Bob Elliott, Unlimited Funds – A Macro Masterclass

[Music] Bob welcome to the show thanks for having me where do we find you today downtown New York uh at our office here at unlimited so the Christmas spirit so for listeners we're recording this the end of November beginning of December it's always been hard for me to get in the Christmas spirit in Los Angeles I'm not a Angelino native and they do tree lighting ceremony here where the tree is At the end of the pier out in the ocean and it's a weird experience because it's 60 degrees but the one commonality is everyone's still

wearing ski jackets right it's 60 degrees here which is freezing whereas in Colorado or New York or somewhere else 60 degrees is probably shorts and a t-shirt so are you feeling the Christmas spirit there the holiday spirit what's the vibe like in uh New York this is one of those States in New York that's uh You know in the 40s pouring rain a blowing gale force wind when you get out of the out of the subway it's a perfect Christmas day in New York I love those I miss it I need I need to get

back so I'm due I'm thinking q1 q1 this year well look man you've been somewhat of a starburst on Twitter and coming on to this the social scene which is great to see we always love having more macro people join into the conversation dialogue and we're going to spend a lot Of time on all things investing in macro today for the people who don't know about you yet let's hear a little bit about like what's your framework how you approach thinking about the world yeah I mean my my career I've been a systematic investor for

a couple of decades now and in particular a systematic macro investor and so when I think about how the world is working I'm I'm basically going back to sort of core cause effect relationships understanding those Cost-effect relationships and from there putting into context essentially all the things that are going on into what those normal relationships are and then from there trying to you know predict what's going to happen and then compare that to what's priced into asset markets and that obviously creates the opportunity for Alpha or or New Opportunities and and you know really at

that at the core of that is thinking about basically where we are in a cyclical Dynamic at Any point in time which you know business Cycles they come they go they go up they go down each one's a little different but there's a lot of commonalities between those and then putting that in the context of more secular Dynamics like debt Cycles like you know globalization deglobalization things like that that sort of are underlying or or underlying all of those sort of cyclical Dynamics that we're seeing in a day-to-day basis and so you Know when I

look at the world today it is in some ways feels very new and different than what we that many investors have experienced which is you know an inflationary business cycle in the context of you know the end of the long-term debt cycle and in the context of a shift from globalization to deglobalization but those sorts of Dynamics they've existed plenty of times in history just not in our professional careers most of our professional careers And so when I'm thinking about what's going on I'm thinking about turning my attention and thinking about those other previous cases

where we saw this sort of Confluence of events where you saw an inflationary business cycle where you saw you know deglobalization Dynamics where you saw you know geopolitical tensions things like that obviously the 70s are are relevant but there's also you know a dash of the 2000 cycle in terms of uh the busting of a of A bubble you know our bubble in the last 15 years is more like an everything bubble that was more a tech bubble some flavor of the 70s and maybe a little bit of flavor of you know back in the

deglobalization Dynamics that happened you know after the the first world war so it's kind of kind of see the combination of all those different things happening at the same time and you know this cycle will be some combination of all of those things Intersecting with each other and and leading to what what transpires so as a portfolio portfolio manager would you characterize the way you sort of think about the world because you spent well over a decade at Bridgewater I believe was it one where you kind of split the world into a traditional I'm thinking

about beta and Alpha you know as like a demarcation or you know you talk to almost every different shop and sometimes shops say no we do Four buckets it's equities bonds real assets and alts or you know other people say no we do it into growth deflation inflation recession you know like the terms seem to be different you end up kind of often in the same place but how do you kind of think about the world is it through that Bridgewater lens still or is it sort of a slightly different I think in a lot

of ways most of my career has been generating Alpha and so creating proprietary strategies That are predictive of what's going to happen in markets you know beta is a critical component of any strategic portfolio there are good ways to structure beta there's good ways to think about it I think there are many people who have totally reasonable maybe different in terms of thinking about exactly how to structure it but there's lots of reasonable solutions to that and then you know really what I've been focused on is figuring out how can I go Beat markets and

so that's really in that process of trying to in a systematic way and in a quantitative way look at the difference between essentially what's likely to transpire relative to what's priced in and find those opportunities in all the different ways in which those can be built and and so that's really been my career Focus yeah you know the beta side I mean we talk to investors all the time and actually said this was it one of my Favorite conferences was in Jackson Hole end of February early March of 2020. it was like the last Conference

of the covet I came home sick as a dog so it was like anywhere in a ski town was I think Ground Zero but anyway I was on a given a talk where it was talking about like you know and this is pretty well established there's nothing groundbreaking I don't think but I was saying look I said I don't think most investors really appreciate that we live In a world where beta is now free meaning like you can go get a global rough almost Global Market portfolio market cap weighted stock spawns even some real assets

and it's darn near zero it's like three basis points or something you know Matt Hogan podcast Alum has been on the podcast and he used to write an article every year it's like the the cheapest Global Market portfolio and you know you watched it over the years ago 20 15 10 5. and with short Lending it's probably negative anyway I was like I don't think the world is really adapted to that fact yet so you see hundreds of billions if not trillions asset allocation mutual funds that are essentially Buy and Hold funds that charge one

one and a half to percent still which to me is insane but I think they're going to slowly just ride those dividends into the sunset or when they retire whichever comes first So in that world if you're going to charge more and that's 99.9 of the investment space outside of Vanguard the Death Star you better be doing something different and so let's talk about that Alpha side because you know the beta side to me is kind of well wallpapered over so let's start to talk about what you think about how to construct that and this

is going to go a lot of different ways today and we can get deep on any of Them but let's start to think about that so let's say all right I got the basics covered I got my Vanguard portfolio of the low-cost beta like where do I even begin I don't want to derail our conversation about Alpha but I do think that a lot of folks are still a ways for beta beta may be free but it's still the vast majority of investors have poorly constructed beta Very sensitive or very long essentially low inflation reasonable

growth Dynamics and so there's lots of opportunities that they can do essentially for free or darn close to free to help them improve their diversification you look at things like gold Commodities and tips all of those things are assets that essentially are unowned by you know 95 of typical investors you know not just retail even institutional reasonably sized institutional investors don't have Those positions I I feel like every time I mention the idea that you know you should hold gold or Commodities I sort of get even relatively sophisticated investors kind of stare at me like

I'm you know a crazy person suggesting that you know something like gold would be uh an appropriate asset in a portfolio but most investors have constructed their portfolios having lived through an experience of The last 30 years that has been the single greatest period for 60 40 portfolio and have it recognized that the unusualness the fact that you've lived through a 95 95th percentile positive outcome of 60 40 over the course of years and years and that in the majority of times or certainly a large plurality of times that portfolio isn't that great in the

grand scheme of things and you know what we saw in this period over the course of 2022 at some Level is not that surprising it's actually quite normal you know the fall in 60 40 it was a large Bond sell-off certainly one of the larger bond sell-offs in history but the general picture of how 60 40 is performed it's not a particularly unusual outcome and one where frankly most investors are quite poorly prepared for an environment where the fed and other central banks may end up not containing inflation as Effectively as they may say they

want to and so that's why positions and things like gold and and commodities from a more strategic perspective could be valuable yeah so you know it's interesting and and I think you hit the nail on the head that investors I mean we look at our age demographic you know the person that was managing money in the 70s probably retired right like there's not that many people that are probably still Experienced kind of the the 70s and are still doing it so you have this entire regime of investors who are conditioned to one sort of outcome

or environment and we see the same thing look on the beta side and this year is sort of like a slap it's like a backhanded slap not necessarily front-handed slap Palm slap but backhanded slap because investors we see most portfolios are very specific to U.S stocks and bonds with the exception of our Canadian and Aussie friends they Tend to have the the real asset component down and so you know it's funny because we'll get to this later when it comes to the alts but I love the idea of doing like a CIO lie detector test

or a CIO blind taste test you know like the old Pepsi Coke where you say okay tell you what you know we're just going to give you a menu and all it's going to have is the risk return numbers for the past 100 years and you have to choose from that It doesn't say what it is right and so go do your optimization and sure enough it's not going to be U.S stocks and bonds only right it's probably gonna have a big chunk and it's certainly not going to be 70 30 US stocks right it's

certainly not going to be that right so for the people listening who probably don't have any gold any tips any commodities like how much like most people say okay I'm gonna go put half a percent or Percent in these like what's the amount that they need for it to make a difference yeah I mean these sorts of assets they don't necessarily have to make up the vast majority of your portfolio like you get a lot of diversification and a lot of protection incremental protection from allocations like 10 say 10 to gold or ten percent to

