Risk Mitigating Strategies Framework - Ryan Lobdell & Jason Josephiac

[00:00:00] Pierre Daillie: Welcome back. I’m Pierre Daillie, Managing Editor at AdvisorAnalyst.com, and this is Raise Your Average. My co host is Mike Philbrick, CEO at ReSolve Asset Management. Mike.

[00:00:12] Mike Philbrick: How are you, Pierre?

[00:00:13] Pierre Daillie: I’m good. I’m good. How about you?

[00:00:15] Mike Philbrick: Good. Good. We got a couple of, uh, really interesting characters joining us today to give us some insights into the, uh, the RMS, the Risk Mitigating Strategy framework that they have published.

[00:00:26] Pierre Daillie: Well, I’m excited. I want to talk about the, I want to talk about the contents of your white paper. For one, we we’ve actually featured it for a couple of months, actually, as a, as a staple item in our newsletter or daily letter. Um, just because it has so much, it has such a wealth of, of information and knowledge in there and, and a way of, of way of thinking about it.

Our very special guests are. Jason Josephiak and Ryan Lobdell from Meketa Consulting. Um, and what I just said, which is exactly what we’re going to talk about today and about how to think about an approach, optimal high net worth or institutional portfolio construction using alternatives in the context of what Meketa aptly refers to as risk mitigation strategies.

Jason, Ryan. Welcome. It’s awesome to have you guys. Thank you so much for joining us.

[00:01:17] Ryan Lobdell: Thanks. It’s nice to be here.

[00:01:18] Jason Josephiac: Likewise.

[00:01:19] Pierre Daillie: So earlier this year, Jason Ryan and their colleague, Brian Dana co-authored a fantastic white paper titled Risk Mitigation Strategies Framework, which explores some pretty nifty new perspectives on portfolio construction, as well as exploding the misuse or overuse of jargon.

Um, you’ll find the link to it in the show notes below. If you like the show, while the music’s playing, please hit that subscribe button, ring that bell, and please, please leave us a review. That helps others like you find us. Let’s get started.

[00:01:57] Disclaimer: The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of advisoranalyst. com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.

[00:02:09] Pierre Daillie: Jason, Ryan, welcome. It’s exciting to have you on the show. We’re, we’re excited to get started. Before we get started, gentlemen, uh, Please tell us about your backgrounds and how you ended up at Meketa and what you’re working on these days.

[00:02:30] Ryan Lobdell: Sure. Um, I mean, I’ve been at Meketa for, and a predecessor firm for about 12 and a half years now.

Uh, primarily more recently on the hedge fund side of things and have background kind of working as more of a generalist, uh, both on the research side and, and the consulting side.

[00:02:48] Jason Josephiac: And I’m Jason Josephiak. I’ve been at Meketa for two years. I’ve joined in May of 2021 prior to Meketa, I spent about seven and a half, eight years at a corporate pension plan, managing their portable alpha program, as well as a few other asset classes and helped out a lot of different things.

And prior to that, I was at a asset management shop, a long, long only global equity shop called the Boston company. I did that for a handful of years, more so on built and client service business development. Love it.

[00:03:16] Mike Philbrick: Awesome. So you, so you guys kind of know what you’re talking about.

[00:03:19] Jason Josephiac: I hope so. We’ll see.

We’ll see.

[00:03:21] Mike Philbrick: Yeah. Maybe you do. We’ll figure it out. We’ll figure it out. Why don’t we start it off with air? So, so when you normally see the pie chart in most, what we would call maybe diversified portfolios. Maybe we can start right there. What’s the underlying challenge with that? Maybe, you know, the overexposure to growth risk, the underappreciation of inflation changes.

Well, what do you see? Like, that’s part of, I think, the premise of the paper is that there’s, there’s a lot being missed in the underlying portion of that. Maybe we can start there.

[00:03:50] Ryan Lobdell: Yeah, I think that’s a great lead in to start talking about that. And that’s really how we tried to, to launch into our description of.

What risk mitigating strategies are in that, in that paper that you referenced, uh, and the way that Jason and I and the rest of our, our team and our firm tries to think about it is trying to identify what risks we have in the portfolio and trying to find things, particularly. If you’re going to use hedge funds or something diversifying, um, because I know as Jason and myself will say to anybody, hedge funds is a pretty, pretty poor term in terms of describing what we’re actually doing or what actually the managers underneath the hood are doing as well.

It can vary quite a bit based on what, what the expectations are and what they’re actually trying to achieve. But back to your point about the allocation across risks. No matter what portfolio you look at, everybody has all of these different asset classes or strategies or line items, whatever you want to call it.

Um, they have private equity, global equity, us equity, non us real estate, high yield, hedge funds, commodities, tips, investment grade bonds, whatever else you want to throw in there. And at first that seems really, really diversifying it. You step back and think, well, I’ve got allocations too. 10, 11, 12 different things that that’s probably good enough.

I spread across those and in some weight and throw it in the optimization, I’ll probably be okay. But when we peel back the onion, uh, at least even just one layer here and say, okay, well, what’s driving the risks here, what’s going to drive whether my portfolio does, does well or does poorly or meets my objective objectives or, or falls a little short of that.

We see that most of the time, 90 plus percent of the portfolio is driven by economic growth risk. So that shows up primarily in those equity link securities, whether public or private. Um, if you’re actually looking through on what the underlying risks are, particularly in the private market space, even if they’re not marked as frequently as the public market stuff, and it shows up in the other things to like high yield as well, and even in real estate, depending on how you’re investing in it.

So noting that as our kind of first step into thinking about what can be diversifying to a portfolio, we really want to try and think about what’s diversifying to your growth risk. If that’s the main key. Driving force of your portfolio. That’s really going to drive returns over the longterm. And, and, uh, I think frankly, with many return targets, no matter the institution, if you’re trying to hit a seven plus percent return, which I think many people are, they’re going to have to allocate in some way, shape or fashion to economic growth risk.

So what can I have on the other side of that to balance my portfolio to play a little defense and compliment the offensive part of my portfolio?

[00:06:42] Pierre Daillie: Yeah. You guys, you artfully opened your white paper by saying investing in hedge funds is akin to playing sports. And you refer to asset or manager selection as building or drafting an all round athlete to your team, your, your portfolio.

And you go on to say that championship teams tend to have both talented offense and defense. Uh, and I absolutely, I love that because, you know, storytelling and analogies are, are, are really important in this business, especially. When you’re talking to advisors, uh, because then you’re giving them also soundbites that they can share with their own clients and convey the same thoughts.

And as you said, Ryan, many strategic asset allocations have a, a very well built offensive roster, which tends to move with changes in economic growth. But most portfolios, uh, or equity risk, most portfolios have, uh, they, they, they severely lack decent defensive talent, right? So they’re not likely to be championship material.

