID outbreak? When you look at… The- the tech sector in China is down 75% in a year. It is mind boggling. But that being said, they… there will be tremendous opportunity around that. There will be… whether it’s on the equity long-short side when equity long-short managers generated more alpha in 2020 than the entire preceding decade because they got the re-leveraging. They went into the crisis with the tech bias, they got the recovery early because every epidemiologists worth its salt was also retained by hedge funds to try to figure out when vaccines were coming and when, and they-
… hedge funds, to try to figure out when vaccines were coming and when. And they bet, and as a result of that they bet on the recovery trade. And so when you had this big swing back into value they were there waiting for it. And so 2021 turned into, was actually one of the worst, interestingly. But not to say that they’re gonna get everything right. But that just the, there are gonna be so many more fish in the pond over the next decade.
And that’s where there will be different ways to capitalize on it. You guys I’m sure will find lots and lots of different ways to identify things that have been h- historically deepened or interesting to invest in. I like hedge funds ’cause I think on average they’re gonna find, when I talked about the, you talked about emerging markets in the 2000s. It wasn’t a, it wasn’t a hidden trade. It was good that these guys went into it with much greater gale and size in their portfolios. And they got in early and they wrote it when the F and, when emerging markets were outperforming the F&B by 30% a year.
So I think you’re gonna, you’re gonna see a lot of opportunities like that. Sometimes they’ll reverse and get ugly but on average it should be a great decade.
So we’re, Andrew we’re… sorry, go-
Yeah, it was massive, that
[01:10:13] Mike Philbrick: emerging market. [crosstalk 01:10:14] sorry.
[01:10:14] Pierre Daillie: I was just gonna say where are you seeing the most uptake in terms of your two main your your main product, your main ETFs. Who are the buyers of DBEH and DMH? Is it DBMH? Yeah. DB, DBMF, pardon me.
[01:10:33] Andrew Beer: So I DMBF.
So all the interest is on the managed future side and, equity long-short is, candidly, it depends on equity allocation. It’s got less equity risk. If you do really you’re gonna do 200 basis points of excess returns. Managed futures you line it up against equities and we’ve got zero beta since we started and eight or 900 basis points of annualized alpha. It’s where all the diversification bang for the buck is. It what we do from a needed intermediate perspective moves the dial a lot more.
The other things that we also manage are are portfolios that combine those two. And where you combine them in Europe, we have a product that we manage for a big at the manager called FDI that’s among the top performing multi strategy usage fund since we launched. Because that’s where we combine managed futures and replicate [inaudible 01:11:34] equity long-short and relative value and event driven all into one package.
And that goes back to the idea that there is a large group of investors who don’t wanna worry within their hedge fund bucket in their asset allocation model. They want a low cost, client friendly, one stop solution that does 200 basis points a year better than the benchmark and they want to buy
… put it a- across all of their, portfolios, as you say, below a certain size. Not the hundred million dollar guys, not even the 10 million dollar guy with the smaller clients, and then just use it as their allocation.
[01:12:11] Mike Philbrick: Yeah.[affirmative]. Yeah, that makes a lot of sense to me. I can see why.
[01:12:16] Andrew Beer: But you look, there, there are, I- I am…
… there are a lot of things we don’t do, right? It’s there are and we don’t, when, even when talk, people talk about DBMF, oh… if commodities go straight up you could have more commodities than we are, than we will ever give you in that portfolio.
In our European portfolios where we can’t own golden oil along the Canadian dollar and along the Aussie dollar, along being along the Canadian dollar probably wouldn’t do much for for your clients. But the it it I think, the key is to be very focused on what it is you’re trying to achieve. And what we’re trying to achieve is balancing… I want exposure to this hedge fund strategy. I have an asset allocation model. I want something to fill the bucket without getting me into trouble.
And so some people say it’s like the sleep at night version of investing in hedge funds. Some people say it, it’s, it, it, the asset allocator’s dream.
To, but again, we’re talking about people who already have an asset allocation model who are looking to fill a bucket and to fill it with a and so all of our pr- products have been built with that person in mind.
[01:13:34] Pierre Daillie: Do you ever find that the the managed futures moniker gets in the way of interest?