Commodities and part of the reason why that is is that they perform typically will perform uniquely Well in environments where you need the protection the most right and so you know Commodities this year obviously performs pretty well and particularly well if you think about them as a diversifying asset class right in the sense of you know Commodities did quite well earlier in the year when stocks and bonds did quite poorly as particularly stocks have rebounded a bit Commodities have come off but the Through Time picture of a commodity position Diversified commodity position over the course

of the year is pretty good and would have alleviated a lot of the stress that you would have had along the way gold is in many ways you know people have said well inflation was up why did my gold perform and I think in part that's a people have a bit of a myopic view of the range of plausible outcomes that could happen for an investor gold in many ways you could Think about it as non-interest bearing money and so when interest rates rise interest-bearing money outperforms non-interest bearing money but the key thing to remember

is that it's also protection against both geopolitical risk and high inflation environments things like 5 10 15 20 type inflation environments which like if you look across the developed world over the last hundred years in something like 10 to 20 percent of rolling 12-month periods You've had inflation in that sort of range or actually gold does very well in deflation very significant deflationary environments and so gold does particularly well there and so when people are looking at gold today and they're saying well it hasn't done that well well first of all it's done a lot

better than stocks of bonds have this year right you know it's essentially flat on the year a lot better than stocks and bonds so you certainly would Have preferred to hold some gold but it does particularly well in that sort of tailed environment I like to call it the the smile of gold which is you know it does very well in extreme deflationary environments and well in high a an extraordinarily High inflation environments and so you know those happen 20 of the time in the developed World they have 40 of the time in in emerging

economies and so the idea that you would allocate 10 to protect you in Those tailed environments seems prudent yeah you know it's funny even if you go back to I mean and obviously this is a charity picked date but if you look at gold I just did like this Century gold stocks and bonds you know since 2000 gold has beaten stocks and bonds which is I think would surprise many investors and then you know REITs has have actually beat all three but you know we did a we I love my polls on Twitter I probably

do more polls than anyone I Know but we did a long poll this summer we were asking people you know what do you own and you know my audience is probably going to be biased towards systematic gonna be biased towards you know Trend people and value and globally Diversified already but even then the vast majority of people I think it was two-thirds said they don't own any Commodities and of course everyone owns U.S stocks and and the like but gold and Commodities are really a a tiny subset which is odd because if you did the

the CIO lie detector blind taste tests you would own some there's no scenario you own none even just a simple optimization since 1970 since as you say 2000 you know if you just kind of did whatever what the optimal portfolio allocations would be and you even went a quarter of the way there you'd be holding some of these assets and so in some ways I think part of it is also That you know how many people are out there like pounding the table as the beneficiaries of gold right we've sat here we've talked about gold

for a little while in this podcast you're not going to make a dime on gold I'm not making a dime on gold right we're not like really incentivized to talk about a diversified commodity or or gold portfolio in the way that you know there's plenty of people out there with their various iterations of stocks and Bonds and Alphas related to that and I think you know part of that is the story that there aren't that many Advocates out there for things like Diversified Commodities in gold and those that exist don't have a sort of uh

institutional uh credibility let's say that folks who are talking about stocks and bonds do and so I think we're going to start to see like if you go back to the 80s you know the the 70s and the 80s there were a lot of people talking about Commodities and Gold and things like that because they were burned by traditional financial investments and so over time you know this conversation will become more normal and more normalized for many investors but we're very early in that process of people you know coming to the realization of the benefits

of those Assets in their beta portfolio well year like 2022 particularly if it ends up being a year like 2022 2023 2024 you know has a way similar to the internet Bubble for I think a lot of whole generation of investors has a way of informing that taste for you know a long period going forward you know hopefully it's not a everyone chases the hot investment after the fact but it's hard to see a portfolio optimally as not including real assets and we've loved them for a long time but we come from uh sort of

farm real asset background so that speaks to me you know at my core as well so you know as we think about the Real assets in a portfolio you know one of the big takeaways seems to be this concept of you know balance where if you get off on one foot with portfolios like is it probably okay over very long periods yes is it probably okay you know most of the time like sure but like it is a hard path you know like because there are years like this year one of the worst years ever

for 60 40 that you know it stings before we leave the beta land of The Disney asset allocation part any other thoughts on beta before we start to really move into your wheelhouse of all things Alpha I know I mean nothing the main thing is like get started right it's like you know there is actually incremental benefits to five percent allocation ten percent allocations like you can get started in moving in the right direction without for instance creating massive peer risk or other tracking error and incrementally you Know improve the diversification of your own or

client portfolios and like the 60 40 experience that you that you describe the slap in the face over the course of the last year like like shouldn't be by and large what you experience right that should be an extraordinary outcome not something that you're experiencing regularly and so like why put yourself through that if you can find ways to you know to increase the The diversification particularly as we look forward into a period where a lot of that you know this little bit of Shifting to a bit of an alpha View and a more tactical

view but like you're looking at a period on a four-looking basis where a lot of the disinflationary forces that were so beneficial to the economy to credit creation to assets like stocks and bonds like that disinflationary Dynamic that was so prevalent it was almost so Prevalent that we all forgot about it like we all forgot that there was a time when you know goods were not by and large produced in China you know like we forgot that that's how the world could work and so and we forgot that the massive disinflation was because hundreds of

millions of people came off went from the farm to the factory in East Asia like we've forgotten about those things That that is a big Force that's basically reversing you know that huge disinflationary force is basically reversing and there's a lot of things that come with it it's probably higher structural inflation if it's not higher structural inflation it's tighter money in order to deal with the fact that the underlying inflationary Dynamics are worse than they were before and so preparing yourself for the end of the era of easy Money for the an error that might

be more inflationary an error that you might almost probabilistically will have more volatility like all of those things I think 2022 was a great slap in the face because it should wake you up to thinking hard about how do you make sure that you don't feel that again over the course of the next five and ten years and you could take actions now to help prepare yourself along that Dimension yeah well you know the funny thing about Inflation that we need to caveat kind of the beginning of the conversation where I was like you know

no one in our industry has experienced it in the past three decades well that's true in the U.S that's not really true in the rest of the world right where you go visit our friends and Brazil or many places and they're like what the hell are you guys talking about Brazil Argentina Mexico turkey you know you don't have to look that far to find what an Inflationary cycle is and what does well and what does poorly and how it affects assets and savings and and the economy they are there to study yeah and real quick

while we're on this topic of inflation you know you're seeing obviously High numbers in the U.S and you've been a great voice to reason listeners you've got to check out Bob on Twitter it's what is it Bob e unlimited you got it Bobby unlimited and we'll put it in the show note links but um he's a Great follow but it had been one of kind of the sane voices of Reason talking about inflation particularly in the U.S and would love to kind of hear your you know Spyglass binoculars outlook for kind of how you think

this might proceed in the ensuing months and quarters in the U.S but then also we can talk about the rest of the world because we've been seeing some some big prints in Europe lately and Europeans you know you talk to our friends in Germany and elsewhere Inflation is something that is a lot more close to home they don't want to deal with than probably our U.S counterparts but Mike to you what's that look like to you yeah I I think when you look at sort of going back to the conversation about how to sort through

the overall framework like what I see today in a lot of ways is a pretty typical inflationary cycle when you look at historical inflationary cycles and of course we sort of got into it in a way That was a bit different you know it's not all the time that you have the sort of monetary stimulation that we had combined then with the magnitude of the fiscal stimulation in order to get the economy roaring back post covid but if you look at that that basically created an economy that was very tight and that put money into

the hands of people to start spending particularly post covet and that that kicked off this What I call a typical inflationary cycle which is that you have uh spending power that exists you have monetary stimulation which leads to spending power which leads to Rising prices which feeds back into increasing things like wages and other compensation which then provides more spending power even as the monetary or fiscal stimulation starts to moderate you still have the benefit from the higher wages exacerbated by the tighter labor force the tight labor Force which allows the spending to continue at

the same sort of nominal Paces even though you're starting to withdraw the monetary and fiscal stimulation that Dynamic that I'm describing which is a typical upswing in an inflationary cycle is very normal like I would just emphasize that I you know I taught a intro macro class for for 10 years where was this yeah Bridgewater I thought I taught that oh we need to get you online man let's get You uh yeah it should put me on YouTube for that but you know part of that experience was students would come in and and I'd say

well we should really go back and we should look at the 50s and the 60s and the 70s and look at those Cycles because those are like the quintessential business cycle in particularly quintessential inflationary business cycles and they go oh no no no that's not how it works like what happens is There's QE and then it goes in and it comes out you know we have more QE and less QE and that basically drives everything that happens and like why are we studying you know what happened in the in the 60s to understand what's going