So I I’d love it if you guys could dig into the analogy and, and expand on it more so that, so that we can actually provide advisors and our, and anybody listening to this, but, but in particular advisors with a way of, of, of approaching this discussion in a, in a way that’s relatable, as you said in your paper.

[00:08:11] Jason Josephiac: And, and, you know, and Pierre, the terms that we use as an industry can be difficult. Because it depends on who’s on the other side of the table and what resonates with them and what they attach to meanings of different terms. Uh, as Ryan mentioned before, for example, hedge funds, what does that really mean?

Are those directional long, short equity strategies or are those more market neutral strategies? Are those strategies where you are explicitly long volatility, where you’re buying a put on the S& P 500 or are you selling puts? On the S& P 500, I’m sure there’s plenty of hedge fund indices out there that would categorize both of those strategies as quote unquote hedge funds, where we want to get as far away from that as possible in terms of just bucketing everything into these labels.

Uh, because at the end of the day, it’s all about the risks that you’re taking. It’s not about the labels. And that’s why we started off that paper with that nice fancy pie chart with a bunch of different colors, a bunch of different terms, description. And then when you break it down, it’s, they’re highly geared toward offense, like you said.

And then to get deeper into the analogy, the way that we break out risk mini game strategies is three buckets, three pillars. It’s really a tripod, right? First one is first responders, the second one, second responders. And the third leg of the tripod are diversifiers. We could also call them stabilizers and first responders are designed to hedge against those say days, the weeks to a few months drawdowns in, you know, in general equity markets, right?

Because mostly, uh, most portfolios are highly geared toward equity risk. But there’s lots of different, you know, other ways that you can get long ball. And we can talk about that more later on. Uh, the second pillar, our second responders, which are for the most part trend following strategies, those strategies that can, that can really pay off well during a long grind, grind down the equity markets, uh, such as 2022 or the GFC, where.

The market peaked, I believe in the summer of 2007 and didn’t find its bottom until March of, uh, 2009. So that was a pretty, you know, long drawn out timeframe with a lot of volatility in the middle and a big dropping, of course, in Q4 of 2008. And the third layer, the tripod diversifiers or stabilizers, those are more market neutral, relative value types of strategies that are meant to have a more of a carry element to the portfolio so that you can pay for the, uh, Uh, say the negative lead in first responders, the long ball, and then the types of regimes or environments where a trend following might not be doing as well, such as, say, from 2013, 14 through 2019, and we believe if you combine all three of those pillars, you could come up with a dependent portfolio that can dig when the rest of your strategic asset allocation is zagging, whether it’s long, only public markets, uh, through equity or through credit, whether it’s a private markets through equity or through credit.

Uh, and, and we use this term alternatives a lot in our industry. We know what are alternatives. We say there’s really five asset classes. There’s FX slash currency. There’s interest rates, there’s credit spreads, there’s equities, and there’s commodities. And it can be long or short, those things. You can get those things in public markets and in private markets.

You can have linear exposure through like beta 1 sorts of instruments, like futures, or when I say beta 1, just think about the, uh, you know, an S& P 500 ETF. Or you can have more convex payoffs, things that have accelerated gains as things go down more. And things like that would be, uh, option, uh, option strategies, long option strategies, not ones that you’re selling, selling options.

Interesting. So, so

[00:11:53] Pierre Daillie: your second responders would be diversifiers that are more structurally correlated, as opposed to…

[00:12:01] Jason Josephiac: I think of those first responders as structurally negatively correlated with equity drawdown. Right. Second responders, we believe that they will be conditionally negatively correlated with equity drawdowns over a longer timeframe.

And then those diversifiers or stabilizers are designed to be uncorrelated. However, when you live in the tails, we would expect many diversifying strategies. Those stabilizers, those market neutral relative value strategies. To most likely lose money during a Q1 of 2020, during a Q4 of 2018. Now it really depends.

It really depends on what’s underneath the hood, but these are just general statements as to our high level expectations of those three pillars and different types of market environments, especially equity drawdowns. But the main, the main

[00:12:52] Pierre Daillie: thing is that each of those three groups will behave differently to the others.

[00:12:58] Jason Josephiac: Exactly. Yeah,

[00:12:59] Pierre Daillie: exactly.

[00:13:00] Mike Philbrick: What I think, I think the dynamism with which they respond is probably worth digging into a little bit as well as, as I think Jason, you’ve, you’ve highlighted a couple of examples, but the first responder, and maybe you can dig into that a little bit. I’m assuming the first responder might respond quite well in the, in the sort of COVID realization in the early part.

Of 2020, where you had this sort of steep decline, very quick, but also, you know, sort of pretty, pretty steep, um, um, recapture. And I’m thinking that the first responders are likely to provide some value there where your second responders would likely not provide value there in a hypothetical world. Again, just using some examples to help people sort of get their heads around that.

Is that, is that, do I have that kind of right?

[00:13:46] Ryan Lobdell: I think that’s, that’s fair. And I think it kind of goes back to our, our point about. Recognizing the risks in the portfolio, if we want to protect against economic growth risk, we’d love to tell you this is what the next event is going to be and how it’s going to occur, but we don’t know.

So we think it’s prudent to let’s diversify against a variety of different equity shock environments. So it kind of is organized in those, those three components that Jason mentioned, starting with those first responders were probably expecting or trying to solve for something that’s going to pay off in some shorter, uh, or more violent or higher, higher velocity shock to equity markets, like a Q1 of 2020, like you mentioned.

So in there, we’re, we’re looking at things like long volatility. Yeah. Long duration or just outright tail risk strategies. Obviously there’s various trade offs across those.

[00:14:43] Pierre Daillie: So those would be the structurally uncorrelated or negatively correlated strategies.

[00:14:47] Ryan Lobdell: Negatively correlated. But, but, but as I think Jason mentioned too, there’s, there’s even within those three tools there, there’s quite a spectrum with long treasuries, which many people might use there.

It’s that conditional correlation, which we know didn’t really hold up in 2022. It had historically, will it happen in the future? I don’t, I don’t know. We don’t know it could or it could not. It just depends. And then you go to things like long volatility that are more structurally tied to what’s going on in the equity markets.

Typically markets go down at least sharply or unexpectedly. Volatility may go up and then those profit from that. And then if you’re just going. To tailor a strategy is probably the most directly tied to The most, um, well defined or reliable payoff there, if you hit this specific insurance event, you’ll get a payout.

So depending on what tools in the toolkit you want to use there, it can vary on, on how those are set up or, or what might make sense for, for somebody. If they’re really worried about, if they don’t care about that Q1 of 2020, that maybe is a sharp shock and they think it’s just going to bounce back and it’s not going to make a big difference to their portfolio, but they’re worried about those more sustained drawdowns like a, an 08 or a 2022, that’s where the second responder bucket kicks in those longer duration drawdowns that are months to quarters to maybe a year plus where that conditional correlation of trend following hopefully kicks in.

