Finding Alpha in the Strait of Chaos ft. Andrew Beer | Systematic Investor | Ep.395

Summary

• Managed Futures: The guest highlights strong recent performance of managed futures and their role as diversifiers, noting broad gains despite volatile macro conditions.
• Trend Following: Detailed discussion of how trend models handled rapid reversals in March, with differences in speed and diversification shaping outcomes across managers.
• CTA ETFs: Strong advocacy for CTA ETFs as efficient access vehicles, citing fee advantages, transparency, tax considerations, and broad growth in the category.
• Replication Strategies: The guest pitches replication as a robust, simpler implementation that captures core CTA signals while reducing trading frictions and costs.
• QIS Products: He contrasts QIS indices with CTAs, flagging selection bias, sharp ratio decay from backtests to live performance, and wide dispersion that can challenge allocators.
• Commodity Trends: Gold’s sharp rally and partial reversal, plus rising crude exposure, were central drivers; portfolios adjusted risk as energy and metals whipsawed.
• Geopolitical Risk: Middle East headlines drove cross-asset volatility, with ceasefire news whipsawing positions and underscoring a wide range of potential market outcomes.
• AI Efficiency: AI is seen as a powerful operational enhancer—coding, reconciliation, and research support—though human judgment and trust remain essential in client relationships.

Transcript

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, [music] and the experiences that shaped how they see the world. No noise, no shortcuts, [music] just real conversations to help you think better and invest with confidence. [music] Welcome or welcome back to this week's edition of the systematic investor series with Andrew Beer and I, Neils Castro Lassen, where each week we take the pulse of the global market through the lens of a rulesbased investor. Andrew, it is wonderful as always to have you back this week on the podcast. How are you doing? >> I'm great, thank you. Thank you for uh uh thank you for having me back as always. I'm thrilled to be here. >> Absolutely. Absolutely. It's always good uh to have you on and give some perspective on on your side of of our industry, so to speak. Um before we get into the topics, uh you brought along quite a few. Um so it will be um a fun conversation today, no doubt. Um you know, I like to just ask you a little bit about what's been on your radar. um not necessarily anything we're going to talk about today, but just what's come across your radar uh in the last few weeks since we last spoke. Um anything in particular springs to mind? I I think my radar is consumed by trying to figure out what's going on on the geopolitical front. [laughter] So like the entire radar screen uh at at midnight at 2:30 in the morning um I find it very unsettling um where we are. Um, it it it reminds me in a sense of a little bit after what what it felt like in 9/11 in the US where you just don't know what could happen next and it could be a lot more devastating than people have been thinking about. And so, look, I I hope I'm wrong, but you know, the things I think about are we've had somebody who for 40 years has been thinking about how do we inflict damage on soft targets basically if if it came to that. And um it it just it just puts me back when people were thinking about poisoning water supplies and uh and now we've got AI and and you know whatever bioweapons and we have you know radioactive file material that's and and uh you know I just I just worry that there's something out there like what 911 was for a New Yorker and for an American and for everything else was was God somebody knew us so much better than we did that you know that somebody with a box cutter could take over an airplane and everybody in the airplane is thinking, you know, if I try to challenge it, my downside is I'm going to be cut and that's terrible. And because the base case is that we're going to land on a tarmac and somebody's going to make a political speech or or or demand asylum or something like that. And then what happened was so catastrophic and so shocking. Um and uh and it just feels like we've opened a Pandora's box that we don't really know what what what the parameters are. Again, I I I hope I'm wrong on all of it, but that's been on my mind. You know, >> I'm sure you most people listening to us today will probably say the same thing. Um, you touch actually on things that I had put down as as on my radar as well. You know what feels different to me about this particular crisis and not just necessarily the last few weeks but just generally what's been going on the last uh few years different to what you and I and many others experienced in the great financial crisis even to some extent um uh the uh pandemic um and of course previous crisis. All of those more or less could be fixed by the Federal Reserve coming in with a big bazooka or you know a fiscal package uh and we would be off to the races again. This one feels very different. This is this is about ideology, right? And I think that this is why in my opinion it's not going to go away. And it literally is a completely different regime we're in and and uh and and really all investors should should pay attention to that if if they're thinking about their financial health. That that's what it feels like to me. Um but I agree with you. It's obviously exhausting to try and and follow all of that. So >> I mean I mean and to me it feels like we've started something. It's just we're going to be talking about this for for 20 years. Whatever you think of Trump, um, good or bad, I think one of the things that's fascinating about him is that his whole life has been about, uh, people will always come back to the table or new people will come to the table if there's money involved in such a transaction involved. I mean, and and so he's kind of taken this idea that you can negotiate in a very very very