on and I said well you know I think there's going to be a day a day sooner than you think that we're going to have an inflationary cycle and understanding how they work the sort of classic elements of inflationary cycle Are so important to them being able to visualize how things will transpire and so you know what we really are are we've we've got the emergent inflationary Dynamics we've got the tightening and response to it in terms of you know fiscal stimulation has withdrawn or you know meaningfully lessened monetary stimulation has has shifted and is

now getting tighter but what you have in these Cycles is a very you have a I Wouldn't necessarily say it's a self-reinforcing or it's not a spiral it's just simply a dynamic that maintains the high price level uh the growth in prices which is you have prices that are rising which feeds through to wages because most prices in the US economy are Services most services are wages right and so what happens is you have the prices rise which is leads to increased incomes which lead to more money in people's Pockets which leads to them to

spend again more nominally and and so on and that cycle doesn't break until you shift the labor market dynamics and start to bring down nominal income growth which then slows that maintenance of the inflationary cycle and so what you see in that Dynamic is we're just I'd say we're just getting started like it's not really clear exactly where we are in that cycle you know there's lots of Differences in the sensitivities of the US economy to tightening than there was in previous Cycles so there's more there's some ambiguity about exactly where we are but like

unemployments at secular lows initial claims are basically at secular lows I mean even we're still adding jobs it's you know something like ADP comes out and it's a little lower than people's expectations but overall labor force growth is actually very very low in the U.S and so You still have you don't have to have that many jobs to continue to have relatively tight labor market and so we're still we haven't tightened enough or the tightening hasn't flowed through enough to start to really deteriorate the labor market which would then deteriorate the wages which would then

deteriorate the spending which would deteriorate the earnings you know which would start to bring down the prices and so we've got a long way to go in that Cycle like when you look at typical Cycles from the point of the peak in stocks to the labor market starting to deteriorate is 12 to 18 months to then inflation coming down is another 12 to 18 months that's how these macroeconomic Cycles work that's three years of conversation about inflation being elevated that's a typical or a normal cycle and we're really in that context like in the third

inning of that overall cycle well people probably don't want to Hear that third inning sounds like uh early part of the game and so your best guess this is a happy hour question this isn't a hold you to a question but like what's your best guess of like the sort of you know couple years Glide path is this something where we hang out up at seven eight or four or five or I think the consensus every time I pull and ask people and seemingly in the media and and investment shops is like we're Coming back

down to two pretty quick what's your best guess what do you think is likely to transpire what I think typically when you see these Cycles inflation is a lot stickier Than People expect and even in environments like that had large secular disinflationary forces like in 2000 if you go back and you look at the inflation Dynamics there it took a long time before inflation actually came down towards you know the two percent Target And that was a very different secular environment that was going on at the time and so uh you know on a year-over-year

basis where are we at you know in the seven to eight range right now that's probably gonna moderate you know more into the five six range give or take maybe a touch below that but but part of the way that you're going to understand where that's going to settle out is by looking at the wage growth the Income growth is going to help you understand where that's settling out you know most people almost always are will say well isn't the labor market the most lagging indicator of the economy they'll say that all the time and

in Credit Cycles that's definitely true because what you have is you have credit booms and credit busts which are the primary driver of spending which then creates a situation where that spending shifts a credit Shifts spending shifts and then labor shifts but when you look at inflationary Cycles you have not a credit problem you have an income problem right an income problem meaning you have income growth that nominal income growth that's too high relative to the productive capacity of the economy and so what ends up happening what ends up driving that Dynamic it's not the

labor market it's not the lagging indicator it's the indicator that tells you Whether or not you've broken that inflationary cycle right that maintenance of inflation through the continued growth and incomes leading to the continued growth in spending and so people get those two things confused because basically everyone's experienced credit Cycles in their lifetimes or asset Cycles like the 2000s bubble and basically have never experienced income Cycles or inflationary cycles and so that's why it's so important to be Focusing on what exactly is happening in the labor market because that is going to help us understand

what's going on right now you know you're getting moderation from extremely tight labor markets extraordinarily tight labor markets you're getting some moderation that will take some time to flow through and then from there we're gonna have to get some weakness in the labor market before you start to get weakness into overall wage income And so then and you need weakness and overall wage income in order to finally get the slowing of spending and the slowing of prices and so that's a relatively long-winded way of describing like what's inflation going to be well it's going to

look like nominal incomes given where the tightness of the labor market and given where we are in the cycle you'll probably we will see income growth continue to be four or five percent it Depends on your preferred measure of exactly what you're talking about and that will lead to inflation that is in that order of magnitude too high relative to Target and that will continue until you get enough labor market weakness in order to start to break the spending cycle and the wage cycle so you know you had a hot take on Twitter as hot

as macro takes can be but it was a hot take where you were talking about recession and I feel Like on one hand people think inflation is going to go right back down to two but also they think like the recession is here like the media always like is ready like the recession is here like let's call it a recession but you were kind of talking about you know things may slow but this could be further out Than People expect is that an accurate representation of your threat a few days ago and what sort of

Job number was it jobs we need to get to I was looking at initial claims just to try and get a sense as to how fast the labor market has to deteriorate the initial claims I like because it's weekly it's you know it's timely It's relatively standardized and I also like it because it's real in the sense of it's measuring like people actually filing claims for employment versus people being surveyed or being asked what's going on I like that as a measure But really you should look at kind of the complex of all the different

it measures in terms of what's going on within employment though kind of an underlying story that's going on right now is that sentiment is being affected by inflation and so indicators of actual activity are slightly more uh indicative of what's Happening than various sentiment indicators which can be influenced by people's views on on inflation so yeah I mean basically what I was talking about was Labor markets are like a huge tanker ship right like what's happened is the Fed has sort of like thrown out an anchor and it's like starting to drag a little bit

on the tankership of employment which is you know which is moving forward at a at a pretty good pace and so you're getting a little bit of slowing but it's like moving a tanker ship which is it takes a long time to slow the tanker ship down or you have to you know Titan incredibly In order to slow it down or have a crisis and so basically I was just penciling out like if you look at normal labor market dynamics it's gonna be a while it's gonna be a while even the most sensitive sectors of

the economy to interest rates like housing even there what you see is that it typically takes a while between when interest rates rise when housing activity starts to slow like like Transaction activity which obviously we're seeing a fair amount of but before you know you actually start to get a slowing of construction you know it's not just a slowing construction because you don't fire everyone instantaneously when when demand slows down it takes even longer to wait for construction employment to slow down so construction employment just so clear has been you know positive right we haven't

had a disaster in Construction employment yet you know we'll see in subsequent months but like if you think that housing is the first it's the most interest rate sensitive part of the economy and it takes a while for that to flow through to actually start to hit the labor market right we've we haven't even gotten to that point let alone slowing down the totality of the economy all the other sectors and all the other areas of the economy we're just getting started in That process and so I think the thing that's going to be interesting

to people I think it has a lot of impact on asset prices over the course of the next 12 months is this idea that we're you know we may very well have a late recession you know something that takes that the US economy is more durable to interest rate Rises and frankly like the macroeconomic linkages just even if they took the normal amount of time we would be talking about actually Like meaningful weakness in the economy you know a year from now and that if that's the case I think it's it's very important when you

think about of course it has implications for stocks which earnings might be a bit better than people expecting a recession it has implications for bonds which monetary policy might be tighter than people are expecting I think it also has a real impact when you think about how inflation psychology And expectations start to transpire because that Dynamic it's a little all of us like try to quantify exactly how inflation works like it is somewhat quantifiable with that connection between wages and prices that I described but it's also a bit of a psychology thing which is the

longer it goes on for the more likely it gets written into contracts and starts to affect people's expectations of the future and so I think there's a really Interesting Dynamic going on which is like the longer it takes to get that slowing in the recession the more the inflation psychology becomes you know starts seeping into people's minds and the harder it is to break the inflation Dynamic right if inflation happens for a month nobody cares right you just look through it you move on it happens for a year even there you're like well I won't