[00:16:17] Pierre Daillie: So, I mean, like Q1, uh, Q1, 2020 and last year that, that long treasury, uh, that long treasury first responder wouldn’t have, wouldn’t have, uh, worked, uh, but the long volatility responder might have, depending on what it was.

[00:16:35] Jason Josephiac: And the treasuries here are really at the X factor, or I should say the most difficult one to, um, assess because although we have it within first responders, that treasures had done really well protected against vicious drawdown, say, over the past 20 years.

Now, will that continue in the future? We have no clue, but we the toolkit as an option for, for investors. Given we don’t, well,

[00:17:02] Pierre Daillie: maybe it applies now, right? I mean, maybe it applies today, but it definitely wasn’t something I don’t think anybody would have been looking at a long treasuries as a. As a first responder diversifier in, in, you know, Q1 of 2020, because rates were so low.

I mean, they were, you know, we were still in, in, in that zero interest rate environment. Why, you know, what, what were, you know, you’d be looking at that in hindsight and, and in the, in, even in the moment you would have been saying. Like, why would I even think of doing that?

[00:17:33] Jason Josephiac: And it also depends on how they’re set up structurally with their, with their strategic app allocation.

Right. If they already have a lot of rate exposure elsewhere in their fixed income book, it might not make sense for them to really have any long duration treasuries within first responders. Whereas we see most investors really don’t have any exposure to these multi asset class, uh, multi geography long ball strategies.

So within first responders, there’s really three ways you can implement that in any combination. It’s multi asset long volatility, it’s tail risk hedging, and it’s it’s those long duration treasuries. Now, again, it depends on the facts and circumstances and the objectives of an investor of what tools they want to use as part of that toolkit.

Um, and where else they might have exposure to some of those things across their asset allocation. The other thing

[00:18:22] Mike Philbrick: is, is the, um, you know, one might think that the opportunity for capital appreciation via bonds is next to nothing when rates are at one or 2%. But we saw the German bond go from one and a half percent positive to 1% negative and produce substantial returns for, um, German portfolios or European portfolios, Euro portfolios, if you will.

Uh, so it’s a really interesting situation where you’re also trying to manage the regime potential shifts in the, in the sort of underlying, um, risk factors. So, so as by way of sort of comparison, the 60 40 portfolio. Typically contains 60% stocks and 40% bonds, but presents a situation where you have 90% risk of the portfolio in stocks, IE 90% plus of the portfolio’s risk targeted at economic growth and not much targeted elsewhere, which is where you generally start in the paper as well.

There’s this overwhelming, uh, bias towards these sort of factors that are growth oriented in the, in this sort of risk meeting, miss mitigating strategy. Do you guys, or do you work with clients to postulate? Well, do you have, and are you worried about inflation risk? Is that something that is? On your mind, how would assets perform in that?

And would you develop a set of strategies that would help sort of address those types of issues for those clients? Is that sort of the bespoke side of, of maybe the consultant approach, or maybe that maybe is overstepping the paper, but just thinking about the actual sources of risk, how do you guys contemplate that in the RMS framework?

Maybe that’s a

[00:20:01] Pierre Daillie: better

[00:20:01] Ryan Lobdell: question. There you go. Yeah. Well, I think, I think the, the first answer is it depends, right? What, to your point, what are you trying to solve for? What are you worried about? How we frame it in the paper is, is relative to equity markets, since I think that’s the biggest risk, but you could definitely could think about it the same way.

If, if what you’re worried about is inflation, you may use the same tools and building blocks, but it may change the allocation across the three components, um, or what you’re using underneath the hood trend following has historically been. Yeah. pretty good diversifier in times of high inflation, maybe you’d consider allocating more to a second responders bucket or other strategies that are more closely or have been historically performed well in that type of

[00:20:44] Jason Josephiac: environment.

In general, like when stuff is happening in the world and vol is higher, vol of vol is higher. This is when these strategies across the spectrum really can be added, uh, additive to the bottom line. While we all love to might want to love to take all our crystal ball and talk about inflation or depletion or high growth or low growth.

The answer is, it’s just that we don’t know and we’re trying to build portfolios to prepare for all different types of environments. However, let’s go back to treasuries for a moment. If you go back to 1926 and take rolling five year correlations of equities versus bonds, and then look at the rolling five year, uh, annualized return of, or not, or the annualized inflation rate, Whenever that five year annualized inflation rate is over 3%, 90% of the time, the correlation between equities and bonds has been positive right now from the year about 2000 up until 2021 or so that correlation between equities and bonds was negative and most of us have lived our careers over the past, you know, 20 or 25 years.

So we’ve been trained by the fiscal authorities, by the monetary authorities. That when stuff happens, we can just. Do things with rates, do things with QE and, you know, these other programs that kind of hide the risks that want to come out, but they don’t come out because of all these other tools that are in the toolkit with what I just described.

And we don’t know if that’s changing. It feels like it’s changing. Yeah, but. I probably would have said back in 2012, 2013, when you had the, you know, the first few rounds of QE starting that, oh yeah, this is not going to end well. And then 10 years later, we’re at all time highs, markets have grinded higher, and you just can’t…

You can’t be flipping around your strategic asset allocation based on some sort of assessment of inflation or growth because things happen too quickly. The tail risk happened, happened fast, the tail risk to the upside and to the downside. So you need to have that home base, that strategic asset allocation that can be a ballast to these different outcomes.

And from what we see with in the marketplace is most investors getting back to the whole like football or sports analogy, most of the investors are still highly geared toward. An offensive minded portfolio.

[00:23:16] Mike Philbrick: And so when you think of these, um, the first responders and sort of the more explicit hedges, uh, are you thinking of them are truly thinking of them as insurance?

I either as a cost to owning them generally, or not really, I mean, the perfect one is when you positive carry and you have this tail hedge, but how do you work through the, the machinations of maybe have both? I don’t know. How do you, how do you think through the, that those first sort of first responders?

Tail risk, explicit hedge type of considerations where you’re looking for that payoff. And you, you are considering it a bit of a insurance type scenario and, you know, to be fair, there should be some thought given to if it is, if there is an insurance premium being paid, that’s not a terrible thing, especially if you get in a huge injection of capital into the portfolio at an opportune time.

Right? So in a hypothetical world, you have something that goes wrong very quickly. And this first responder. Provides the portfolio, wonderful injection of profit where that can be spread across other assets that may be providing long term carry and, and at a, at a great price. But how do you guys think through that?

Is it truly a cost of insurance? Is it a bit of both? How do you think through that?