[01:13:43] Andrew Beer: All the time. It, some people call it DTAs in the US. People don’t, it’s, l- a lot of people that, that, that initially when the ETF was small I would talk to people, they didn’t know what a future’s contract was. And they didn’t know, therefore, what managed futures meant. That’s [crosstalk 01:14:03]
That’s what I
[01:14:04] Pierre Daillie: was gonna say, why don’t you call it something why don’t you call it something else? [laughs]
If we just change the semantics [laughs],
Because I think the when it comes to futures, people start thinking about Randolph and
[01:14:13] Andrew Beer: Mortimer, right?
And that, I yeah. I would say that the uptake that we get from, we get uptake from sophisticated advisors, and most of them-
[01:14:24] Pierre Daillie: No, obviously it’s not an issue but if you’re trying to introduce, in- introduce the idea into a more mainstream cohort of the market and to, lay clients l- lay people to, to the average client at first, obviously it’s the advisor’s job to, to take up the responsibility, the mantle of educating their clients on what exactly a managed futures what managed futures are. But I guess what I’m getting at is that at the outset that terminology can confound the activity, right? It can actually get in the way of the activity itself.
[01:15:08] Andrew Beer: Oh, even at gather term hedge funds. I think, so what’s interesting about, about, so one of the things that’s interesting or fun about my job, I would say, is that when I talk to an advisor I have no idea where the conversation’s going. There’s no hand pitch about this. I need to understand what they do, what their clients are like. I spoke to a guy earlier today, most of his clients they have full discretion over client portfolios. There’s not a lot of communication with clients about why they’re putting something into the portfolio versus, versus something else, he has a huge advantage in terms of being able to build the portfolio, ’cause the term managed futures probably never makes it back to his clients. It’s probably a, this is in a fixed income hit or something like that.
For the clients, for advisors who-
… have to explain things on a line item by line basis, manager future is hard. It’s hard to explain, it’s quantitative. It, it, it’s easier to say here’s a guy who picks, keep stock. Things that are worth less than their trading at. People can understand that language more. And it also arms you with, a defense that, oh, it went down, we bought it at 20, but it’s at 15 right now. We don’t wanna get out now because it’s even cheaper than it was, as opposed to maybe it wasn’t worth 20 in the first place, like an easy narrative around it.
Managed future is really hard on that. It’s we invested in a guy who was short term trend, then he just got whipsawed six times in a row and he’s down 15%. So I think what I try to do is understand the person on the other side and what kind of what are their real actual business considerations. And if they’ll share that with me then we just really talk about it.
How if I was sitting in their shoes, how would I try to explain it to people?
For some people it’s as simple as it’s an inflation hit.
Oh yeah. I think it starts
[01:17:00] Mike Philbrick: there-
… the regime shift that, that I would say most people aren’t prepared for isn’t just the inflation, it’s the inflation volatility. So we have now inflation but the volatility around the inflation, that, that variance around the mean has been exceedingly low since 1990. [HL Man 01:17:20] put out a paper on this, which I think is about 1.3% in historically before that was like five and a half percent. So it’s almost a factor of three times larger.[affirmative].
That has all kinds of negative implications for risk premiums on equities and bonds, very significant ones. And it also has negative implications on their correlations. Like the 1970s saw stocks and bonds correlated because of the inflationary environment. Correlation means you are not getting that zigzag benefit of negative correlation that stocks and bonds have enjoyed. And so y- you are going to see your 60/40 portfolio move more violently. What is the thing that can solve that?
Exposure to commodities. Now the challenging thing is even in the seventies, when commodities compounded at 14% real and stocks and bonds did negative real, there was still a three year period in there where your portfolio of commodities on a market cap basis was down 37%.[affirmative].
Trend followers who were in that weren’t down 37%. Risk parody type portfolios that allocated on a risk adjusted on a risk weighted basis to commodities did not experience that. So it’s not just, a dumb allocation as [Anders 01:18:44] says, you’ve gotta think about this through the portfolio construction lens. And then, an advisor that we spoke to the other day, just to add some color, they wanted to actually bury the managed futures side of it into an overall portfolio, cloaking it.
Obscuring it, basically saying the client doesn’t need to see it, ’cause we’re gonna have to answer questions about it.