Reset my wage expectations because I know in the future it won't happen again but if it happens for years and that's really the tale of the 70s which is years of inflation or frankly talked about other Emerging Markets like that's really the tale of the Mexico Brazil other Latin American economies years and years of inflate persistent inflation that then starts to affect lots of other things and becomes embedded like the Baseline shifts from being a two percent Baseline to a five percent Baseline and that's very very hard to break it's going to be a race

to the finish here like I I don't know whether inflation expectations are going to become ingrained or if the fed's going to do enough to break the back of the economy in order to slow inflation before it becomes so deeply entrenched in in our minds it really is a race to the finish and so as you think about that is kind of everything you said Rhyme with the rest of the world or is that like a whole different bucket of issues and situations like does it are they just kind of trailing what's going on here

or is it totally different well I think you mentioned Europe and I think the thing that's so interesting about the European context is going back to a typical inflation Dynamic what we're actually seeing is very normal in the sense of you get a big you often in these Dynamics get a big Supply shock in Some form or another whether it was you know Iran cutting off the oil back in the 70s or or other Supply shocks that happen and you get a spike in primary input cost energy in the case of Europe to the extent

that that persists which it obviously has persisted for a period of time that starts to trickle into all the other elements of pricing first you know very very closely Connected to energy type Dynamics you know something related to the transport of goods or things like that you know Trucking prices or shipping prices or something but then slowly but surely it starts to work its way all the way down to the pure Services economy and when you look at Europe you're starting to see that process happen you're starting to see increasing breadth of high inflation across

the economy you know over something like 70 percent of Categories in the seat in the European CPI are rising faster than three percent you know that's not as bad as it actually is it is in the U.S but it's starting to show that starting to permeate through the economy core inflation is at five percent and remains elevated and so you're starting to get that Dynamic and the ECB is in a really critical moment which is do you respond to that to try and slow aggregate demand to help reduce the inflation missionary Pressures flowing through to

the rest of the economy in order to ensure that you don't start to get into that inflationary mindset or do you hope for transitory inflation and by and large the ECB is just running monetary policy on Hope the idea that in a 10 inflation environment or even a five percent core inflation environment that three percent interest rates as a terminal rate is appropriate monetary policy is a bordering on irresponsible in terms of Their mandate in terms of what they should be be doing and so you know I think one of the big surprises may be

in the course of 2023 is that the European economy first of all is a little more resilient than we all expected like if you talk to most people in the U.S they'd say oh Europe it's in a depression and you look at the stats and you're like yeah Europe is like kind of moderately growing you know it's like kind of okay You know it's not great but it's like okay and inflation's at 10 you could easily see the sort of repricing of the expectations of monetary policy that we saw in the U.S start to flow

through Europe and I think that has lots of other interesting you know second and third over consequences in terms of you know bond market investing and exchange rates over the course of 2023. is that one of the reasons we kind of have seen the dollar wrecking ball romping and Stomping like what's your perspective on the dollar and currencies where we stand versus most of the pairs yeah I think you're seeing a combination of two things in terms of the Dynamics the first thing that you're seeing is that the US has a couple of structural forces

that are very supportive to the dollar and the two main ones are the shift from the US being a big commodity importer to being neutral basically no longer sensitive to Energy prices and Obviously in an environment where Energy prices went up a lot that made the US much stronger the U.S external balance is much stronger than they were in Europe and the UK who are obviously big energy importers you know part of the reason why the dollar has softened particularly against the pound in the Euro over the course of the last couple of weeks is

because we've also seen Energy prices come down right so in the same way that Dynamic was beneficial to The US and to the dollar earlier in the year it's detrimental to the dollar in the back half of the year so that's part of the dynamic that's going on the other part of the dynamic is that you know the U.S in general is less sensitive to interest rates particularly relative to places like the UK Austria and Australia who have much more shorthand borrowing sensitivity from households and so the U.S can run tighter monetary policy then can

many Other economies in the world because we mostly have long dated mortgages that are not resetting in price and so what you've seen there is that that has allowed the US to get ahead of many of those other economies in terms of monetary policy but we're now reaching the point where you know the US is not going to tighten another 500 basis points from here right so that that is not in the cards the us is going to probably tighten a Moderate amount additionally probably more than what's priced in from my perspective given the Dynamics

I'm describing but not radically more than priced in whereas when you look at some of these other economies places like the UK and Europe in particular you could easily see given the inflation and economic conditions a meaningfully tighter set of monetary policy and a shift in the bond market which would be advantageous for their exchange rates Relative to the US and so probably what we're going to see on the margin is basically the dollar wrecking ball is kind of behind us not ahead of us and we'll probably see you know some softening from high levels

probably not a huge shift but you'll see some softening from relatively high levels from this point assuming that you know the frankly the Europeans and the and the bank of England you know take the Appropriate steps to manage their their monetary policy consistent with what the domestic economic conditions are yeah the dollar great time listeners if you're an American go travel but on the purchasing power parity it's certainly On The Higher Side versus a lot of the world so get your travels in though if you travel you try and go to Europe uh that inflation

is not helping the circumstance you know in dollars even with the dollar I think uh you'd find That the cost of services in Europe is actually pretty high uh certainly relative to pre-covered levels yeah so travel and and travel cheap so that's the way to do it the old uh Anthony Bourdain way of travel so we had a Twitter poll I remember it went something along the lines of what do you think is going to hit five percent first CPI coming back down or two-year Bond on the way up what would be Bob's vote oh

your bond is going to hit yeah for sure I mean depends on exactly what you're gonna book a CPI but if you look at it year-over-year CPI versus the two-year Bond yeah what you have in the curve right now is you have Cuts starting in the second half of 2023 my guess is that that's going to get mostly priced out as the economy is stronger than everybody expects and monetary policy continues to rise not as aggressively as it has been rising but it will probably you know Continue to rise and be higher for longer than

people that is currently priced in and so you know that that would be my expectation is something like that whereas it's going to take a little while I don't know five precisely I'd certainly take that bet on four right as usual like my polls part of it is just curious and a lot of it's sentiment but certainly um most of the people answered that it was certainly going to Be inflation so we'll see yeah we'll see how that one that one works I mean that's part of the the story is you got to be in

order to make money in markets you got to be out of you know non-consensus right if you just assume that things are going to play out as their price right you just assume that inflation is going to fall to two percent consistent with what's priced in you know you're not going to make money in markets and so part of the You might be writer you might be wrong but you certainly can't generate Alpha if you just go with the consensus and so part of the strategy is to look for those opportunities where the risk return

of positioning in a certain way is to your advantage you know it won't be no bet is greatly to your advantage and anyone who tells you differently is misleading themselves or trying to mislead you but you're just trying to build a bunch of Little bets that are a bit better than 50 50 organized in One Direction and so as an example I think things like longer you know two-year bonds or short rates in the second half of 2023 probably will be higher than it's currently priced in so on the margin that looks like a good

bet it certainly looks like a better bet than you know just taking two percent expecting lower than two percent inflation on a forward-looking basis that seems like uh not a great bet yeah And it's kind of weird world we're in most people listening to this uh and when I say most I mean probably 90 because when we did our poll we asked investors that are you up or down in 2022 and it was like 90 said down which isn't surprising because 90 of ETFs are down on the year maybe less today because the markets have

rallied a bit over the last month or so but most are certainly down and so it's been a rough year for most people you know we talked About the beta and kind of how to think about it like having that a little more balance let's talk about the fun stuff now Alpha the secret Alpha juice I used to own that website I think I probably still do I have a lot of domains the secret Alpha juice no it's not this it just is just Alpha juice and I was I have a handful of domains that

I bought for the sole purpose of gifting to a friend and this was I had a friend who used to joke about his secret Alpha Juice in markets and so I was going to give it to him and then I had someone try to buy it from me who was a uh was gonna do a website targeted solely for selling steroids or something that's you know so Alpha juice is slightly different demographic yeah but so let's talk about markets you know when you start to get away from the beta what does that mean to you

we can go through the lens of your newly launched strategy or we can Come back to that but how do you think about about Alpha in general you know the toolkit is essentially now everything and then also now it's also long and short so you just doubled your chances to be right or wrong how should we think about you know adding Alpha to a traditional sort of Buy and Hold portfolio yeah you think about beta let's start with beta because I think it's a good framework to think about like beta is pretty reliable in the