[00:24:29] Jason Josephiac: Yeah. So treasuries aside, because treasuries should carry, you know, positive. Right over the long term. So let’s put treasuries aside when it comes to multi asset long ball, uh, we would expect that to bleed over the longer term now folks miss with first responders and long ball is that they look at these strategies in isolation.

They don’t look at it as part of the complete team where, for example, you know, with football on defense, defense can score points too. You can get a pick six, run back for a touchdown. You can get a fumble recovery, run back for a touchdown. You get a safety. Now, do those things happen that all that often throughout the course of a game or throughout the course of the season?

No, no, not as much as your offense scores. However, it does happen. But more importantly, your defense is there to put your offense in a better position to score over time. And that’s what those long volatility strategies are really, uh, meant for to put your long only equities, your private investments and a better position to enter those trades.

When it feels the worst to do that, because if you don’t have this exposure, you don’t have anything that zigging when those things are zagging, hence, you cannot just structurally rebalance into cheaper prices and I would say roughly in general, maybe a third. To a half of the benefit from long vol comes from the outright return from the strategy and the other two thirds to one half comes from being able to rebalance into things like long only equities, long only credit, maybe treasuries, maybe private investments, fund, those capital calls for your private equity or, or for other things in your, in your portfolio.

[00:26:21] Pierre Daillie: Yeah. And that’s, that’s underestimated, right? The rebalancing premium.

[00:26:26] Ryan Lobdell: Yeah. I think, I think that’s pretty key to this whole thing is if we’re going to allocate to something that’s going to be different than equities, how and when am I going to be able to get my capital out to rebalance? I don’t want to just invest in something that like a long ball.

That’s if it’s a negative, it’s just called zero expect to return. And it looks very different than the rest of my portfolio. But by the time I get my capital back, equities have already rallied and it doesn’t matter. And maybe I had to pay out for whatever purpose, some distributions out of the portfolio and I had to sell my equities when they were down.

It’s really nice to have something that’s up to sell and be liquid enough to fund those capital constraints or to just, or just to rebalance into your equities or to fund capital calls or whatever it may be.

[00:27:13] Mike Philbrick: It certainly, it drives against, you know, generally the, um, the individual’s bias. To not want to sell the thing that’s up and definitely not want to buy the thing that’s down and this is where you have that professional level of management where it goes on under the hood, hopefully where these things and decisions are being made, maybe, probably rules based and are a function of you.

You have a win and that can be sometimes a bit of the challenge with the first responders. I would imagine Is that you do have to, uh, um, cut the tail off or, or, or monetize that, put it to the other portfolios, or then you have the tail wagging the dog. You have the, uh, the first responders in the portfolio wagging the entire dog portfolio, which is also something else that, that needs to be, uh, you need to be mindful of.

So. Well, yeah,

[00:27:59] Pierre Daillie: I mean, and for the last, you know, for the last decade. Or even a little longer, nobody, you know, as long as equities were, were, you know, going up into the left, um, or sorry, up until the right, I’m thinking of, I’m thinking of the efficient frontier at the same time, but up until the right, um, you know, nobody, nobody wanted to, you know, carry those in their portfolio as long as money was free or nearly free.

With, uh, with QE and, but that’s all changed, right? I mean, now, now money’s no longer free. Now, you know, uh, short term paper carries, you know, provides 5%, uh, long bonds, you know, three something. And, and, um, you don’t have that luxury anymore. And then, you know, we, we, we could be up against, uh, some, you know, who knows what, you know, economic shocks or market events.

In the, uh, coming years and, you know, all of a sudden, you know, the diversifiers have become a topic of interest. Uh, I mean, it makes sense that it wasn’t a topic of interest for, for a very long time. Um, but there’s kind of a renaissance, right? You know,

[00:29:13] Jason Josephiac: up here, we would, I think, um, take the other side of there was reasons for this not to be a topic of interest, because if you, if you take this back in time.

Well, with advisors anyway, I mean,

[00:29:23] Pierre Daillie: yeah, you know, I understand. That, that, uh, line item risk, you know, is, is always a big issue with, with, uh, advisors, maybe not with institutional investors, but definitely with advisors, it’s, it’s both, it’s both no mistake, Jason, go ahead, go even if you take this

[00:29:43] Jason Josephiac: stuff through the past, say.

Um, 15 years, we would say your portfolio would have been much better off over the past 15 years, having this stuff in it than not having it in it, even with this massive, uh, you know, beta run and equities and, um, the proliferation of private markets across a lot of portfolios, the pure diversification effect of doing this enabled you to take more risk in those things when it made sense to take more risk and help help to blunt the, the tail risks and, and the left part of the distribution.

Uh, to then raise the probability of having a higher compounded return over, over time. And, and, and we get that feedback a lot where, why would I, why do I want this in my portfolio when markets have been so good over the past 15, 20 years? And the simple answer is because the markets have been so good to you over the past 15 or 20 years.

But even if you have that mind that, and again, if you take it back and you, and you go through the modeling, um, and, and you go through all the different scenarios. Portfolios for the most part, again, a lot of nuance here and how you implement this, but we believe that we could raise the probability of meeting a required minimum return.

We’re not trying to shoot the lights out here, right? We’re trying to smooth out the path along, along the, uh, the way. This is not a portfolio that we’re saying, okay, in a tail event, you’re going to have a multi bagger payout. It’s not like that. We are trying to raise the probability. Of having a smoother return over any given point in time, as well as throughout different look back periods.

So

[00:31:22] Mike Philbrick: before we jump into second responders, Sue, and I think this is a really good point to emphasize right here while you’re on it, Jason, the idea of, um, what’s the pool of assets for it’s often to fund obligations, right? Those obligations are from allocators, from wealthy individuals. They have some sort of allocation or, uh, some sort of decumulation, the portfolio.

And the volatility of the portfolio is actually very informative of how much you can sustainably withdraw from a portfolio. And so if you can even have a slightly lower return and have a lower volatility in the portfolio, the sustainable pay rate payout ratio of the portfolio is higher. And I think that’s something that is underestimated, underappreciated and lost on a lot of folks who are, um, sort of, you know, skewing to more, more and more of that economic growth.

Sensitivity in their portfolios. I don’t know if you agree with that, or you want to add to that as the whole process is, I think, to push people in that direction or educate them to move in that direction. And let’s,

[00:32:29] Jason Josephiac: let’s use a real, uh, world example where during the pandemic, say. You need to build out some sort of office space in order to, you know, be more comfortable, you know, in your job.

And again, we have first world problems here. So I want to be cognizant of all the people that, you know, don’t have the luxury or I’m not sure if it’s always a luxury of, of, you know, working from home. If you didn’t have something in your personal portfolio to offset the risk in Q1 of 2020, then perhaps you didn’t have the capital to really, uh, um, put into an investment like that to build out, you know, a home office space.