And the behavioral vulnerability is of the clients wanting to sell the thing that’s not working rather than to rebalance into the thing that is not working because it’s had a low period of, a period of low returns, which is behaviorally more optimal. This is the extent some very thoughtful advisors are going to make sure they have allocations across these different types of managers.
And I think this is probably what Andrew’s clients in Europe with the usage funds were going for too.
They don’t wanna see the line items. [laughs]
[01:19:38] Andrew Beer: Oh, no question. Yeah, no it, and look, I actually like the idea of combining.
We have these two ETFs. I do like the idea of combining them, ’cause I want something… again it’s not a scientific analysis but I think if the ma- equity markets do really well, I feel confident that the equity long-short guys probably, it’s probably gonna be an environment where he’s doing better, they’re doing better than on the managed future side. I think, I think going back to your point about communicating with clients and stuff, I think, therein, in, I found that there’s a lot of power in anecdotes. And so last year we were towards the Japanese yen and the Japanese yen was going down, right? That going, if the client had a 5% allocation in it and this was not going to save them in terms of what they were doing but it was very useful in terms of having a concrete example of a, of an exposure you’re not gonna get elsewhere.
If the Japanese, you know-
… Japan hasn’t grown in a long time. It’s, they’re never gonna raise rates in Japan because they’re never gonna have inflation in Japan for all these different reasons. That actually was not a difficult argument to say to a retail to to, to the end client. But it was really just, it was having something tangible almost like if you said with a guy who is picking stock, oh, he put these, he’s buying the stock at $16 and his analysis says it’s worth 25. Yeah. That it’s powerful. It’s a powerful story that makes it tangible for the client to know what you’re trying to do. When you ta- when you take managed futures away from beta, alpha, non-correlate, and other things like that it, I, to me, it’s about story.
And so around the, when I wrote this thing about the inflation trade and people were saying how do I describe to you? I said, look if inflation hits, it’s, most guys are not gonna have things in their portfolio that will directly make money from it. Now you, and I know that means shorting treasuries but you can frame that with your clients in a way that that, that take that and frames a story around it.
That if inflation’s going up, these guys will be long inflated, whatever that means. And so I think a lot of it is finding a way to craft narratives around it. Right now we are short the euro. That’s not a hard thing to explain to people given what’s going on.[laughs] Yeah.
It’s not working today only. [laughs] It was working until
But the capital flight story is definitely goes hand in hand with that. So the exodus-
[01:22:28] Mike Philbrick: And I think the other thing for advisors that [crosstalk 01:22:32]-
But I think [crosstalk 01:22:32]-
There’s, we’re trading 85 different futures and currency markets. And so those are just things that you don’t have access to. And then we’re looking at them through the lens of being long or short. And one of the ways in which to take advantage of inflation is to be short bonds or short the bond complex. So how many advisors can actually execute a short in the, in, in the bond markets and efficiently? They can’t. How many can trade the grain complex? Can’t. You could maybe get away with a long gold position in the metal side of things. Maybe have some silver and that might be acceptable in the current client side case, depending on what country you’re in. But these things are just significant diversifiers that come to play when you have an inflationary of volatility market.
And it seems I think both Andrew and I are trying to convey that regime shift is occurring. The de-globalization and onshoring of supply chains, that’s a major shift from 1989, the collapse of the Berlin wall, and the massive globalization that we encountered. And then interest rates falling for 40 years. All of these things seem to be at a moment of change in regime and that change in regime and then change in inflationary and growth dynamics and liquidity dynamics has significant and long-term implications for h- how asset prices behave. And so this isn’t, this isn’t your father’s market. It might not even be your grandfather’s market. It might be your great-grandfather’s market.
[01:24:19] Pierre Daillie: Yeah. [laughs] You had me at giving you access to things you don’t have access to. [
[01:24:28] Mike Philbrick: laughs]
There you go.
[01:24:30] Andrew Beer: [laughs]
I think also, this is where it, again, depends, but I also-
… I wrote something for family offices, which is basically why every value investor should have managed futures. And it was because, I know a lot of family offices who everybody that they invest in has a value bias in one way, shape, or form.