tough way. You'll never alienate everybody so much because as long as there's money, they'll come back. Um, and he's kind of applied this now in a geopolitical context, you know, where you can threaten to invade Greenland, you can threaten to invade Canada, you can do all these different things that are so outside the scope of the normal proprieties of, you know, the kind of like geopolitical intellencia. And and when this started to happen, there was I just occasionally you like read that one sentence and it kind of lands with you. And it was a one-s sentence thing that basically said in a war, the other side has a vote. And so if you think about liberation day, every counter response to it was basically giving him an opportunity to come back to the table if he wanted. He could come, he could decide when to deescalate. And uh and I just remember reading that and thinking maybe this is as you say for ideological reasons because their incentive structure of this regime as it stands is very very different. that maybe that kind of this is a this is a scenario where that with that transactional mindset um will have these grave unintended consequences. Now that being said, if a month from now Iran has given up their file material and you know there's some negotiated solutions, everyone will think Trump is Bismar like so so it is you know it just and we'll talk about in the markets. I mean just the problem is the range of outcomes is not like between you know four and six. It's between zero and 10 and and so the markets are whipsawing back and forth trying to figure out what the hell all this means. >> It's interesting what you point out about the whole kind of tactics and and how essentially it's to a large degree about uh you know human behavior right and which is exactly what we talk about. Um, and you're right, we'll probably maybe we will in 20 years still be talking about um these kind of issues. Um, but that at least makes it two things we're going to be talking about because we'll also be talking about CTAs and trend following in 20 years. Um, for sure. Um, but you touch on another thing uh which I also find frightening uh to be frank and that's AI and and what's happening in in that space. I I um I recently traveled uh um on a long journey and I was listening to a uh to one of the new newer uh AI books uh about Sam Oldman uh and how uh maybe a different side to him uh described in this book. I forget the name but it's all about the empires that these firms are building. Now then this just this week I came across a story um could be in Bloomberg or maybe it was linked from another uh source but it was about this guy who on his own the only other employee I think he he hired um later on was uh his brother he's a 41-year-old uh guy from Los Angeles and in a relatively short space of time with the use of AI he has built a company that this year, I think it is, is estimated to do $1.8 billion >> in in in revenue. And he's one guy and his brother. And so that's kind of interesting and and and optimistic. Um, so I wanted to, so I wanted to ask you, um, is there a technology, could be AI of course, but is there a technology or a gadget, but not your iPhone or your whatever phone you use that that really has become sort of part of your life that you really would not want to give up again? Is there something that really makes your life great >> on the technology side? Yeah, technology, gadget, whatever we define it as. >> So, so it's funny. I mean, I I'm I of the view that social media and stuff has actually destroyed a generation of minds. Um, and uh, so I'm actually going the other direction uh, in that >> I am all about paper books. Um, I am totally addicted to peeking at my iPhone, particularly during periods like this, because, you know, I need to know I really need to know at at 10:00 at night New York [laughter] time what's been happening to the oil markets. There's absolutely nothing I can do about it, but it's it's compulsive. Um, >> and I have a 4 and a halfyear-old and you know, we are trying to raise him basically in the 19th century. Um, so you know, like you know, avoid that stuff as long as possible. Let his brain develop as it should. I think, you know, back to the question about AI, you know, as a firm, we see extraordinary potential in a few ways. Not in terms of how it impacts our underlying investment strategy, but in terms of just efficiency. I mean, like I think about it. You've got these people who have spent are spending hundreds and hundreds of billions of dollars to create tools that would cost us millions or tens of millions of dollars to build on our own that they're basically giving us for like $20 a month, you know, or or like it is it is and and so my partner who's um I mean if there's if if one of the two of us needs to get run over by a bus, like I would throw him out of the way and get me put me myself in front of it because he's the one who who kind of manages all all the business um and and he's extraordinarily capable techn technologically and so so you know we have a team of people who is very very deep into AI figuring out what it can do for us from an efficiency perspective as a business from from programming and trade reconciliation etc and and it it is extraordinarily powerful um >> you know on my end my bet is that I will not be made obsolete because a human human contact and being able read the you know read the whites of people's eyes when you're talking to them trust you know these very very very human elements of it will coexist with that um but uh but I think it's rather than saying there are things that we don't need or need I think it's all changing >> and and I think like if if I could get an AI agent who I could just say to it you know can you look through all my emails and find that email I think it was from you know 2023 where I sent it to somebody can you go like dig through everything and see if you can find it and and tell me if this is what I said. I would love