Lead-Lag Live

Paisley Nardini on Alternative Investments, Managed Futures Strategies, and Navigating Market Volatility

• Michael A. Gayed, CFA

Share episode

Ever felt overwhelmed by the sheer number of investment options, much like trying to choose from dozens of toothpaste brands? Join us for a fascinating discussion with Paisley Nardini, a seasoned CFA charterholder, as she pulls back the curtain on the world of alternative investments. Discover how Paisley's extensive experience at Simplify Asset Management, Invesco, and PIMCO equips her with unique insights into navigating market volatility and enhancing portfolio management. This episode promises to challenge your understanding of diversification and reveal how alternative strategies, particularly within ETFs, can offer a suite of new opportunities for investors.

Dive into the mechanics of managed futures where the art of trend-following takes the spotlight. Our conversation explores these complex strategies, which have historically provided robust diversification during market upheavals like the tech bubble and the global financial crisis. You'll learn how managed futures can offer S&P-like returns by adopting strategic approaches that defy conventional skepticism. Paisley also shares her thoughts on Simplify's strategic partnership with Altus Partners, which leverages cutting-edge algorithms for systematic portfolio management, highlighting the prowess of rules-based approaches in tumultuous market conditions.

Amidst rising market volatility, understanding retail investor behavior in the alternatives market has never been more critical. Our discussion highlights the significant role education plays in bridging the gap between retail and institutional investors, emphasizing Simplify’s commitment to transparency and client empowerment. Uncover how a proactive mindset is essential in protecting client capital and learn why financial advisors are increasingly turning to capital-efficient, low-correlation asset classes like managed futures. Whether you're a seasoned investor or just beginning to navigate the maze of alternative investments, this episode offers a treasure trove of insights to enhance your financial journey.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Simplify and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or

Today's sponsor is Deftform, the simplified form builder you've been waiting for. Stop using overpriced and bloated alternatives. Deftform gives you everything you need to create unlimited forms and collect unlimited responses.

Visit deftform.com and use the code LEADLAG to get 20% off the Lifetime package.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Foodies unite…with HowUdish!

It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!

Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!

HowUdish makes it simple to connect through food anywhere in the world.

So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show

Speaker 1:

I mean even myself and my personal portfolio. I think people sigh and they think back over the last 10 or 15 years, and diversification has been a thorn in everyone's side. It's detracted from equity returns. Up until a couple of years ago it was detracting from fixed income returns and so it was really dead weight in a portfolio for 10 or 15 years. We don't have to have a massive recession in order for alternatives or diversifiers to stake their place in a portfolio for 10 or 15 years. We don't have to have a massive recession in order for alternatives or diversifiers to stake their place in a portfolio. We can have these short-term bouts that keep us on track and keep us motivated. So I think increased volatility going forward, elevated stock bond valuations is really interesting and again making us excited that we're in the right space. We're going to continue to grow with the market as advisors and investors understand the importance of alts.

Speaker 2:

This conversation is sponsored by Simplify, a number of really interesting funds and products that I'm sure Paisley will get into. My name is Michael Guyad, publisher of the Lead Lag Report. Joining me here is Paisley Nardini. It's good to see another CFA charterholder, by the way, on the show, although I feel like people don't respect CFA charterholders like they used to. Is that a fair thing?

Speaker 1:

I am trying to carry the torch. I have been on the board of the CFA Society of Orange County, where I reside, for eight plus years now, and I think most people that are friends of mine or follow me on LinkedIn are probably sick of hearing about how wonderful the CFA Society and Institute is. But I agree, I think we need to probably continue to raise awareness for the credentials and you'll also see, after my name there is Kaya C-A-I-A and that's really in the wheelhouse I think of what we're talking about today is the rising tide of alternative markets and diversifiers. So either or is great in my opinion.

Speaker 2:

So, before we get into that, introduce yourself to those that are watching and listening. Who are you, what's your background, what have you done throughout your career and what are you doing at Simplify?

Speaker 1:

Yeah, absolutely so. Before I give my background, I just want to take a brief moment to share my thoughts and prayers with everyone that's affected by the LA fires. I live in Orange County. I am fine, but many of my friends have either had to evacuate or lost their homes just in the last 24 hours lost their homes just in the last 24 hours, so I hope everyone stays safe and gets the resources that they need. Definitely scary time for those in the LA area.