And they did. They probably all have attack bias at some point today that the real diversification is, as you’d say, is somebody doing something you aren’t comfortable with. You don’t like in some fashion. And so to me, people ask me about the portfolio and how we’re positioned. And in one of our portfolios, we’re, we went very short Europe over the past couple of days. That makes me cringe because that just makes me feel like, it’s because I feel, I always feel myself personally, I always feel like the market gods are waiting for our portfolios to take a big position.[laughs] Yeah.
So they can, they can, bring their boot down from market heaven and stomp on us. But, there are a lot of times where I’ve seen positions like that and they’ve worked and it’s never something that I would’ve done on my own. So people often say, do you ever override the positions? Do and my answer’s always no. I don’t override them because I don’t think I would be more right than they are. And an advisor didn’t think about overriding them because the whole point is, when the yen has gone all the way down like this and then they’re, shorting the end, shorting and expecting to go down further, and that, there’s real value in that in a portfolio. And I think back to your point is when we do have these regime shifts, why do things keep moving? It’s because we all, we get this very tight consensus. Last year, it’s incredible, end of August-
… 65% of economists expected no rate hikes this year in the US. And then they start moving and they start piling on and somebody says two and then somebody says three and then [crosstalk 01:26:36]
Nine. Yeah, I know, it’s like crazy.
Now we’re back to two again.
Yeah. [laughs] And and, and so back, back to the trading places thing, that’s the typical, pit mentality of emotions building on it. And I think the best thing, the best trades or opportunities that people have found over time, they’re often, it’s like Warren buffet says, or Charlie Munger says, it should be blindingly obvious why you’re doing it. You shouldn’t have to have poor decimal places to figure out why you’re doing something and I think to me right now managed futures is blindingly obvious given the world that we’re in.
Absolutely. That is a great spot. Put
[01:27:17] Mike Philbrick: a pin in this, we’ve been and at it about an hour and a half but that’s yeah.
[01:27:22] Pierre Daillie: That was [laughs] that was an amazing discussion. Amazing conversation, I’d have to say.
[01:27:29] Andrew Beer: [laughs]
Yeah. Listen, thank you. Thank you guys so much [crosstalk 01:27:36].
Andrew, also let
[01:27:36] Mike Philbrick: them know where they can find you. The specifics, like your Twitter handle the website all the stuff where people can dig in, find some of those web pa- white papers you were talking about all along the call.
[01:27:51] Andrew Beer: Sure. So everyone, first of all I published a lot of stuff on LinkedIn, so just reach out to me over LinkedIn. It’s Andrew Beer, B-E-E-R like the drink. My company is called Dynamic Beta Investment. And then you’ll see a steady stream of things that are going on in the hedge fund space. Occasionally, tossing rocks or at different cabins in the industry. And then on Twitter it’s AndrewDBeer1, I think it is but in any case it’s the same. And then we have a website ww dynamicbeta.com where we do publish research. Despite my listing a couple of articles, I publish things relatively rarely because I only write things when I think I have something interesting to say.
[01:28:41] Pierre Daillie: Excellent. Andrew, thank you very much. I wanna say that was very enlightening. I know I said it at the beginning, it was gonna be an enlightening and insightful conversation but I think that’s an understatement.
That was amazing,
[01:28:52] Andrew Beer: Thank you guys very much for having me on. It was a pleasure and. I hope we’ll have an opportunity to do this again in a couple years talking about year three of the great regime shift.
[01:29:02] Mike Philbrick: yeah. Just, let’s just all remind ourselves when we’re really popular that we’re near the end.
Listen on The Move (audio only)
Our very special guest Andrew Beer, has a fascinating background and career in finance. He is a managing member at Dynamic Beta Investments, one of the oldest firms doing liquid alternatives. Their mission is to sponsor and roll out ETFs that look like managed futures (CTAs) and hedge funds, except with full transparency, liquidity, and none of the high fees.
Dynamic Beta Investments' approach is both unique and fascinating, which brings Jack Bogle's philosophy to the managed futures (CTAs) and hedge fund space.
If you’re looking to liquid alts or manage futures and want to learn more about how these things work, stay tuned, you’ll find this to be an enlightening and insightful conversation.
Where to find Andrew Beer, Dynamic Beta Investments:
Where to find the Raise Your Average crew:
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