Sense of like you hand people money they give you a return on your money over time and they hand it back to you otherwise you would never hand them your money and like there's different forms of that bonds and stocks and things like Commodities and things like that and so you basically credit things like that you'd expect to earn money over time for it to go up and to the right you just want to kind of create the most balanced or at least a moderately balanced Version of that but the problem is that the risk

return of that is not that great you know it's better than not being invested given you know given that you're going to get positive returns but there's reasonable volatility Alpha is pretty different and the reason why Alpha is pretty different is because as you say it opens the aperture to you know make bets long short and for making those bets you can make money or lose money and on average when you take into Consideration transaction costs people are losing money and so the key thing when you're thinking about Alpha is thinking carefully about who you're

betting on because that's what's happening when you when you do alpha is you're betting on manager skill and so you have to think very carefully about how do you who do you bet on in terms of manager skill and how good do you expect any particular manager to be when you're thinking about that and so I Think one of the things that is probably before we get into all the interesting nuances around strategies and opportunities and things like that the biggest thing I would say when you think about Alpha is by and large people are

totally under Diversified in Alpha like very very under Diversified if you think about most you know most rias that I talk to are trying to get their clients into a variety of different strategies they may Look at one or two or even or five let's say five managers would be a very Diversified set of portfolios or you know they might have a couple of actively managed ETFs or mutual funds that's just a handful of different managers and given that any manager even the best managers are wrong 40 and 40 of months in their views like

what ends up happening is if you only concentrate in a couple of different managers or a couple of different strategies you're Not flipping the coin enough to actually have it land in your favor in a way that's consistent enough and so what you end up seeing most people when they think about Alpha they shy away from alpha because what they see is they see you know the returns of beta and then what they see with the alpha manager is like a lot of this and maybe over time a lot of this for those listening is

a lot of chop a lot of up and down a lot of above and below Benchmark and like when it's above Benchmark it's good but then it's below and then you have to sit there and you have to have a conversation with someone about why it's below Benchmark and that's a miserable experience as we all know anyone who's been in this industry knows that that's a miserable experience and the problem is if you just have a handful of managers you're going to have a lot of those Vol a lot of that volatility you'll be forced

into those Conversations with some regularity and the result is frankly that a lot of people basically say ah instead of holding Alpha I just forget Alpha like I want nothing to do with Alpha because it's a pain rather than doing what they what they should be doing is looking for Diversified Alpha because if you can get Diversified Alpha you can get a high quality return stream that is beneficial to a portfolio yeah so you know the discretionary Discretionary managers which is kind of long been the pedestal or the news story of the last 50 years

right the Peter Lynch's of the world that the media really focuses on it's sort of my nightmare like being at one of these big institutions and having to like sift through these stock Pickers like it's it's it's a hard job I think for a lot of reasons but there's a great thread well add to the show note links about Not necessarily just any active manager but also I think it applies to strategies as well as asset classes but it just talks about you know investors chasing performance and that the streaks even if you're a top

decile active manager just how many years you actually underperform and how many years you can underperform in a row you know and lining that up with the traditional allocators time Horizon is woefully mismatched you know most people operate On the zero to three years if that and really in my mind it's like 10 maybe 20 years for a lot of these which of course no one's willing to wait for but on the systematic it's a little bit easier it's still hard in my mind picking systematic strategies but talk to us a little bit now about

okay let's say you're gonna do some active I feel like you opened up the Pandora's box right a lot of advisors say well Hells Bells there's 30 different Categories there's Global macro there's long short there's on and on and on and on and on like where do I even begin too hard bucket like I just I can't even deal with this this is just too much how should people think about it like as they start to open the toolkit from just long only beta to all of a sudden got this whole new world of alpha

systematic opportunity yeah I think you you draw a good distinction the difference between Discretionary and systematic alphas and so you know discretionary Alphas are painfully like impossible to evaluate let's be perfectly Frank like you can't really know whether or not someone can consistently generate Alpha if they're trading in a discretionary way and the reason why that is is it's very hard to get enough sample size to separate luck from skill and we've all seen if you flip a coin Enough times like somebody's going to get all heads that's just the way it works and so

and when you invest in some a particular manager it's not about the backward looking track record that might be right it might be wrong who the heck knows particularly from a discretionary perspective like the only thing that matters to you is the future and if you can't differentiate the backward looking Dynamic based upon whether it was luck or skill then you Can't have confidence that it's going to deliver returns in the future and so that's why you know if I was suggesting to a manager like should you use a discretionary Alpha manager I would say

like like why put yourself through that when what you can one of the things you could do is you could look at systematic Alpha managers now to be clear it doesn't necessarily mean that just because it was a systematic process that Has worked well in the past that it will be certain to work in the future but you can have a lot more confidence in understanding what the nature of returns are what the patterns of returns are what the consistency of returns is whether or not with a range of plausible outcomes are whether a particular

manager's outcomes are consistent without plausible range of outcomes or inconsistent with them like systematic Alpha strategies are Much easier to manage from an allocator's perspective because you can actually Define and understand what's actually happening there and so I think that that's like most if you look back through time like the vast vast majority of strategies that are out there are of I should say have true Alpha this isn't just like sort of smart betas I'm talking about true Alpha managers that are trying to generate uniquely differentiated returns most of it that's Out there has been

discretionary of the trillions of dollars in in actively managed mutual funds the vast vast majority is essentially discretionary in one form or another and that does not make any sense to invest in relative to finding systematic strategies we wrote a book on 13f tracking years ago listeners it's free to download online called invest with the house but we talked about like you Know these discretionary managers I said one of the hardest problems is like when you sell them like they go through a rough patch you're like okay well is this just because value is not

working or is it because he bought a Jet and is hanging out in Monaco or is it because the manager got a divorce is it because they are now buying sports team like on and on and on you're like are they fired their main analyst who is responsible for this like it just like my God like Why would you put yourself through that anyway so it's hard certainly but the systematic you at least have a sort of a foundation or a Rudder to compare to as we often say now it may be different from that

and one of my favorite jokes we talk a lot about I say you know we have over 130 000 investors now and I certainly get emails where people are like you know I bought this strategy I bought this fund it's done worse than I expected you know we're selling it and Yet to this day we've never had someone say you know it's a systematic strategy I looked at it relative to its past it sounds way better than expected so we have to sell it map I'm just letting you know it's out of the range of

what we expected you crushed it well done goodbye someone sent me that email one day I'd love to receive it because I'll I'll smile but but I like the systematic again because you can compare it to expectations and then come up with a Plausible reason hey is this fit within expectations is this okay is this not okay what's going on um and the conclusion maybe we sent out an email this week where we were talking about a similar scenario where we have a strategy that's done poorly not surprisingly it's Global deep value stocks that's about

as uh bad a strategy as is out there right yeah and thank you for rubbing it in but we've come to Realize that when we appease the market Gods with humility and honesty we're often rewarded and when we do the traditional you know banging our chests and trying to say how how much we're crushing it usually uh it takes us to the Woodshed so I'm airing on the side of talking about what's not working anyway systematic I 100 agree with you now granted that's sort of a loaded audience so let's talk a little bit now

about okay like what does that mean like This this kimono this open Buffet of available choices what are some of the areas or systematic approaches you think are really interesting or conducive or great diversifiers to a traditional portfolio and we could certainly use as a case study your new strategy which launched congratulations thank you I appreciate it Bob is now in the ETF game with you guys know I appreciate a good ticker hfnd hedge fund ETF and hopefully lots More to come so I'll give you the choice you can talk about strategies in general you

can talk about this strategy specifically where do you want to go the first thing I think for most managers in terms of thinking about systematic strategies and you just want to think about it more generally like we could talk about how we're doing it with hfnd but more generally when you think about systematic strategies the key thing that many Allocators or investors don't recognize is that the purpose of building a systematic strategy is not to knock it out of the park like that's by and large not what you're trying to do what you're trying to

do is get repeated incremental Edge and so a lot of these different strategies that show positive returns positive Alpha over time are about sort of weighing that coin slightly in your favor each time That you trade it and then having a bunch of different a bunch of sample size each day is a new incremental bet on that particular strategy or that way of decision making and all too often people in general are return chasing but in particular when they're looking at Alpha strategies what they're worried about is I want to find the best Alpha strategy