Speaker 1:

But my personal background, as Michael mentioned, I am at Simplify Asset Management in the capacity of portfolio manager as well as asset allocation strategist. I'll give them a little bit more background on what that means in a moment. But Simplify Asset Management, for those of you that are not familiar, launched in 2020 on the back of what was really an instrumental rule change by the SEC to allow for derivatives within ETF vehicles. There's obviously been an explosion of these innovative vehicles and strategies and ETF wrappers over the last couple of years, which I think is wonderful. It's bringing institutional caliber strategies to the mass affluent and to financial advisors to just better navigate markets, and that's really a key theme that we'll talk about today as another tool in the kit to think about how we navigate markets. So my role in particular here at Simplify is overseeing our alternative suite of strategies in a portfolio capacity as well as in a client facing. So meeting with our clients and investors to talk about the processes, positioning, attribution and really helping to make a case for these in a portfolio long term.

Speaker 1:

Prior to joining Simplify earlier in 2024, I was an Invesco for about seven years on their multi-asset strategy team as well, overseeing model development as well as launching various platforms like institutional indexing, liability-driven investing and then also acting in capacity of client portfolio responsibilities for our dynamic and tactical equity suite, client portfolio responsibilities for our dynamic and tactical equity suite. So if this sounds like a very broad background, it is. You can kind of see the navigation of my career path here. But I've also spent time at PIMCO focusing on institutional client relationships and actually got my career started behind a Bloomberg terminal as a trader and PM for fixed income portfolios, primarily the front end of the curve high quality investment grade treasury agency mortgages and munis. So very diverse background which ultimately I think just funnels nicely into the ability to have conversations with clients on how all of these various aspects of the market come together for holistic portfolio construction.

Speaker 2:

You mentioned the ETF rule and how that really got to open the floodgates for a lot of innovative new funds, because now you can implement derivatives in a much bigger way. I wonder if you think, when you look across all the new funds that have come out since that rule passed, if we're maybe at a saturation point where it seems like a lot of these innovative funds are trying to are solutions looking for a problem. I mean, I know what Simplify does is very targeted right, but it seems like even among the competition there's a lot of fluff.

Speaker 1:

Yeah, I would concur with that. I think the ability to kind of weed through the amount of products that have come to market is a really monumental task for a lot of advisors. Come to market is a really monumental task for a lot of advisors. I think in some aspects, the marketplace has been blessed with additional technology and tools to make their lives easier in regards to portfolio management and investment decision making. But, in the same token, more breadth of product. I equate it to like you go to the grocery store to buy toothpaste and like why are there 45 different kinds of toothpaste? So helping those advisors and investors sift through those options.

Speaker 1:

And I would say too I mean the pendulum always swings. I saw this too with the proliferation of interval funds back in 2017. They had more interval funds come to market, I think in 2018, than ever existed prior, and a lot of those, I think, have since wound down or closed or lost a lot of assets, and so I see this as an order for the market to make that progress. A lot of things have to come to market. We figure out as an industry what works where there's prudent ability to take risk for those more objective based outcomes. But I will not disagree with you that there's a lot of products out there that available to kind of the masses is probably not appropriate, just because investors without the right you know insight or tools don't understand how much risk or leverage is being taken.

Speaker 2:

What's funny about that statement to me is the tools that matter the most are not the analytical tools, it's simply is it going up into the right chart? I myself have made this argument, to play my own issue with clients, that I don't care how thoughtful or smart a strategy is. What closes a sale is the chart? Yes, which is unfortunate, because that's not what thoughtful investing should be about, and I give Simplify a lot of credit because I know you focus very much on getting the right kinds of investors in your funds.

Speaker 1:

Yeah, it's been difficult to just the last few years, like you said, up and to the right, from an equity beta perspective, like why fight that trend? One of my colleagues, which many of you are probably familiar with and are already following, michael Green, has done extensive work and research behind the rise of passive investing and the number one question that we often get from our clients is okay, but what? And I think the answer is do you fight the trend? And if that's your decision, right, you probably have had some headwinds the last few years.

Speaker 1:

But the way I see it is, can you ride the wave, not fight the trend, but be prudent, and that's really leaning again towards this lens of diversification. Can you keep your chips on the table, knowing full well that recent performance often drives future, or at least the look back bias? So our goal is to really equip our clients with tools to be successful and we think right now and for the foreseeable future, there's a huge opportunity in the marketplace for our clients to embed some of those gains, protect principle for their clients and then be prudent and diversify some of their risk premium beyond just equity beta. And what has, I think, already become apparent is within the fixed income world. How can you diversify some of that bond market volatility?

Speaker 2:

So I want to focus on that diversification word. But you said something which made me smile, which is recent performance actually is indicative of future results, or something along those lines, which is always funny to me, because that's what momentum is. Momentum requires past performance and the idea of the momentum factor is that it is indicative of results. It's always just funny to me that that's a disclosure we have to put out there, but it's not Exactly right.