So again, that’s kind of trying to bring it back to the, you know, advisor level, the individual level where you want something that can zig where everything else is zagging, because perhaps you have some sort of liability that comes to you at some point in time that that’s really chunky. And if you live in this world where everything is sort of based on the average return or average risk, you can really get punched in the face during those during those worst of times.

[00:33:32] Pierre Daillie: Well, this is, this is the, uh, entrepreneurial risk, right? I mean, if you think about wealthy investors, most of whom got that way through, you know, their, their businesses, uh, you know, whether it’s small or large businesses. Um, you know, they’re not, they’re, they’re more interested in staying wealthy than, than getting significantly wealthier if it happens, wonderful.

But it’s, it’s much more important to that sort of cohort of, of investors to keep their wealth and, and also to diversify some of it. away from that sort of standard, that economic risk that we’re talking about for exactly what you just, you know, detailed, uh, Jason, which is that. Uh, you know, your business might need capital from, from its assets at the exact moment when the markets are down.

And, and it’s so, so if you didn’t diversify your business, your corporate or your, your endowment or your, you know, whatever the, the assets that are held in your company are, are invested. If you didn’t diversify them properly, then you might find yourself in a double whammy where. Not only do you need capital, but your sources of capital are, you know, have been through a drawdown.

And so you’d want to, you’d want to avoid that. And so entrepreneurs, the entrepreneurial class, uh, you know, wealthy class of entrepreneurs are not interested in, in, uh, you know, the next home run. They’re interested in, in just getting on base and staying there and, and, and, and then walking in there, you know, walking in or running in the runs as opposed to always trying to hit home runs.

[00:35:15] Jason Josephiac: And, and, you know, one more thing I’d say on the first responder long ball topic before we move on to second responders is that getting back to that multi asset class approach, uh, you also want to be multi manager because in 2020, I think in general, a lot of long ball Tilly strategies, he would have been fairly happy.

But in 2022, with the markets down the state, the 60 party portfolio down 15, 16, 17%, depending on how you measure it, equity only vol didn’t do that well. Now that depends on how you implement it. But if you’re implementing, say, with debited money, three months or, or, um, six months sort of rolling puts, and that strategy got cut up.

However, if you were multi asset class and you had long vol in areas like FX currencies and interest rates and commodities. Then you had a pretty deep in year. Now again, we don’t know what asset class is going to perform. But that’s why it’s crucial to have vol exposure. And this is a theme throughout all of RMS and the three pillars here.

You want exposure across all asset classes, across different tenors, across different strike prices. So you really raise that probability of performing regardless of whatever the event might be. Nice.

[00:36:34] Mike Philbrick: Yeah. So, so let, let’s move, let’s move into the second responders. Yeah. And, and here you’ve, you’ve, um, you really kind of looked at the commodity trading advisor space and the trend followers.

And maybe you can walk us through what the, uh, logic is there.

[00:36:48] Ryan Lobdell: Yeah. Uh, sure. So, I mean, as we implied by the name, they’re meant to be second responders. So those kind of longer, more drawn out drawdowns. So something like a tech bubble 08, 2022. So the natural place to look was, was trend following and these, these managers or strategies that are going long and short.

Interest rates, currencies, commodities, equities, based on what the trends in those markets are typically just on average medium term. So something that lines up with that kind of 6 to 9 month drawdown, uh, where those models are looking back and saying, Hey, our markets going up or down over those periods, purely systematic.

Let’s go long. If they’re going up, go short. If they’re going down. And historically that’s been, been pretty, a pretty good strategy to have in those, in those periods, um, producing pretty significant, significant gains, but oftentimes not from the places that you might think. So I think naturally, uh, we hear that and we think, Oh, well, the main drivers of that, because equities are going down must’ve been short equities, but typically it’s, it’s not that because they’re diversified similar to those.

Multi asset class long vol managers or strategies that Jason mentioned, these are doing the same thing. So when equities are going down in, in 08, when long trip being long duration, long treasuries worked really well, they were going along those assets. They’re also able to be pretty dynamic. And some of the gains in 2022 that we saw were from going short, those same securities as long duration us treasuries were falling as well.

[00:38:26] Mike Philbrick: It’s, um, it’s amazing to, and you guys in the, in the paper itself, you’ve got the SG trend index against global equity. And, uh, I think a complimentary piece of people are listening to this and they want to sort of get their heads wrapped around. The differentiation or the difference in the performance of these types of strategies, um, you know, defying the bear’s grasp, the emotional journey of managed futures prosperity that we wrote, I think is what would help.

But if you’re looking at, uh, the paper and, um, you know, you guys have got in the second responders, you can see that SG trend index actually since 1999. Outperforms global equity. That doesn’t always outperform, but it’s outperformed it pretty substantially. Now that’s the big, long 22 year equity line. Now within that 22 year equity line, and if you own those trend following bit types of strategies from 2014, 15 to 2020, What you felt was a persistent and pervasive underperformance in your portfolio.

But again, the future always holds what the past has yet to reveal. And I think this is what, you know, Jason, you and Ryan are getting at, is you want to build a portfolio that’s got four wheel drive, that’s going to get you to work, whether it’s snowing, sunny, or raining, you’re still going to get to work.

Uh, driving a sports car, you know, you’re going to have more difficulties in the variance of the weather, the variance of the weathering markets. And so this is not, you know, it sounds really good and it sounds really easy. It’s definitely hard. And that behavioral barrier is what makes it pay off in the long run.

It’s what attenuates the, the volatility increases the, uh, the consistency of the performance. But so trend, they’re going to be long or short, these various different asset classes, they’re going to respond a little bit later. What’s your, what’s your sense with the cost of carry there? I’m assuming that that that cost is not sort of as large as you might expect in the first responders.

Maybe you can comment to that a little bit.

[00:40:27] Pierre Daillie: It’s a, it’s a beautiful chart, by the way.

[00:40:30] Ryan Lobdell: Yeah, I think, I think you make a good point though. If you were to just shorten that chart and you cut it at the end of that commodity rally in 2014, it was a really tough time to hold trend following strategies from then all the way to 2020.

And a lot of talk about is trend following dead, is it still useful in a portfolio? But those people that held it and was in there, they recognized the reason that it was in there and it played a specific role, uh, were able to benefit from that pretty significantly in the, over the last two ish years. Um, but getting back to your,

[00:41:01] Jason Josephiac: that’s the

[00:41:01] Pierre Daillie: danger, right?

The danger is that you, you get into it at the time when it’s most popular. Right. Right. And you get out of it at the time when it’s least popular. So, you know, you’re just falling, you know, as a diversifier, as a, diversifying or trying to make a diversifying decision, you’re still, you’re, you’re also, even if you, you know, I mean, if you look at it contextually and, you know, in the context of a portfolio, as opposed to in isolation, um, I mean, that’s the problem, right?