I want to find one that's going to be you know the two sharp ratio strategy you know for the last five Years and the answer is like things that you can rely on are kind of good like you can rely on kind of good strategies you cannot rely on very good strategies because they almost certainly aren't true in terms of the reality and they end up in a bunch of options selling right like it's like the strategy and they end up just not delivering on what your what Your expected returns are it's like you see

somebody hit you know 750 in the big Leagues for three games and you're like sitting there trying to extrapolate that that's going to exist in the future the answer is like no like what you want is a team of hitters between 300 and 350. and if you can put together a team of three hitters of 300 to 350 you've got you know World Series champions investors don't think about Alphas in that way and don't particularly don't think about systematic Alphas or systematic managers in that way and the Thing is if what you can do is

you can get a bunch of incrementally pretty good strategies that you can rely on over time and you can diversify them through time because they all have a bit of edge but some do well and some do poorly at different points in time then what you can do is you can basically put together that Diversified return stream that is so much better and frankly a lot more reliable of delivering up you know plausibly delivering a pretty good Return in the future then if you try and pick out the particular strategy so like you know your

value fund like the point is like you shouldn't just be investing in your value fund you should be buying you know Trends you should be buying value in other sectors you should be buying you know all sorts of other different strategies that are out there global macro strategies other Equity long short strategies individual stock picking strategies like you buy them all Like that's the idea is buy them all they all have Edge and as a result you'll get a pretty high probability of a pretty good return that's what you're trying to do as a manager

a pretty high probability of a pretty good return so let's find some pretty good returns it's the endless seduction where I mean we have an Old Post starting to show my age the nice thing about having a Blog and Twitter for over a decade now is you can always go back And say something we talked about but there's no post it's like like where have all the sharp ratios of two gone I think was the name of it but basically like looked at you know a lot of the active strategies and you have sort of

like a a curve where over time yeah you may have an amazing sharp ratio strategy that high for like a year or two and listeners if you don't know sharp ratios risk adjusted return for an asset but anything over one which is like World Beating often should elicit more warnings maybe than excitement because often those things aren't sustainable if they were we would all do it and be zillionaires so okay let's talk about some specific ideas here are there any particular active strategies you're drawn to you mentioned a few of my favorites valued you mentioned

Trend my number one probably but how do you think about which ones are particularly pretty good as you would say Reliably pretty good yeah I think when you're thinking about the strategies I think you sort of want to intersect style which I think is an important consideration so you know are you talking about Equity long short or fixed income Arbitrage or Global macro or Trend or manage futures or however exactly you wanted to call that so there's sort of the Style version of those different things and then you want to think about who is implementing

them Right because ultimately Alpha strategies are matters of skill and in order to get the skill you have to have the skill in creating you know the insight about what's likely to transpire in markets and so you always want to think about sort of what are the attributes of the of the strategy and how much skill does it take to deliver that strategy and you want to basically create the best portfolio which gives you the highest Probability of success reflecting both of those different elements so as an example if you think about something like Trent

it's just a simple strategy from a skill perspective there's some art in in crafting the particular nuances of Trend in terms of how exactly you want to do it or how you want to weigh the portfolios or things like that but in a big picture level trend is a core concept a core you know systematic strategy that exhibits a certain set of Attributes so you put you know Trends and Trend strategies as something that is I don't say easy it's not simple to implement but it is an easier strategy to implement than say certain other

strategies but is moderately good as a function of you know it is a moderately good reasonably High conviction strategy that's reasonably easy to implement in the scope of all Alpha strategies I want to be clearance I'm not I'm not trying To say oh it's just so easy you just implement it and you snap your fingers like that there's skill in it but on that scale it's it's easier then you go to something like Global macro let's just say which I I find sort of on the total other end which is very hard to implement like

lots of people have views on macro environments everyone has a view but to actually rigorously and systematically develop a great Global macro trading business is challenging Like trust me I did it for almost 15 years I know what it takes it's incredibly challenging but if you can do it well your probability of delivering a high quality Alpha a low correlation high quality Alpha is is pretty high like if you if you can do that well and so when you're thinking about that sort of range of different things in terms of the the alpha fuzz that

you're creating you want to sort of balance those two different pieces I think what you end up Seeing is that in some ways the market sort of works itself out which is that the easier to create strategies are a bit lower performing but you're more confident in them and the better strategies are definitely higher performing but you're a bit less confident in them and so the main question then becomes can you get access to the best people essentially the best managers in each one of those different Strategies particularly the ones that take real skill are

you getting access to negative selection bias managers are you getting access to the best managers and if you get access to the best managers you know what you sort of see is like what's the right answer it's like kind of all of them you know a little bit of everything like is is kind of what I'd say if you can get access to the best managers and so that's sort of the the question and the sort of the Access that you want to think about when you're thinking about them and it basically leads and and

actually what you do is if you go look at the most sophisticated managers in the world like the big Pension funds the big endowments and things like that what you basically see is that they hold a market portfolio of Alphas you know because they basically invest in all of the top 50 let's say and all those top 50 have a bunch of different strategies and you Work it all out and you basically say well basically they hold like an equal weight of the main big strategies big Alpha strategies and like that's the answer you know

is kind of everything assuming you can get access to the best that goes along with the line of people often I give them getting this question now in 2022. I wasn't getting it for probably the decade prior but people would come to me and they say Meb I'm interested in managed futures suddenly but you know which one should I buy you know my you know as I always tell people I say look I'm not giving you advice like what are you crazy this number one thing like I don't recommend funds but I'm like as long

as these pass to me you know your criteria I was like you don't have to just buy one everyone always assumes you have to just like oh no which is the one like tell me the one I'm like bye I don't say buy all of them Because there's some that are I think either way too expensive or poorly designed but to the extent you make it down like your final list and there's five I'm like just buy all of them what's wrong with that because inevitably there's gonna be an outlier to the upside an outlier

downside but you kind of want that exposure and I think that's totally okay like the average of that is still pretty great like you you end up with a a lot of kind Of decent ones and they may be a little different but to me that's you know better than picking one and flipping a coin and hoping that's the one right which is marriage which which which just describes a lot of life but um but anyway so okay so we have this huge buffet there's a lot of great choices out there why don't we talk

a little bit about your recently launched strategy because I think this is super Interesting tell us a little bit about I saw that holds Australia big upset today Australia making it into the next round by the time this publishes I'll show you will probably long gone from the World Cup but at least for today my Aussie friends congrats so tell us a little bit about a strategy and why did you decide on this one to be kind of the First Market yeah in a lot of ways what we've tried to do with hfnd is consistent

with what we've been talking about which is To create that Diversified portfolio of hedge fund style strategies that instead of having to go buy 20 or 30 different strategies that are out there or managers that are out there trying to give advisors who are busy and have a lot of different you know things on their mind try and provide them a single Diversified hedge fund style exposure in you know the advantages with all the Advantages of an ETF wrapper and the way that we do that is what we're trying to do is it close to

real time look over the shoulder of the biggest most sophisticated hedge funds in the world see what they're doing see how they're implementing their portfolios and from there basically take that understanding translate it into a set of long and short positions in you know low-cost index ETFs and other and Other assets and base and package that into the ETF wrapper with the idea being that we can we can provide investors the goal being we can provide investors a product that you know looks to replicate basically the gross of fees returns of hedge funds Diversified pool

of hedge funds which is a which is a great return stream that most investors want to have it's you know Returns on if you look through time back through time Returns on par with socks About half the volatility about a third of the drawdowns that's a return stream that you'd be interested in having in your portfolio that's what we're trying to match trying to track but instead of charging 2 and 20 which is what most of those managers charge we're going to charge you know 95 basis point management fee which is you know considerably less

and then have it in this tax efficient wrapper of the ETF of course I don't have to convince you About why ETFs are the best wrapper for investors but in particular in this space you know most of the options that are out there for investors are you know LP type structures which are Super tax and efficient illiquid frankly involve a whole lot of paperwork which you know we talk to advisors and it's the paperwork oh my God we used to have private funds and trying to present someone with here you go there's a 70 page

Private placement document whatever whatever it's called I don't even remember three of them read this sign it like you're it forget it but also so we ended up in converting those straight up into ETFs which is a trend you're seeing a lot you're now seeing the big floodgates with the mutual fund ETF conversions happening um DFA being the big one with I don't know 50 billion or so but you're also seeing it with the hedge funds and I you know I said this Probably on Twitter who knows maybe on the podcast years ago but I

said if I was a hedge fund LP and I was taxable I would say look if it's not some weird crazy strategy like let's say I'm allocating Maverick I say Lee buddy you gotta launch a long only version of this as an ETF because you know your Alpha juice your long short 2 and 20 maybe let's keep it over here because you can't get carry in an ETF but hey you know what you're kind of vanilla version That I'm going to be sitting in in my taxable portfolio you got to do it as an ETF

or else you know signara because it's a huge I mean it's like a 70 bips just on the tax alone benefit to the structure anyway let's talk about it so like theoretically Yes sounds great we'd like the exposure the the best hedge funds out there in a tax efficient ETF structure but Devil's in the details how does one actually replicate that yeah I think the way that we approach it is by Basically combining our Decades of experience having built proprietary hedge fund strategies in you know across basically this whole range of different styles in a