Speaker 1:

Well, it's very much truth and I think one of the topics we were looking to dive into today is trend following. And then you just mentioned it as momentum, as a factor in thinking about the support for some of these asset prices and the continuation of those themes and trends, and it's a proven statistical and historical kind of risk premium or return premium that can be captured and whether you're investing in, you know, liquid public equity markets, that would be the momentum factor, or whether you're looking at more of the diversifiers and thinking about more like trend following and the ability to capture momentum and asset prices through liquid futures. So I very much agree that that's relevant in today's conversation All right.

Speaker 2:

So the joke about diversification is that it fails when you need it the most Yep, and that most things are really just variations of beta. So people like to feel like they're diversified, but oftentimes it's just moving off of the same risk factors. I've done studies on, for example, long short indices and long short indices on average basically track the XLP consumer staples ETF Because the net long is lower and it's basically that sector. So they consider it alternative. I would argue it's not, but I feel like we should define for the audience what true diversifiers are. The very definition of diversification to me is a portion of your portfolio that you hate, because if you hate it it's not working. If it's not working, it's not co-moving with the stuff that's working, which makes it not quality.

Speaker 1:

I would concur with that. I mean, when you say diversification, I mean even myself and my personal portfolio. I think people sigh and they think back over the last 10 or 15 years and diversification has been a thorn in everyone's side. It's detracted from equity returns. Up until a couple of years ago it was detracting from fixed income returns and so it was really dead weight in a portfolio for 10 or 15 years. I think some of those reasons as to why are starting to shift and I can talk about that, but I would say at a high level there's various layers of diversification. So I think you know there's no right or wrong answer. I always say that when I'm speaking with clients. I don't know your objectives, biases, so I don't want to make blanket statements. But I would say, from a diversification standpoint, like the first level or layer could be as simple as moving beyond equity beta, adding in factor exposure, whether it's low volatility, quality momentum, and then you can really start to get into the weeds. And I think where you were going is like the pure representation of diversification in a portfolio is something that you're probably not going to love in all markets.

Speaker 1:

We can get in, of course, to the differences between manager dispersion and some managers can provide alpha while others don't but at an asset class level, the reason you have diversifiers in your portfolio is for when you need them, and so that's where I think doing the due diligence and understanding the marketplace as to, historically, what are those asset classes or strategies that have delivered in times of stress. Managed futures is absolutely one of those. If we look back over the last 5, 10, 15, 25 years, managed futures have shown up when we need them to. That doesn't mean that in those pockets or periods where your equity beta continues to rip or bonds are working, that they're not kind of sitting over on the sidelines collecting dust. And again, that gets into finding a manager that can add attractive absolute return, even when broader market beta is trending higher.

Speaker 1:

But ultimately, to get to your question, is the definition of what is a diversifier? Beyond just showing up when you need it, meaning when we have a sell-off in equity markets or bonds underperform as they have the last two years from a statistical or risk perspective, is like looking at correlations, looking at the beta, and if you want something that's truly going to offer an alternative risk or return premium, it needs to have different sources of risk in return, and so that's where I think diversifiers show up, whether it's looking at carry, whether it's looking at commodities trend and from a correlation perspective. Something that we really pound the table on is how do we provide strategies that are uncorrelated and uncorrelated just means either low to even negative correlation and, again, managed futures as an asset class are one of the few where, irrespective of the tools you have in your strategy, for the most part the industry at large has delivered that no correlation and it has shown up when you need it in your portfolio.

Speaker 2:

All right. So, going on this kick of defining things, I think we have to define managed futures, because I get the sense that managed futures, yes, there's a trend following aspect to it, but a lot of it also has to do with the opportunity set. It's like the very definition of alts right, it's categorized as managed futures, but there's a lot of variability among the managed future strategies. So let's first define the category and then talk about the sort of different ways managed futures strategies are executed.

Speaker 1:

Yeah. So managed futures, as you alluded to, I would say high level, we think about it in the sense of it's trend following. There are signals and models that move beyond simple trend following, which I can highlight, but it's really looking at underlying daily liquid futures futures in commodity markets, interest rate markets, equity markets, fx. More recently we've seen the proliferation of Bitcoin futures. And, again, daily liquid, these are managed by CTAs, which is a commodity trading advisor, so a specialized manager and kind of a designation that's required for these. So a specialized manager and kind of a designation that's required for these.