A lot of investors looked at trend following in isolation and said, Oh, this is doing really well, I’m going to do this. And then it turned out to be the worst thing for their portfolio at, you know, at the worst, at the best time, at the worst thing at the best time. And, and, uh, so how do you overcome, you know, the, the, the timing issues, even, even, you know, diversification has timing problems too, right?

It’s not just, it’s not just, uh, you know, the core 60, 40 portfolio we’re talking about, but, but adding diversifiers also has a timing problem.

[00:42:05] Jason Josephiac: Yeah. I

[00:42:06] Ryan Lobdell: think, like, I think. The most common question we get, particularly recently is, did I miss it? Is it too late? Is it worth it for me to do this anymore? And we always go back to that point of, you don’t know what’s going to happen.

The point of allocating to these or considering these is we’re considering not just trend following, but we’re also thinking about first responders and diversifiers so that as a group, we have something that hopefully gives you positive expected return. Regardless of the market environment or at least over the longterm, you have different things in there that’s going to pay off in different times and bad markets, good markets, sideways markets, and it’s going to provide you some convexity or some upside in those very poor markets and maybe in the out markets as well.

Sometimes when we talk about it, I like to talk about it as these different levers that you have to pull within your portfolio. Um, and you want to be able to pull different levers at different times. So when Q1 of 2020 happened, I don’t need to pull all three at the same time, but I can pull that first responders lever.

I can take that capital off, off the table and rebalance it back in equity as we use it for something else. Another environment comes in inflationary shock. 2022 really glad I had that second responders lever. Let’s pull that and rebalance that off the table. That could happen again next in the next 12 months.

You could see another rally and trend falling or you could not. It just depends on on where markets are going. And that’s kind of the beauty of the systematic fashion that those are implemented. It just yeah. It’s purely price driven. It’s not somebody sitting there having a discretionary opinion on, well, I think the fundamentals of markets are going to go up or go down and peeling that back a layer further and thinking about allocating across those three legs of the stool and the similar kind of strategic fashion where we always hold in our portfolio.

We have a A policy or a procedure that we always point back to and say, okay, let’s rebalance when things get out of whack, let’s add capital and trend following is down, not just neglect it and let it go away because we want it to be there. We want that lever to be as much as useful as possible when we need it.

And I think that that is really important and combining the three together. And complimentary pieces hopefully allows you to hold the whole thing through the long term. It allows you to hold trend following in that 2015 to 2020 period when it was really struggling because you have those diversifiers, whether it’s global macro or something else that’s bringing more positive carry to the portfolio.

Trend is, I think we would argue, gives you a positive return over the long term. It’s not, it shouldn’t be a drag on your portfolio at all. It’s very different than what’s happening in long vol or tail risk strategies, but it does go through periods of falling out of favor, and it’s really nice to have other things around it to, to let you hold that until it really pays off.

[00:44:59] Mike Philbrick: Yeah. And that’s what I wanted to make sure you highlighted is that it’s not expected that you have that sort of maybe zero or slightly even slight bleed in the portfolio for trend following trend following is going to, it’s expected that it’s going to create a positive return vector on a regular basis.

And maybe, um, Brian or Jason, just jump into the, the, the nice compliment it makes to that equity portfolio, that economic growth portfolio that we’re so sensitive to, I know you mentioned it in the paper, but. It can be short equities and how does that convex payoff and that payout sort of compliment, you know, that, that growth portfolio, can

[00:45:38] Pierre Daillie: I just add, did I

[00:45:38] Mike Philbrick: steal that thunder already?

[00:45:41] Pierre Daillie: I just wanted to add that, that, you know, it makes sense to have a, uh, you don’t just, you don’t just suddenly like go out and buy a bundle of first and second responders all at once. I mean, there’s a period of adjustment. There’s tactical moments where you want to add to, to some of these strategies, uh, depending on, you know, where they are in, in price and valuation, um, or, or timing wise, uh, but there’s, but, but as far as not knowing the timing, you want to, you want to kind of average into.

Average out of your core portfolio holdings and into some of these diversifiers over this period of adjustment, whatever that is, it could be two years, could be three years, but that way you’re not, you’re not subjecting your portfolio to a timing shock. Or potential timing shock. Yeah. I

[00:46:30] Ryan Lobdell: think, I think that’s a tough one to answer.

I think, I think there’s for a long time, there’s been research on both sides of the coin on that one, whether you should just average into it. I think some stuff more recently says just go to the right to the optimal portfolio, it might be beyond the scope of risk mitigating strategies. Um,

[00:46:47] Pierre Daillie: and that goes to what you were saying, Ryan, right.

Which is that if you, if you’re, if you’re buying this whole group of first and second responders, um, then they should all offset. Each other all at once. Yeah. I think in a, in a

[00:47:01] Ryan Lobdell: manner that should be complimentary. Right. And I think you do highlight a really important point on a governance piece of this.

So if you’re thinking about, if you have a track, if you’re going to have a track record in a, that you’re reporting in a performance report and you’re, you have, you’re going to say, I’m going to allocate to risk mitigating strategies. Oh, let’s just start with long duration treasuries at the beginning of 2022.

And I’ll add the other stuff later. And then you add that other stuff later, but. The first year of the track record is or the in their performance report, whatever you’re reporting to your constituents or your, your fund or whoever it may be, is really skewed towards just that one long treasury. So it’s, I think it’s important to think about the governance and the reporting structure of it as, as you implement and yeah.

Even before that really emphasize the education piece of it. And I think that’s really important to really understand this is going to zig when your other stuff’s zagging and that’s okay.

[00:47:58] Mike Philbrick: Well, do you want to have a massive bet on economic growth? That’s the question to ask yourself. If you’re sitting there saying, well, I don’t want to do it today.

I missed it today, or I do not want to diversify today. What you’re saying is, no, I would like to continue on with a massive bet on economic growth. While the central banks of the world are contracting liquidity and growth is falling off a clip. Sure, go for it. Maybe that’s not the environment we’re in.

Maybe it is, but what you’re saying is it’s not because I don’t want to do it today. So I think the, the overarching theme is, do you want to take a step in the right direction? Are you going to stay on the path that maybe you’re going to get lucky in or maybe you’re not? And I just want to, I just want to come back to the trend following because I don’t think the question got around, but I just want to, in the paper they cover that you guys cover why trend following is a nice compliment to this economically growth sensitive portfolio.

And that simply is, it will be short equities at times, and it will give you a payoff and help hedge some of the things that are in your predominantly growth portfolio. If we assume that’s the case, that’s not the case for everybody, but those with that. There’s a particular type of extra layer of maybe risk mitigation or convexity to the portfolio.

The trend following Briggs, and that’s what I was trying to get you to dig into a little bit more. And I don’t know if I’ve bastardized it or covered it well enough. So you guys having written it, probably thought about it some more and been knee deep in the data. What else am I missing there?