systematic way with modern basically machine learning techniques and that basically what that allows us to do is to look at the sort of returns that various hedge fund strategies are producing in pretty close to real time and compare that's what they could plausibly the types of exposures they Could plausibly be be investing in and then say well given that understanding given what we're seeing them how we're seeing them return relative to what they could plausibly invest in we can start to solve for what portfolio of positions is the most likely portfolio of exposures that explain

the returns that we're seeing and because we get the returns information pretty fast like there's some daily information some information comes out a few days after The end of the previous month where does one get that sort of information is that like you know Bob's got a pseudonym and or you just like subscribe to all the hedge funds and be like by the way you know I'm now they're going to kick you out as LP or use the databases like where does one find all that info yeah there's a bunch of performance aggregators like the

part of the thing coming from the hedge fund space is you kind of know where where does everyone Report their hedge fund returns you know because there's various benchmarks and you're constantly putting yourself against the benchmarks and so there's lots of different aggregators you know there's the places like Bloomberg or Barclay hedge or places like that that bring together you know reasonable often pretty extensive representative samples of all the different funds and how they're performing and really what we're doing we're not trying to predict You know one particular fund or the other we're kind of

looking at Styles and sort of extracting the wisdom of the crowd is kind of how I like to say it so you know what do Equity long short managers how are they generally positioned or how are Global macro Managers generally positioned and essentially what you're doing is you're creating a portfolio a diversified portfolio of all the different Global macro managers and what what does that Infer and all the different Equity long short managers what does that infer and then you're diversifying it further because you're taking those portfolios and you're putting them all together in a

way that you know should be more consistent over time because it's relatively Diversified compared to any one particular strategy or any one particular manager and what we're doing really like the machine learning it can kind of sound very black boxy I mean all We're really doing is we're doing what many people would do if you just like looked at the returns that that are being posted like Global macro did great in the first half of the year you kind of know in your gut that they were short bonds short short rates long Commodities long gold

Etc like you kind of know that that that's the only way they could have produced the returns that you're seeing and so all we're doing with machine Learning really is just doing that in a much more computationally rigorous and systematic way then you know me just looking at a return and saying oh it's obviously you know they're they're short Bonds in their portfolio yeah and so how many funds do you guys kind of look at is like is there a way you sift through all these funds is it ongoing is it a one-time list like

how do you kind of arrive at the creme de La Creme of like who you guys are are looking for Yeah I mean we we use constructed indices which cover basically all 3 000 plus funds and part of the reason why we do that is because you can't predict which funds are likely to be successful in the future with any reliability you can't predict which strategies are likely to be successful and you can't predict which funds are likely to be successful and so you could easily have emerging funds at periods of time do very well

Relative to well-established larger funds at other points in time well-established larger funds do better than emerging funds and so by replicating an index rather than trying to pick we're doing basically what many people have learned with beta and the S P 500 is you don't know which company is going to do particularly well or particularly poorly so why worry too much about that just buy all the companies we're doing the same thing Here in terms of hedge funds which is some will do well some will do poorly good ones will do well sometimes good ones

will do poorly sometimes bad ones will do well sometimes and poorly sometimes but but since it's so hard to pick which strategy on a forward-looking basis which strategy or which manager is going to outperform as long as you believe that all of them have Edge in aggregate over time which I think is you know pretty compelling like Hedge funds particularly before you start charging crazy fees they're the smartest most sophisticated investors in the world like yes you expect them to have to generate Alpha over time so as long as you can sort of bet on

all of them which is what we're trying to do at a reasonable fee you can build a pretty good Diversified portfolio all right so let's say we've settled on the thesis that we want to incorporate the alpha of hedge funds we Don't want to pay this giant carry and we want to do an attack sufficient structure we've established we're going to kind of replicate it how do you actually implement it so tell us our using swaps are you looking through daily is this something that updates and has like ten thousand percent turnover give us the

recipe yeah yeah I mean what we're trying to do is capture the most important and most explanatory exposures that those funds have on at any point in Time and so the way that we do that is through positions in our universe is roughly 50 of the largest you know liquid asset markets as well as you know stock sectors geographies factors things like that and so that's really the universe we express it today mostly using low-cost index ETFs long and short positions it's nice you talked about how cheap data is like how great is it that

Vanguard and I shares have like done all the work for you in creating nice Packages of Securities that you know directly reflect exactly the concepts that you're trying to do at a de minimis cost and also at in a very liquid structure because in many cases you know the ETFs might be even better to hold more liquid to hold and more cost efficient to express than if you're trying to buy individual stocks at the size that you have to in order to implement these things and so you know that's what we're doing as long and

Short positions in ETFs I think part of the over time we may add exchange traded Futures swaps we may buy some physicals depending on exactly you know what makes the most sense from a liquidity and cost perspective for the investor but you know for right now that's primarily where we're focused and I think what it speaks to in some ways having sort of uh my career has been as a macro investor in a lot of ways what I see is whether it's making a a Proprietary alphabet or developing this process to infer what managers are

doing I really believe that a lot of the outcomes that you see really come back to core macroeconomic exposures whether it's exposures to liquidity or interest rates or sectors or things like that you might be trading something that to you looks idiosyncratic or to a manager you could they could say oh it's idiosyncratic it's idiosyncratic off the Run versus On The Run bonds but in Reality all the different things that allow you to take advantage of that opportunity things like uh interest rate costs or credit conditions or liquidity conditions or things like that those are

things for more bespoke strategies that you can basically explain a fair amount of understanding the sort of macrodynamics that are at play in the macro exposures that are at play particularly if you start to diversify across managers and Across Styles you can really you know extract a lot of the understanding of what the effective positioning is of these managers through those sort of macroeconomic Concepts so what are these hedge fund Titans uh putting you in today what's the exposure broadly look like are there some general themes we can uh tease out yeah yeah for sure

the thing that's most interesting about how their position right now is they're basically as conservative as They've been in the last 25 years outside of some of the most acute crisis periods of 08 and 20. and so that's pretty interesting right when you say conservative what does that mean just as far as Equity exposure or just long exposure to anything or what does that actually mean in general they're taking basically the lowest risk the lowest VAR that they have over the last 25 years so their aggregate positions are very small relative to historical aggregate Positions

and then even within that let's say what you see is that they're holding effectively a lot less Equity exposure this is again managers in aggregate a lot of the equity exposure is through long short Equity managers as well as some Global macro managers even the stock Pickers when you look at what they're doing they're running much lower risk than they typically would and even within the risk the dollar risk that they're taking what you see is that They're positioning to lower risk sectors so much more value oriented you know Consumer Staples like very frankly like

very boring the sort of boring businesses you know versus being short growth type stocks and then you see in general also a relatively Diversified set of positions like not just holding Equity exposure but positioning in credit and higher you know short end credit higher rated credit so so looking for those sort of high strong balance Sheet opportunities and then also holding positions in things like gold and commodities you know part of the reason why we're having this this conversation about betas is uh is recognizing that the most sophisticated asset managers in the world think that

holding gold and other in a diversified commodity exposure is a good tactical bet as well as a good strategic bet in terms of those positions and so that whole package is Pretty conservative All Things Considered and and I think that makes a lot of sense like if you're living through a cycle I mean first of all tightening cycle you want to be very careful about adding risk in a tightening environment so you can preserve capital for better liquidity environments and then also we're seeing a cycle that is basically totally different than any cycle that we've

seen in our professional lifetimes and when You see that it makes sense to be pretty conservative with your positions no well it lines up with my Trend follower heart and you know look we look back on the craziness of 2021 really peaking I think in February we have a Twitter thread listeners you can look up it's called what in tarnation and man that was a weird time like we had there's like 50 charts where we just kept adding and adding and they got weirder and weirder and crazier and I'm like man look back on it

like what were people thinking they weren't I guess but a lot of that is kind of obviously getting exposed today so listeners check out that fund it's super cool the nice thing about ETFs course is you can download the positions and check out what's under the hood how often does this update this update daily weekly monthly quarterly we get uh we're updating it uh regularly with uh when we get incremental information about hedge Fund performance which comes in we have a bunch of different sources that we use to to track that so whenever we get

that in and then some extent when market conditions adjust and change will be in there but you know it's a couple times a month uh sort of in terms of Shifting the the positions around but do you notice it actually make like pretty large changes that much or does it tend to be kind of incremental Turning the dial over the course of months if you think about it like in the context of the wisdom of the crowd and these managers you think about how their views change over time it's the sort of thing that you

know will change over the course of six or 12 or 18 months and so it's any one position change or any one incremental set of information you might not even notice and then you look back like as an example we saw Equity long short Managers really long tech and growth coming out of covid and then you know by the beginning of this year they were very long value and essentially short growth right that kind of gives you a sense it took 18 months they went from being very high beta positioned to essentially be very low

beta positioned that's pretty normal in terms of how you'd expect this to evolve so you know if you looked at every incremental change you'd probably not see something That's a that's a huge difference and then you know over longer periods of time you see more substantive changes what's sort of the max exposure this can have Can it have leverage like does it get more than ever like a hundred percent net long or short yeah I mean we're in the context of the various regulatory constraints in terms of the leverage that we can take in the