Speaker 1:

But I think what's really important is that managed futures are a very capital efficient diversifier, and I say that because when you invest in futures, there's embedded leverage in these positions. So the ability to take both long and short positions in various futures markets across kind of those four main categories that I just outlined has the opportunity to seek different differentiated excuse me sources of risk and return that go beyond just equity beta. So these have historically been in hedge fund type structures and they still exist successfully within hedge funds that have a lot more tools. They trade across global markets. There's some things, of course, you can do outside of a pure ETF wrapper. But for the purpose, I think for the most listeners today, whether it's a 40-act fund, a mutual fund, an ETF is kind of that daily liquid futures with embedded leverage, all this collateralized by treasury bills. So there's also that component of you know, with the rates being higher, the underlying collateral of those treasury bills also provide some attractive carry to the returns as well.

Speaker 2:

And managed future strategies. Are what 100% systematic? Are there some that are blended with discretionary?

Speaker 1:

Yeah, so managed futures tend to be a rules-based or systematic strategy, thinking about kind of their origins in that hedge fund world.

Speaker 1:

I think a lot of them, like many hedge funds, have gotten the label of black box, which in a sense, I won't refute that point. I think there's a lot of things that happen from an algorithmic perspective and systematic strategies that we are either not privy to or, even if we are, we do not comprehend them because they're pretty sophisticated and complex.

Speaker 1:

But at the core of managed futures is a trend following model, and I think again not to oversimplify this, but to really just think about momentum of prices. And so if there's trends, meaning underlying, let's say, cocoa futures, which had an exceptionally strong year in 2024, which our strategy was able to take advantage of as the price of cocoa via futures markets trended higher you continually increase positions or maintain positions and then, as that signal were to revert, then the model will signal to get out of that position. I think one thing that's important to note as well, just like momentum as a factor, is that you know, as you have those corners of the market, when the trend shifts, that's when portfolios can be caught off sides and so having strategies that can adapt and be dynamic in short order. To take advantage of getting in and out of those positions is also very important.

Speaker 2:

So I'm looking at the CTA ETF that Simplify has as future side, looking at the holdings and I see that looks like everything's either soft commodities or oil on the future side, long and short positions. Talk to me about how that fund is first of all deciding what to go long and what to go short. I understand everybody says trend following and it sounds good, but it's like I always go back to that line. People say the trend is your friend until it ends. Nobody ever tells you when it ends because it's hard to actually define sometimes right, is it actually ending or is it a whipsaw?

Speaker 1:

So let's talk about sort of the construction of that fund. Yeah, so I would say, first and foremost, at the core of all trend following is a trend signal. So, again, going back to the momentum of asset prices and I think I've beaten the dead horse on kind of the philosophy behind that I would say, specific to CTA as a strategy and how we differentiate is thinking about what other signals can inform our sizing and risk-taking beyond just pure trend. Because, to your point, when we see these shoulders of the market and we see these trends revert, how are we quickly identifying that the trend is ending or the trend is beginning to get in and out? And that's where we have multi-layer of signals that inform our positioning on a daily basis, one of which is what's kind of, in a sense, a valuation model we call it a fundamental reversion and that allows us to also look at the valuations of these asset classes to understand maybe the trend is signaling all in pedal to the metal, but maybe this trend is kind of long in the tooth and so our model might go in and cut some of those tails, whether they're long positions or short positions, to more appropriately size them based on some of those other kind of additional factors and signals. Another important signal and I'll mention why here in a moment is as it relates to interest rate futures. And so when we're looking at the shape of the curve and the opportunity from an interest rate perspective, an additional signal that our model leverages is one that we call carry.

Speaker 1:

For much of 2024, the systematic trend, industry or the market at large, was long interest rates with the expectation that interest rates were going to decline.

Speaker 1:

I think a lot has transpired over the last few months and we saw that that exactly was not the case.

Speaker 1:

We did have 100 bps of rate cuts, of course, but there's been quite a bit of a backup in interest rates over the last few months as we digest some of the stickier inflation.

Speaker 1:

So what that's meant is that a lot of these trend following strategies were caught off sides by really kind of piling in and being long duration. Our model, because it was looking at the underlying funding source or the shape of the curve, because that curve was inverted, our carry signal was saying don't go long duration here, you should be short duration. You're not being compensated based on the underlying funding source, and so that's another way that our model offers kind of more, that hedge fund-esque institutional type, sophisticated modeling beyond, just like the pure systematic trend, which again can provide core alpha in the industry, but it won't protect in some of those kind of corners of the market or as trends are shifting, and it doesn't account for some of the logistics and kind of funding sources because again these are funded by treasury bill collateral and so as you're investing in those positions, that differential has to make sense.