that. >> That would be a huge improvement in my life. >> Yeah. No, I agree. So, I was I was driving um in the last couple of hours. I had a a short drive to do and I was listening to the radio and um since I'm in Denmark today, um it was Danish radio and they had a Danish journalist living in China >> and they were talking about technology and how China is so far ahead in many ways. Um, and he was he was saying that he had a Chinese phone and a Danish phone. And his Chinese phone got got, you know, damaged. So, he didn't have it with him for 3 days. >> Mhm. >> He could do nothing. He said he could do he could not even order a cup of coffee. Without your phone, you're nothing. And of course, in one way, they were talking about, oh, this is this is so convenient, right? Every you can do everything on your phone. And I was thinking, sure, but you're being watched every single move you do, even when you buy a coffee, even where that coffee gets delivered, uh, is being logged somewhere. Um, so, um, yeah, I have mixed feelings. I I of course technology is wonderful. I wouldn't have been able to do a podcast without technology and efficiency and all of those stuff, but um, it is interesting. Anyways, by the way, the last thing on my radar was yesterday, I don't know if you watch this movie. I rarely go to the movies. Um, but I did yesterday with my son and we watched a new movie kit that came out called Project Hail Mary with Ryan Gosling. Have you seen it? >> I I've heard of it. I've actually not seen a I've seen one movie in like six years. Um, so it's it's uh other than seeing it pop up in a couple places, I don't don't know anything about it. >> Yeah. Well, the message was fine. It's all about maybe looking after others before we look after ourselves. That was fine. But I have to say it was a little bit of a long movie when it all happens pretty much um in a confined um space shuttle. Um so with one actor and a and a and a and an alien so to speak. Anyways, that was a bit of a side step. Trend following, it's been interesting. We're going to talk about this of course. Um my own trend barometer yesterday uh closed at 48 which indicates kind of a neutral environment right now. I think that's fair. Um because I really don't think there's much direction. Um one day markets go up, next day they go down pretty much depending on whatever comes out of the Middle East. So I think a a neutral setting is fair. Um the indices that I um have data for is as of Tuesday. So without yesterday um and I'll come to yesterday in a second. Um but um what's interesting to me uh looking from um semi outside um when I look at the space as a whole will be to see for example how speed of models uh will differentiate returns uh for example you know have managers started to go short equities are they still long and so on and so forth. Um, I think that could be a little bit of a decisive uh moment. Um, historically, and I when I say historically, I'm thinking about the last three years. Um, being slow has certainly in these situations been useful. Um, doesn't mean it's useful this time. We we'll we'll see. But the encouraging things as of Tuesday was that the Btop 50 index was up 83 basis points. It's up more than 8% so far this year. Sockchen CTA index up about 1% uh up 8 and a.5% for the year. Stocken trend up 1.3% up 8 and a half for the year. And the short-term traders index up 35 basis points up 4.78% for the year. What was even more encouraging was when I looked at the um the public data like mutual funds, ETFs, etc. um on the returns yesterday and also comparing it to what happened on our side yesterday. Yesterday wasn't a big day. Um it was probably net net most people lost a little bit of money but you know with the moves we saw in the markets um and some of them going certainly against uh positioning um the outcome was uh pretty uh muted um down a little bit and I think that's a great testament really to how risk management um and how people are are um really focused on on this uh and uh despite the fact that this environment ment really isn't great for for for people who are kind of a longerterm trend followers. Uh certainly um I think actually was pretty useful to see um that people have you know generally done done well uh navigating this in in uh in this environment and I'm sure risk management um is part of that. Um what how have you experienced I mean we can talk about the year to date uh we can talk about what probably people are mostly interested in the last 5 weeks since the Iranian conflict started. How do you see it? Well, I mean I would go back to I mean so through the first quarter um suction CTA I think was up seven and a half and equities in the US were down and bonds were flatterish or down um and >> like that should be one of those iconic quarters that you point to when it the strategy is really doing doing its job now it's a quarter not a year. >> Yeah. >> Right. And so so my experience has been that you know first of all January and February were was like trend heaven around a handful of rates right I mean it's gold goes up 30% everybody's long gold or metals in some fashion goes up 30% gold goes up 30%. Um and then there is this >> you know massive potential multi-year rotation out of US stocks and international stocks. So I'm guessing a lot of funds, you know, were overweight Cosby and they're overweight in their Nikki and they've got all these other things out of exposure outside the US and those those markets like last year were crushing US markets. Um so uh like in the stuff that we do, we're up between 11 and 12 through January and February and then you know March starts and it's one of the you know great rug pulls um in terms of all of the positions that were working in January and February kind of reversed. And so I just did a did a video talking about this and I said I've called it the the the great macro doover of 2026 like [laughter] like hedge funds who were winning on you know non- US equities and