[00:49:29] Ryan Lobdell: I think that the, just how risk is being taken as a, as an important thing and thinking about how these strategies are.

It’s somewhat dynamic, so it doesn’t really matter what direction markets are going. It only matters that they’re trending and in a direction, right? And you can profit off of equities, currencies, commodities, fixed income. I think to your point on being short equities, when I, when I think when most people think about it, that’s the thing that they think about, Oh, well this is going to benefit my portfolio because it is going to be short equities and that’s, what’s going to be the driver of returns.

In an 08 in a 2022, but it’s actually, while it may be beneficial at the margin, I think typically is at least historically has not been the case in the more recent larger shocks benefited from being long treasuries or short treasuries in 2022 being long the dollar or being long commodities in an inflationary shock really paid dividends.

So it’s as. You might think of it as, as a, if an event occurs in one market, let’s just say it occurs in equities, it often spills over into other markets and trend followers may be able to pick up those trends as they develop and as the market begins to react or start to digest that data and other markets.

[00:50:53] Jason Josephiac: And it cuts through the noise of all the narrative. The different narratives that are out in the marketplace where, you know, we’re not going to need oil anymore because of renewables, like, well, trend is going to going to ignore that narrative and get long oil when it makes sense or net gas or whatever it might be.

Um, now, perhaps longer term, that narrative may make sense and you might want to pick and choose your spot in a private markets when it comes to those might be.

But that’s, however, that’s not the reality of the situation the market is in today based on price. So what is the price telling you, right? Are those things breaking out to, uh, to, uh, you know, breaking out into, you know, higher trends or, you know, trends on the upside, trends on the downside, ignore the Bloomberg, uh, headlines.

We have other managers that look at that stuff. It’s really just diversifying your approaches as well in terms of the different types of strategies that you implement underneath the hood. And there’s a lot of investors that probably don’t have enough exposure to commodities and trend following depending on what types of strategies that you’re invested in and how they think about the world and are they.

Heavy in the financials or more heavily invested in the commodity space right there is bang for your buck in terms of diversification by having that exposure to commodities across many different markets.

[00:52:16] Mike Philbrick: Love it. Love it. You want to jump into the diversifiers now? This is, this is probably the hint.

Tell me about the diversifiers, the global macro, the, I mean, this is kind of, to me, the, one of the harder parts. I don’t know how do you, I don’t know how you guys

[00:52:32] Jason Josephiac: feel a

[00:52:33] Mike Philbrick: little bit, a little bit more nebulous, if you will. So how do you guys think through the, the diversifiers and. Trying to parse, you know, what is alpha versus ARP or the, you know, uh, alternative risk premia, those types of things.

How do you, how do you work through that?

[00:52:50] Jason Josephiac: High level, think about diversifiers as a suite of strategies that can synthetically replicate bonds with a higher carry and a. Less crummy, negative skew profile. So, so what do I mean by that? Um, credit when tail event happen, credit tends to get hit pretty hard.

Um, at the same time, that’s because we tend to be going through a deep leveraging event, right? At the same time for diversifiers, things that are designed to be market neutral, relative value, beta neutral. They tend to use a decent amount of leverage in order to put up a respectable return. However, when we run the math and, and run different scenarios, we see that diversifier slash market neutral tends to have a better downside risk profile relative to fixed income.

You know, when I say fixed income, I mean, you know, uh, elements of credit, not just, you know, pure, pure treasury risk. And so if you can have something that can have a higher absolute return relative to the coupon that you get from, say, investment grade corporate bonds, and that protects better on the downside, then we view that as, again, I wouldn’t say replacement for bond, but a nice compliment for bond that can live within this risk mitigating strategies framework, and that can act as that ballast, as that positive carry, that coupon, um, That can help pay for the exposure, especially within long vol first responders.

And then during those timeframes where things like trend may not be doing that well because of the environment that we’re in, such as we mentioned before, from that 14, 15 period through 2019. Interesting.

[00:54:43] Pierre Daillie: And you, you said earlier that, that the diversifiers, because they. Are expected to basically provide a, a, uh, total return from their strategies that you could use that for, for example, for covering fees on or carry.

Yeah. That would be like fee budgeting, right?

[00:55:04] Jason Josephiac: It’s, that’s part of it. And the other part is, is how can you diversify that say Barclays ad or what’s the index now? Bloomberg, Bloomberg ad exposure. And, uh, think about how. And different types of environments or regime changes or phase shifts, what strategies can complement bonds?

And we believe there’s lots of different strategies that are relative value, market neutral, beta neutral, that if you put together a suite of those, it can achieve those goals. Interesting. So,

[00:55:38] Pierre Daillie: so they are. They’re meant to be viewed as synthetic bonds, basically, or synthetic. I mean, that’s

[00:55:46] Jason Josephiac: one way to describe it.

Um, it’s not, you know, we’re not investing in these things for contractual income. Uh, right. As it gets back to more of that profile of. A stable return, and I hate using the term aptly return because in a Q1 of 2020, like this portfolio of diversifiers, market neutral, most likely will get hit, right? There are no free lunches, just like in long vol, you can’t expect long vol to carry positive, you’re going to bleed.

If you’re not bleeding, then you have hidden risks where someone is selling volatility. And then when that storm comes in Q1 of 2020, they’re going to get blown out. And if you have a long vol manager that is trying to pay for the negative carry in a way that is, um, not highly risk managed, and we would probably say, don’t even try for the most part to pay for that negative carry.

Then you can just get taken out on a stretcher. And before you know it, your first responders are highly correlated to those, those equity drawdowns. Your diversifiers again, blown out because there’s elements of leverage to help put up a respectable, absolute return. And then trend really is a, is a toss up depending on, on, on, you know, what the environment looks like across various different asset classes.

So when you, when

[00:57:03] Mike Philbrick: you’re thinking about putting this framework to work, and I know you cover a bit of this in the paper too, you’re thinking through the initial conditions too, right? You’re thinking through, is this a multi asset portfolio? Is this a heavy growth tilted portfolio? Is this an LDI type portfolio?

In thinking about how you would structure the RMS around those things. Am I, am I correct in sort of heading in that direction? There’s definitely, you want to fill in the gaps for us there on or expand upon it if you will.

[00:57:33] Jason Josephiac: Yeah, I mean, we do view as a tripod. However, if an entity has a lot of exposure to say private investments or, or, you know, most of their portfolio is equity risk, then maybe you want more in first and second responders.

In order to, um, perform better and in those tail events, right? So it depends on the initial starting conditions of the asset allocation and whether an investor is already fairly balanced across different sort of economic regimes and asset classes, or are they mostly playing offense as we described before?