Speaker 2:

I do find it interesting that CTA was up, looks like 24% in 2024. I mean right, certainly. I mean you know S&P like returns without the opposite same holdings and doing very different strategic, which I think is kind of worth kind of exploring a little bit, because I think the I think the narrative out there is that when you think about alternatives, there are alternatives to making money, cause most alternatives have sucked. So it's basically the last decade or so. Take me through some scenario analysis. I remember in 2022, I that some of these managed futures strategies funds that really killed it were very much long dollar and everything around that theme, and that was obviously a bear market. But take me through some different scenarios under which managed futures tends to, as a strategy, do well on its own, nevermind what the S&P is doing and environments where managed futures tend to struggle with it.

Speaker 1:

Yeah, absolutely. So. I'm glad that you asked that question because I think there's this misconception in the post GFC era where managed futures kind of sat idle. And that goes back to one of the opening comments that you made is, you know, diversification puts a bad taste in a lot of people's mouth because it just historically hasn't showed up. But we're also again that recency bias of like equity beta has dominated portfolio returns for the last 15 years.

Speaker 1:

So when do managed futures, when does trend following, actually deliver? And this is going to be I'll make my comments at the asset class level and then I can speak to our strategy. But I think it's really important for people to understand that managed futures, as an asset class, have delivered when they're expected to since 2000. I think that's some of the longest look back at an index level for the industry. So this isn't me cherry picking a date, but going back to like 1999, when the index started and I'm referencing the SOC Gen CTA index is we've had really four events, I think, that were a moment for managed futures to shine and they showed up. Of course, the first one is the tech bubble and, relative to stocks and bonds, managed futures were up in that period with the tech bubble, of almost 50% 5-0. Bonds were also up, not as much. I think they were up about 25% and, as we know, equities were down quite a bit. So that's the first instance.

Speaker 1:

Looking at the GFC era, managed futures showed up again. So, as we think about the global financial crisis, again managed futures up, almost 20%. Bonds were up a little bit, added a bit of that diversification Equities, of course, down a lot. Added a bit of that diversification equities, of course, down a lot. More recently, we had the COVID sell off. That was quite short lived, but again managed futures showed up, especially relative to stocks and bonds. And then, more recently, 2022. And I think 2022 was really eye opening Because it's been a while since bonds have not been the portfolio diversifier and that's where I think going forward.

Speaker 1:

Looking at correlations, today we saw that stock bond correlation move from negative to positive, with the most recent rate increases in 2022. And it's remained elevated since. So are bonds providing and I've posted quite a bit about this on LinkedIn and in client conversations is are bonds delivering? They haven't.

Speaker 1:

That's not to say that we won't have a traditional recession in 2025 and bonds won't show up from a duration perspective, but there's a lot of factors at play that again just warrant the use of alternative sources of diversification in the portfolio, warrant the use of alternative sources of diversification in the portfolio.

Speaker 1:

And then I'll also say, maybe more specifically to our strategy, in particular CTA is that in a year like 2024, which you alluded to the ability to not only show up from a diversification standpoint and I say that because our strategy as the market at large had low and even no correlation to equities and fixed income that somehow provided equity like returns. And that's where I think you get the both of best worlds, in the sense that it's a hedge that you get paid to own, and that's how we look at it is. It's sitting there waiting for those major events where the industry is kind of like locked down, liquidity dries up, equities sell off I need my diversifier, Managed futures play out, but then if you can have a manager also deliver when times are okay and your equities continue to grind higher to provide equity like returns with negative correlation to equities, it's really a home run from a portfolio diversification standpoint.

Speaker 2:

And take me through how the mechanics of the fund work in terms of is there somebody pulling the trigger? Is it purely automated? How is the actual execution of the long and short positions done?

Speaker 1:

Yeah, great question. So Simplify has many strategies that are fully run in-house. Where we think that someone is already doing something better or can do better, we partner with outside advisors. So our Managed Futures strategy is an example of that where we've partnered with a futures advisor who is based out of the UK by the name of Altus Partners, who has been around since the early 2000s, won many awards in the hedge fund space and I alluded to managed futures kind of coming from that hedge fund world.

Speaker 1:

Altus Partners still runs a multi-asset class hedge fund version using the exact same signals that we're delivering in CTA. So really, again, sophisticated algorithm that's running their hedge fund money as well, which is really impressive considering we're giving it in a daily liquid vehicle at much lower cost. But Altus Partners, as our future advisor, is the brains behind the algorithm from the model perspective that determines the positioning on a daily basis. They're responsible for the signals, they're responsible for the sizing of the positions and on a daily basis they are providing us with a trade file and Simplify is executing on that, managing the actual portfolio as well as the distribution of the ETF. So that's a relationship that we have and, again, entirely rules-based, and I share that because neither Altus Partners nor Simplify are intervening.

