Trend ETFs, CTA Replication, and the Fall of 60/40 | Systematic Investor | Ep.376

Episode Overview

• The conversation explores the significant shift of private wealth into alternative investments, highlighted by a Goldman Sachs report indicating trillions of dollars are set to flow into hedge funds.
• It delves into the structural evolution of accessing systematic strategies like managed futures, moving from traditional funds to more flexible indices and derivative-based products.
• The discussion emphasizes the critical need for better communication and narrative, proposing a shift from complex "black box" explanations to more intuitive metaphors like a "crystal ball."
• The future of the asset management industry is framed around the concept of alpha-beta separation, where investors can access cheap core exposure and selectively pay for specialized manager skill.

Key Concepts

• Private Wealth Inflow: A major market trend where trillions of dollars from high-net-worth individuals are being reallocated from traditional portfolios into hedge funds and alternative investments.
• Evolution of Access: The shift in how managed futures are offered, moving beyond mutual funds to include index-based products and derivative structures like swaps, allowing for more customized and efficient access for allocators.
• The "Black Box" vs. "Crystal Ball" Narrative: The challenge of explaining complex strategies. The industry often uses defensive, technical "black box" language, while a more effective approach is a "crystal ball" metaphor, framing the strategy as a system that detects and acts on major market shifts.
• Alpha-Beta Separation: The idea that investors can increasingly access the core, systematic return of a strategy (the "beta") through low-cost, index-like vehicles. This allows them to then focus on paying for true, differentiated skill from specialized managers (the "alpha").
• "All-In Cost" Analysis: The importance of looking beyond a product's stated management fee or expense ratio to understand the total cost of ownership, which can include hidden expenses like swap financing and transaction costs.
• Source of Trend Following Alpha: The strategy's ability to profit from the structural inertia of large institutional models and traditional 60/40 portfolios, which are often slow to adapt to significant changes in market direction.

Quotes

• At 1:49 - "Thanksgiving is my favorite holiday. I mean, it's, it's an opportunity to sit back and just take a break from everything and just think about all the things you could be grateful for." - Andrew Beer explains why Thanksgiving is his favorite holiday, centering on the theme of gratitude.
• At 2:32 - "You've got a generation of people who are getting excited about politics for the first time." - Andrew Beer reflects on the positive energy he observed during a Thanksgiving dinner, noting a rise in political engagement among a younger generation.
• At 3:31 - "Rich people have trillions of dollars they want to give to hedge funds." - Niels Kaastrup-Larsen quotes the title of an article based on a Goldman Sachs report, introducing a major theme of the episode.
• At 26:47 - "The long-term vision for what we did was to actually have an index around the strategy so that somebody building a model for their clients could have two decades of data and say what would have been like if I invested in it." - Andrew Beer explains the rationale behind creating an index for their strategy, providing a reliable data history for asset allocators.
• At 27:42 - "You can also access it through a swap. So you don't have to actually hire us as a sub-advisor. You can go to SocGen or your favorite bank and ask them to build a derivative around it." - Andrew Beer describes how creating an index has enabled more flexible, customized access for institutional investors.
• At 31:26 - "I don't want to make it sound like this is a low-cost version of DBMF. It's not, right? Because there are other costs, it's just that they're not reported when you use swaps." - Niels Kaastrup-Larsen clarifies that investors need to be aware of other embedded costs to make a true comparison between products.
• At 46:25 - "Every now and then, it's contrarian, early, and right in a big way." - Andrew Beer distills the core value proposition of a successful trend-following strategy.
• At 47:55 - "I think the way to talk about the strategy is not to talk about it as a black box, but to talk about it as a crystal ball." - Andrew Beer proposes a new metaphor to explain trend following's value to a broader audience.
• At 55:20 - "It's all of us against them. And 'them' is every institutional model that when the world changes is not going to change. It's every 60/40 portfolio that was dialing up their exposure to bonds going into 2022." - Andrew Beer frames the source of trend following alpha as capitalizing on the slow-moving nature of traditional portfolios.
• At 1:02:13 - "The evolution of the space is an alpha-beta separation... you'll be able to get more comfortable taking a bet on AQR who has been... very different from what anybody else is doing." - Andrew Beer argues that as investors gain access to cheap trend "beta," they will be more willing to selectively pay for differentiated "alpha" strategies.

Takeaways

• Reframe complex investment strategies using simple, powerful metaphors to improve client understanding and adoption.
• When evaluating investment products, especially those using derivatives, conduct a thorough "all-in cost" analysis that goes beyond the headline expense ratio.
• Structure portfolios by separating core strategy exposure (beta) obtained through low-cost vehicles from specialized manager skill (alpha), for which you can selectively pay a premium.
• Position your advisory practice or investment portfolio to capitalize on the significant, ongoing flow of capital from private wealth into the alternative investment space.
• Explore flexible, modern investment structures like indices and swaps for more efficient and customized implementation of strategies, rather than relying solely on traditional funds.
• Justify holding systematic, trend-following strategies by understanding their value comes from capitalizing on the structural inertia of traditional portfolios during major market shifts.