However, now, when we see investors think about implementing these things. If you’re focused on one leg of the tripod, we call it tripod for a reason, because if you kick out one leg of the tripod, the whole thing falls down. So at the end of the day, we ultimately believe you need risk in each one of the three buckets.

Um, and, and just getting back to the analogy of defense, it, we’re not putting a bunch of linebackers on the field, right? We’re not pushing, putting a bunch of only safeties on the field. We’re not only putting linemen on the field. We’re putting all the functional positions on the defensive team to help raise the probability of performing during different types of sell offs.

If

[00:58:52] Pierre Daillie: you

[00:58:52] Mike Philbrick: look at the team you’re adding the thing to though, and it’s a whole team of linebackers. You probably would have to, like, as you say, if it was all growth risk, all you got is linebackers on the field and you come in, you go, well, I, I think we need some first and second responders here because we need the defensive line and that, you know, we need the defensive backs to compliment this, this bias already in the construction of whomever’s underlying portfolio is built, I guess that’s, a, a, Yeah, I agree that, you know, it’s always best to have a, you know, what is it, a five tool baseball player?

Like it’s, it’s the, you know, the best, but yeah, if you, if you got, you still have to think about the, the, uh, the gestalt of it all too, I suppose. Well,

[00:59:33] Jason Josephiac: getting back to that, that hedge fund conversation, right. There’s a lot of, a lot of investors might have a hedge fund bucket or an alt’s bucket or an absolute return bucket.

Um, now when you look underneath the hood, if it’s a bunch of long direction, long, short equity, then we say, Hey, you don’t even have alignment on the field. You still have elements of the offensive team on the field, but if they already have, you know, a more market neutral sort of, um, exposure within their hedge fund allocation, then maybe they don’t need more market neutral.

Maybe they just need. Trend and, and long ball exposure there. Excellent. I mean,

[01:00:09] Pierre Daillie: yeah. So the, the idea is that each, each of the three sort of silos, the first responders, second responders and diversifiers each have their, uh, you know, independent of one another. They each have their own volatility. Uh, you know, they have their own internal, their own, they have their own market pressures happening within each.

Each silo or each leg of that tripod, pushing up against, holding up against, holding up the portfolio.

[01:00:37] Jason Josephiac: Yeah. And the reason why we package it up into those, you know, the tripod is that in general, we see that investors are woefully under allocated to all three, all three legs of the tripod, right? It’s not like there’s a lot of investors out there that have already have a lot of mark, even market neutral exposure or nevermind trend or, or long ball.

So if you can. Wrap it up in a way that is, um, palpable for investors to hold it behaviorally. Then I think we can raise the probability of success over the longer time frame or at any given point in time. What are the,

[01:01:18] Mike Philbrick: what are the major objections that we’ve missed in chatting with you today? What have we, have we missed anything that where we haven’t asked you the question or that you sort of get repeated back at you as you walk, uh, you know, potential folks through the framework and that sort of thing?

[01:01:34] Ryan Lobdell: Well, I think, uh, I mean, the first one that was, that I mentioned earlier was, did we miss it? Is it still worth doing this? Yeah. I think another one we hear, Jason, I hear pretty often is if we’re going to do this, why do we need the diverse fires if they’re not actually risk mitigating, like what are they useful for?

And I think, I think Jason kind of just already answered that it’s, it’s about the collection of the whole rather than. Having only one, it’s, uh, if you only had defensive line and a secondary, you got a big gap in the middle, your defense with some of the parts. Yeah, right. So you got to think about it

[01:02:09] Jason Josephiac: holistically.

In 2020, folks would love first responders slash long wall. In 2021, folks would love diversifiers. In 2022, folks would love trend, trend following second responders. So, you know, going back in time, you don’t get there by

[01:02:26] Pierre Daillie: market timing, you get there strategically, right? Right. It’s not tactical. It’s purely strategic.

It’s something you have to already have been doing,

[01:02:35] Ryan Lobdell: right? You got to have the protection in place before the event occurs. You can’t go out and buy it after, after go buy insurance after your house burns down or you get in a car accident, you got to have it beforehand and you got to be able to hold it until you get there.

So if you were just, if you just had trend in that 15 to 20 period, there might’ve been a lot of questions going, going around on the board or across investment professionals or. With advisors, whoever it may be, do we, do we still want to have this? Well, let’s keep it, let’s reduce the weight down. Let’s cut it in half or something.

And then when that happens, either you don’t have it or you don’t have it nearly as much of it as you thought you wanted. Precisely.

[01:03:15] Jason Josephiac: And the other thing I would say is this whole You know, notion, notion of hedge funds and investors like hedge funds have been a four letter word for folks for a long time.

And I think for a good reason, because some of the strategies that have garnered a lot of assets are those more directional strategies that have played the macro quite well. And maybe not in a macro well, just their strategy tends to be, uh, do well in the conditions that we’ve had. And when you’re collecting a 20% incentive fee on, say, a 0.

5 embedded beta equity beta. I go, that’s not necessarily a fair share or a fair handshake for, for investors, because you can get equity beta or next to nothing. Now that’s not saying that those strategies can’t be additive to the strategic asset allocation. We believe it can be, but when they’re sold as quote unquote hedge funds.

And you go through the tail events, you go through the Q1s of 2020, you go through the GFCs, you go through 2022, and then these things are down 10, percent. Like, how can you say that that’s hedging? It is absolutely not hedging. Hence the reason we try to stay away from the term alternatives, we should try to stay away from the term hedge fund.

Cause it just means way too many different things to way too many different constituents.

[01:04:50] Pierre Daillie: Yeah, that makes sense that they’re there. It’s, it’s, it’s far too broad of a term. Jason, Ryan, where can people find you?

[01:04:59] Ryan Lobdell: So I think the natural place to find us would just be at our website, Meketa. com. Um, if you’re looking for the white paper, any other research content we put out, you can navigate to the thought leadership portion of that page.

Um, and hopefully we’re, we’re pretty easy to find there with, uh, our contact info and, and that should be, I think that’s the only, the only place or the, or the best place to point people.

[01:05:24] Pierre Daillie: Great. Gentlemen, thank you so much. I think the conversation could easily have continued, but I got to respect Mike’s schedule.

He’s got a plane to catch. Yeah.

[01:05:34] Mike Philbrick: We’ll do another hour later.

[01:05:37] Pierre Daillie: Absolutely. Anytime guys. I, that was a fascinating conversation. I, uh, I think, I think there’s, uh, so much food for thought in what we just talked about. And, uh, you know, takeaways, uh, you guys have a really eloquent way of, uh, uh, describing the need for more diversification for risk management.

[01:05:58] Ryan Lobdell: Thank, thank you. And thanks for having us on. We really appreciate it. Nice to talk to you both.

[01:06:03] Mike Philbrick: Thanks guys. Great seeing you again.