Speaker 1:

So if the model is telling us, you know to be long, cattle feeder, which we are currently we have been for the last few weeks we don't have anyone on either side of the table saying, yeah, well, maybe we should, you know, up our position in Cocoa at the expense of cattle feeder. It's entirely systematic and rules-based, so I think that also helps. When just the client conversations I've had, clients like to know what's going on in their portfolios and they like to know that they're not going to wake up to any surprises. From a positioning standpoint and I think, as you have active management and this is no diss on active it definitely serves a role in portfolios in many asset classes. But there's something nice about having a rules-based process, whether it's in your equity portfolio, bonds through factor investing or even in these rules-based trend following is the model is driving the positioning and you're removing that human emotion component. So hopefully that answers the question.

Speaker 2:

And typically, when you look at what advisors and allocators do, are they putting it at a small percentage 5%, 10%, 15%. I mean sizing, non-investment advice. Just curious what other people have said about this. In general, from an asset allocation perspective, you want a larger portion of your portfolio in alternatives towards the tail end of a tired bull market which maybe we're at now right. So what's typically the range of weightings you see?

Speaker 1:

Yeah, and I think your last point is really important is where we are in the cycle and not to say that these shouldn't have a strategic allocation. I'll be clear they absolutely should and I'm happy to give you multiple reasons why. But we know there's Advisors have to be thinking about their clients and their unique objectives and income needs. So we understand that sometimes these allocations come in more of a market timing perspective and I would say I have not been in a single client conversation in the last three months where the number one concern isn't where we are in the cycle today elevated valuations and equity. Thinking about where credit spreads are today. I look at it as keeping your chips on the table but also being prudent about where and how you're taking risks. So by no means, and I'm sure there's a couple of people out there that are entirely moving to cash right now. I think people are still a little bit constructive. We haven't seen any massive cracks in the system to show us otherwise immediately. But how can you start thinking about chipping away and adding some of those diversifiers? And, like I said, every conversation I've had in the last few months has been geared towards like what can we do to move that needle. And then the next question is great if we've determined that diversifiers, alternatives, or maybe managed futures in particular, are that allocation? How much are we putting in our portfolio and how are we funding it right? What's the underlying source of capital that we're going to have to pull away from something if we want to allocate to this space? And I say it's going to be dependent, of course, on do you have income needs, right, because some strategies in the alternative space aren't providing income.

Speaker 1:

Simplify focuses on making sure that we balance, that we have a lot of income producing strategies, but I would say, just to give you a rough number here, anything from 10% to 20%, I think, is enough to make the allocation worthwhile without taking undue risk. If you look at it from a pure optimization, like a risk optimizer perspective, though, because managed futures are so capital efficient because they have low and even negative correlation to stocks and bonds, an optimizer is going to say put 40% of your portfolio into managed futures. That, of course, is also looking at some of the recency or look back bias as well, but I know in practice most advisors are not making those types of allocation decisions. So I would say again anywhere from 10 to 20% of a portfolio I think is ideal. I would say just some recent statistics is most financial advisors in the high net worth space. I think right now the average allocation to alts is in the high single digits. But any survey that you look at, that's done for the advisor level high net worth, even quasi-institutional all of them have plans to allocate to alternatives and diversifiers over the next cycle and I think this goes back to the advancement of the industry from a product perspective and I can just speak to.

Speaker 1:

I think what we would love to see is managed futures. As an asset class grow. I think we need to shine a light again on managed futures. Have delivered where they're expecting to deliver in the next downturn? We have, but it's finding a manager that can deliver for you in between those market events as well. And what's really important is, as the asset class grows, advisors, institutional investors, start to see the merits of this and again, if we can grow the pie, we view it as just getting a larger slice of that pie. And just in the last couple of weeks here we've seen some of the big players, like BlackRock, like my prior employer, invesco, filing to launch a managed futures ETF. So if you don't believe me, don't take my word for it, but the importance of this asset class in the next cycle is being recognized by some of the biggest players in the industry and they're gearing up to gather assets to take advantage of that trend.

Speaker 2:

I'm curious at Simplify, given just the sheer number of products you have and thought leaders like you as part of the firm. Is there sort of a house view on markets currently and by markets I'm really talking about indexation. I mean, I know Mike Green well over the years and I've interviewed him talking about the passive side of things. But I mean, I know Mike Green well over the years and I've interviewed him talking about the passive side of things. But is there a sense among the major players of Simplify that now actually might be a really good time for Simplify to turn up the noise, because maybe we are at the end or tail end of a bull market which is a lot of those products that you offer look even more appealing.