ETF it does have the option of taking leverage both you know on the long side as well As holding short positions in the portfolio through time and so we've got a set of risk controls that I think are you know institutional quality risk controls that are well within the tolerances of our sort of regulatory constraints and to make sure that you know we're not taking undue risk through the course of the process and risk controls are an important component of any systematic investment manager to make sure that you're being prudent About the strategy over time

but we do have uh leveraged and short positions in the in the portfolio give us a peek to the extent you can and you can say I can't if that's the reality but do you have future strategies that you're considering as well and like what's missing in the toolkit this is a great broad first one but what else has Bob got kicking around his head I started an unlimited with a basic idea that 2 and 20 asset Strategies are pretty great for managers and pretty terrible for investors and that's because the managers are pretty good

at generating high quality returns and also pretty good at taking it away in fees and putting it in tax and efficient structures and so having sort of spent my career across the 2 and 20 landscape and the team in in aggregate doing that in both the public side and the private side I think what we're really excited to do is to Bring to Market a set of sort of Diversified low-cost index style funds ETFs that provide the everyday investor with the types of returns and exposures that you typically get in holding 2 and 20 products

so hedge funds being the first but also private Equity Venture Capital private credit Etc and bring those sort of index style ETFs for the 220 World out out to everyone and so you know in a lot of ways in the same way that Vanguard Revolutionized you know stock and bond investing what we're trying to do is bring the same sort of Diversified low-cost index ideas here to the world of 2 and 20 and really democratize it and make it available for every investor and you launched uh the first one with our good friends the title

uh former turo so which are podcast alums listeners Michael venuto it's a good old episode we need to get back on Good People the concept that you're talking About is is really transforming some of these strategies and exposures into what we would call investable benchmarks right so the cool part about what you're doing and and we like to see this development and hopefully continues in a lot of areas is because you know you read Wall Street Journal story or all of a sudden now every hedge fund on the planet it's not necessarily comparing it to

some arbitrary Benchmark that no one can invest in and be like can you beat Bob's fund and if you can't Calpers you better have some justification for why you're paying performance fees when there's an investment Benchmark that does better so it's a cool idea and a cool concept and I think that's really like that's where this world is going like part of the world of 2 and 20 what we had was you know years of monetary fueled High returns where people didn't really carefully look at The types of fees that they were charging and increasingly

I think there's going to be a rationalization of the fees on a forward-looking basis the world of type money is going to create you know lower in general returns and it's going to create a real examination of the 700 billion dollars of fees that are being paid to two and twenty managers every day and I think what we're going to find is that the vast majority of those 220 managers aren't Worth the fees that people are paying and as you say the investable benchmarks if we can create great investable benchmarks that are you know imperfect

but capture a good portion of the composition of returns at a low fee I think what it'll do is it'll really start to create an examination of all of those fees that are out there and it'll start to create a much more frankly bifurcated Market which is there will be managers they will they are great Managers they justify the fees that they earn because of their very of their skill that's right they should exist investors should go invest in those managers that can justify their fees but the vast majority of products that don't justify their

fees I think what we're going to see is we're going to see investors you know pretty happy with investable style benchmarks particularly when they're paired with tax efficiency liquidity transparency all of those Different things I think there's going to be a lot of investors that are going to look at that and say pretty good you know in the same way index investing in stocks and bonds is pretty good you know it's not perfect you wish you could get better but it's pretty good and it's low cost if we can bring that to the world of

2 and 20 I think investors will be much much better off than they are today across the board both you know those that are investing directly in those 2 And 20 products as well as the the everyday investor that frankly doesn't really have access access to these sorts of strategies yeah so we start to wind down here look man we're gonna have to have you back on because there's um you know macros and never ending playground that we can hang out and talk in it's so easy running uh macro Twitter right there's like new how

many stats every day always very interesting Dynamics going on what's Bob's favorite data Point in the macro world that you track it could be obscure or standard but there's one that you're like man this is mine this is my my indicator or my data point is there one it really sticks out if anyone follows me on a regular basis initial claims I love initial claims it's Timely it's concrete it's actual activity I mean today it's sort of at the critical juncture of all of the different dynamics that are going on so you might Find me

every Thursday reminding people that the U.S labor market is still secularly strong after initial claims comes out it'll be a moment when that repeated uh refrain starts to change but uh that's what I'm I'm always looking at that that's an exciting part of every week for me so it's kind of two final questions one of the ones we started asking people and I think it's particularly interesting for someone like yourself is um if we Look at our peers and I have a running Twitter thread that's up to almost 20 now but the topic is what

is something I believe that the vast majority of my professional peers don't believe so not just macro peers but just investing professionals real money asset manager a real like big institutions cios what what is something Bob believes at his core the vast majority of his uh his peers do not vast majority is like three quarters Well I think that if you look at how the world manages money relative to how we've had this conversation I think the biggest difference is I believe that the the key to success is diversification and that's just all there is

to it it's all about diversification and there's so many the value of diversification diversification is certain right Edge is uncertain diversification is certain and people who esue Diversification as if it's a bad idea it's as if they're saying gravity doesn't exist I never seeks to amaze me in how many places in Asset Management people have the choice to gauge in diversification and they consistently Time After Time After Time choose differently and so like I think that's the biggest thing I think part of the challenge of picking diversification is also recognizing is having like humility to

recognize that you there's a lot you Don't know and if you don't understand a lot the most confident choice you can make is to put a bunch of vets on the table and try and create a little bit of Edge and try and diversify over that and you'll end up getting something that's pretty high probability of being pretty good and that that if you could do that you know you'll make a great business it's the reality um but at the core it's about Diversification there's even a few areas that outside the traditional set that I

still would be super interested in so when if you're ready to launch a catastrophe Bond ETF I would be the first one to invest Farmland is a little hard to do in this structure too but both of those are I would love to add a tiny position in you had a long career a lot to go we're both still youngins but what's been your most memorable investment so far Bob a good Bad in between anything uh stick out in your mind probably the most formative uh investment of my career was back when I was just

getting started in 2005 and I became very interested in trading natural gas no what did I know at 22 years old about natural gas nothing not a lick about natural gas what I did know it was volatile and there was uh and as a result you could make a lot of money um trading natural gas and I got a good Life lesson early in my career by being lulled into a series of being long natural gas getting some cold outcomes as a function of that and benefiting from that and then getting burned terribly when the

weather changed and that trading environment and recognizing that frankly I didn't have Edge trading natural gas at you know 22 or 23 years old was probably one of the best lessons I could have had I I basically like lost my first Year's bonus as a result of Trading natural gas and losing money and in particular like Levering up what I thought I had Edge and I was making money and then getting burned on the back side like how many experienced Traders have been through that cycle before and in a lot of ways I was lucky

because I got to do it you know not 10 or 15 or 20 years into my career where you know it was ruinous I got to learn that lesson early in my career where it was painful for sure but not ruinous and I think it really like it really became a core part of my day-to-day investing strategy and experience and and really sort of Drew me to ideas like diversification likes systematic processes and moving away from discretionary like I learned those lessons real early and so um losing a boatload of money on natural gas would

be the best trade of my career yeah that's like if there's a way we could uh ensure that all young Traders get Attracted to Commodities or FX I guess crypto and and meme stocks will do it in this cycle but get attracted nuke all your money learn the lessons get the scars get the stitches because that's a pretty valuable thing to look back on and I had the same thing a slightly different a sector being options in biotech but same story different characters same ending Bob this is uh awesome I've already kept you way too

long where do people go they want to Check out your new fund they want to check you out on your email list which I highly recommend your updates what's the best places yeah you can check me out on Twitter for uh all my macro hot takes and weekly updates on initial claims uh it's Bob e unlimited I handle it are pretty active there if you want to learn more about unlimited and what we're up to with the hfnd ETF or check out our blog and subscribe to a pretty regular newsletter about uh various investing Topics

it's unlimited funds.com from there you can get to all the information you you'd want to know about what we're up to awesome my man um this has been a blast thanks so much for joining us today yeah thank you so much for having me it was really uh it was really great time [Music] [Applause]