Speaker 1:

Yeah, I would say to answer your first question on a house view, I would say a lot of us have similar thoughts, but I think one thing we really try to emphasize here is difference in opinion, and I think that if if you've spoken to Mike Green or you've seen him and Harley Bassman on their monthly podcast kiss, which is keeping it simple, our next episode's tomorrow actually, so tune in for that, but we really love difference in opinion and the conflict that can create to help think about better investment decisions. So I wouldn't say there's necessarily a house view from the firm level, but I think what we're really excited about at Simplify broadly to your point is this rising tide in the alternative space. The reason that we launched back in 2020, and that was really kind of early, I would say with that rule change is that we saw where the markets are headed. We've been talking about alternatives for several years, whether it be private markets, whether it be liquid alternatives, and I think that as we capture that, we see the next year, two years, five years, as just continuation of this recent trend, and so I would say we're really excited and we see plenty of reasons why I mean elevated stock bond correlations. I think, was really what opened the door for additional product development and conversations and the understanding that the past may not look like the future. Bonds haven't delivered over the last two years. Might they deliver, sure, at some point again. Yes, they will, but do you want to sit around and wait for that or do you want to be proactive and think about how to protect your client's capital today? And so that's a big trend that we're excited about that.

Speaker 1:

I think we all agree that there's a place and a growing need for alternatives in the portfolio. I do also think that there's likely a reasonable house view around just elevated volatility in the marketplace. I think, as interest rates increased in the last few years, really kind of removing some of that liquidity in the market and looking at elevated levels of bond volatility. We've seen, obviously, elevated levels of stock volatility with the August spike we saw it in December again, as the Fed continues to pivot, and so it continued bouts of the short term volatility and what that means for portfolios, and again, we don't have to have a massive recession in order for alternatives or diversifiers to stake their place in a portfolio. We can have these short term bouts that keep us on track and keep us motivated. So I think increased volatility going forward elevated stock bond valuations is really interesting and again making us excited that we're in the right space. We're going to continue to grow with the market as advisors and investors understand the importance of alts.

Speaker 2:

You said something interesting. You said well, you say a lot of things that are interesting. You said something particularly interesting. You said To protect your client's capital, which means maybe subconsciously or purposely. The assumption is that this way of thinking is much more driven towards advisors, asset allocators, fiduciaries. I'm curious what's the reception by retail? Let's face it, you know retail has driven a lot of the market movements. We know retail has gone bonkers on levered funds. Does that message resonate at all to that audience?

Speaker 1:

Message being the need for diversifiers.

Speaker 2:

Yeah, and the idea of protecting capital.

Speaker 1:

Got it. I think back to your earlier comment of up and to the right, I think, as you go from sovereign wealth fund, large public pension, down to high net worth to advisor, all the way down to, you know, the retail investor, people like me managing my personal account, technically, I think we care less about how we get there, and I don't. I'm not talking about path dependency, I'm talking about the tools and the kit. Right, there's less of, there's no policy statements, there's no risk constraints, tracking error, so I think that's a little bit of even more the hindsight bias, whereas I think you're talking to advisors and institutional investors. I think there's a lot more proactiveness in thinking about the need to protect capital in advance. I think there's a lot more emotion at the retail level, which, again, I'm not saying anything that's surprising to anyone listening in right now. But I think there's a lot more emotion at the retail level, which, again, I'm not saying anything that's surprising to anyone listening in right now. But I think the proliferation of product is helping the retail investor understand the menu of options, the breadth and depth of their investment choices.

Speaker 1:

Where there's a massive gap and I don't know if that will change anytime soon is on the education if that will change anytime soon is on the education, and so I think there is a bit of I don't want to say a liability, but an understanding that, as we bring these strategies and products to market, we need to make sure that messaging is clear and there's use cases, and I think that's something that Simplify has done from the inception of our firm back in 2020 is a huge component around education how can we help investors, whether they're retail or institutional, understand the place in a portfolio? Historically, how has this behaved? When should it expect to perform? When might it not? So that education component, I think, is really prudent and, from a fiduciary lens, if you're launching product but you're not educating the marketplace on how to use it and when to use these strategies, I think that's where some of our peers might be falling short.

Speaker 2:

It's certainly cliche to say that the thing everybody expects is volatility, especially under the new administration. Volatility, of course, doesn't necessarily mean you have to have a bear market in the S&P. It just means there's going to be more price gyrations. I love ETFs, but I will say that I think ETFs are an interesting vehicle from a temptation perspective to get people to overtrade. Yeah Right.

Speaker 2:

So there are a lot of studies, for example, that look at an S&P 500 mutual fund versus an S&P 500 ETF. Guess what? The investor returns are better in the mutual fund than the ETF, even though they're both the S&P 500, because mutual funds priced once a day, etfs priced second by second. You have that urge, right. If you're retail, if you're an advisor, an allocator, maybe not, but I will tell you from my own experience I think a lot of advisors are just hyped up retail in many ways too. So when there's these periods, whether it's for CTA or other funds that SimpleLife offers, and there's a lot of volatility, and advisors are calling you up and you're telling them well, it's rules-based, it's a model, is that a hard answer for people to accept in terms of thinking about? Should they stick with it when they have that temptation to maybe sell at the wrong time.

Speaker 1:

Yeah, I think absolutely, and I can even share in my prior life at Invesco overseeing our tactical equity strategies, which were entirely rules-based because they were codified into an index. Many of the new strategies that are available, even if they're rules-based, may be in an active ETF. So there is the ability to enhance and evolve the strategies, whether it's the underlying markets that you're trading in, the signals, the time period any of those factors can be enhanced at any given moment, whereas many of the index-based strategies, again codified into an index, there's not the ability to move the needle and I think I had a lot of really difficult conversations with clients when those strategies were not behaving in a way that was acceptable, even though they were behaving as expected. Given the rules and given the marketplace, you have an expectation for something and if that deviates, that's when clients get upset. So it is really easy, to your point, with really I mean even in the mutual fund space to get in and out of these vehicles on a daily basis.

Speaker 1:

I think again, this goes back to the education component of like upfront, helping your clients understand how they should behave when they will behave as expected. But unfortunately, and to your point, in the ETF world we don't have visibility into a lot of our underlying clients because, as again, we as retail investors can go on to Schwab account and buy any of these ETFs and the investment manager won't even know that we hold them. So there is a disconnect. And again, I think that as the marketplace grows and the product availability increases alongside that, as the marketplace grows and the product availability increases alongside that, it just stresses even more the importance of having an advisor help with some of this investment management decision. But again, I mean, we've also seen a big uptake in retail and retail investors trading options. I would say there's probably a lot more risk and misunderstanding in that space than some of these diversified ETFs. But yeah, I think we're on the same page.

Speaker 2:

Paisley for those who want to learn more about managed futures generally, want to learn more about CTA and, in general, simplify, talk about sort of the different avenues to which people can do just that and make a pitch for maybe another fund that you think could be interesting to pair against CTA.

Speaker 1:

So I will start by saying our website, simplifyus, has endless resources in regards to collateral research, case studies, education. It's not just our funds, but I think what's also really unique is that almost on every fund page, if you're on a website, you'll see a video with my colleagues, my peers, describing what these strategies are, how they should behave, how they can be used. So, again, we really try to equip our investors with information so that they make the right decision. I think one, and maybe I'll mention as well you're more than welcome to reach out to me, find me. You can go to our website. A lot of my colleagues are all over socials and LinkedIn. We are readily available and pride ourselves on responding to all inquiries we get. So please reach out. We'd love to engage.

Speaker 1:

And then maybe another pitch beyond CTA something, maybe two things. We have a strategy which is hedged equity, heqt. We look at that relative to a 60-40 portfolio, and the reason I mentioned this is it's one of our flagship products. It has delivered really strong performance. And again, thinking about where we are in the cycle, thinking about how you can stay in the market, keep your chips on the table but dial back a bit of risk, heqt, hedged equity would be a great solution for investors that are looking for that type of exposure.

Speaker 1:

And then, on the other end of the spectrum, I would say cash is still king for a lot of people. I think we see really meaningful allocations to money market funds and cash-like vehicles, with just uncertainty around bond market volatility and with rates still being somewhat elevated, and so if there's a way to squeeze more out of your cash, I think many of our clients in the marketplace would be interested, and we have a solution with ticker B-U-C-K buck, and that strategy really looks to provide cash-like returns. So cash plus 2% to 3% through an options overlay where we're writing options on treasuries, so really attractive opportunities. That's just a glimmer, but I would say, if you're looking for enhanced income, if you're looking for diversifiers, simplify has a strong shelf of over 35 ETFs and we're now about $6.2 billion, and I think if we're talking to each other here in a year from now, with just where we are in the cycle and the recent tailwinds we've seen, from an AUM perspective, I think we'll be even a bigger player in the market.

Speaker 2:

Appreciate those that watch this live conversation. Again, this is a conversation sponsored by Simplify. Make sure you learn more about Simplify's products at Simplifyus and hopefully I'll see you all in the next episode of Needlag Live. Thank you, paisley, appreciate it. Thanks, michael, cheers everybody.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host