winning on emerging market stocks then got absolutely flattened uh you know gold goes down I don't know like goes up 30 and then down 20 or something. I mean it was just it was um and but I think for a lot of people the saving grace was then and it was being caused by the fact that oil spiked >> and so I think a lot of people like at least what we saw in our portfolios is we had no essentially no exposure to the energy complex at the end of last year but then starting January we started adding adding to it and so by the time March rolled around we actually had a meaningful allocation. So, so we got tagged, you know, we did much better than the overall space in January and February and then we got tagged a bit in March. We kind of ended up March in roughly the same place. Um, >> and and so, you know, what we've seen in our portfolios is basically a gradual derisking um of the positions that were working and have not been working. uh a is that you know a reduction equity risk for instance and and so one of [clears throat] our clients I was talking about and he said you know so are you in I used to have the things that were in crash protection mode and he said are you in crash protection mode I said no but we've put on shinuards and knee pads [laughter] maybe elbow pads and so but it's look it's a very strange time as you talked about yesterday you know you're if you're long crude oil and long gold you know you're sort of hedged I guess because you know they they're kind of not going up or down if you have if you're long uh international stocks but short the S&P you know so so we've seen um but you know you talk about a day like yesterday with the magnitude of the moves I mean you know when I saw the ceasefire announcement again this is and this is the emotional torture being in the markets right now I am would be thrilled for humanity if we had a stable ceasefire and you know fewer people died and everything else but from a positioning perspective when you see yourself kind of positioning for [laughter] for like ongoing chaos. Um and uh you know there is a little from a portfolio perspective you're like h god it's going to be another liberation day or something like that. It hasn't been but but it does it does feel a little bit like we're on tender hooks like like you know that that uh that just the the magnitude is so great >> and and I think like I think this is what's happening across the space. The overall space is doing great. I think I looked I looked I look at all the mutual funded ETF comps I think until like a week or two was like literally everybody was up this year right and you had you had a wide range of performance but everybody was up I love to see that >> but within that you know as you say short-term models may have been a saving grace in March you know you may have gotten out faster and avoided you know the last escalation to deescalate or um uh you know on the other hand or having um exposure spread across a lot of positions may have helped because you're not as concentrated in WTI. You know, we're going to be concentrated in WTI, but if you've got a zillion different contracts. So, so I think it's been a um uh it's been absolutely riveting to watch it. Uh but also um it just, you know, feels a little harrowing and unstable given how how much the markets are moving. But but again like I feel like we're on this like like this nice edge where if we continue to perform well of 7 and a half and a quarter if we have another year like 2022 and these things do escalate and it plays out through through stocks and bonds at the same time which again have the same risk which is inflation then then we'll have another 2022 and that would be unbelievable. On the other hand, you know, as we saw yesterday, maybe the world goes back to normal in two months and we'll be remembered for having had a good first quarter, but then we'll be back kind of in the middle of the pack or below equities again. We'll see. >> Speaking of traditional markets, um um had we recorded this uh the day before, the numbers would have been very different because of what happened yesterday. But as of Wednesday evening, Msei World uh up 4.73% in April, up only uh 1.09% so far this year. The US aggregate bond index up 46 basis points uh up 53 basis points for the year. And the S&P 500 up 3.92% for the month of April uh and down 59 basis points so far this year. But the year is by no means over. So um we'll just have to wait um and see. It is interesting to see look at I mean obviously your attributions will be very different from something like mine but um at least what I would expect um is that so far in April um the comeback of equities um will probably be supportive meaning I think longerterm managers are overall still long even though with smaller positions as you rightly uh indicated. I think some of the currencies might have been um productive uh from a trend perspective um and um and and maybe even the precious metals uh would have helped a little bit but energies fixed income etc etc much harder to tell uh right now how um how that's affecting um uh managers overall I think we can we can be a little bit different in uh in those positioning >> one point I would add to that if you expand outside the CTA face. Yeah. And um by the way, if if anybody listening to this is goes on to LinkedIn, you you must follow a guy named Nishantkumar at at Bloomberg. He's um and and Nishant publishes he covers hedge funds for Bloomberg and he publishes the basically the rankings or the returns rankings of underlying hedge funds and he puts it up on LinkedIn and his data is great and it's up to date and he up to date and and um but what you see is that is that tons of really smart people got shellacked in in um in March u you know that that funds that again were doing well in January and February If you're doing well in January, the better you're doing in January, February, the more you got shellocked generally in in in March. Um, but you know, because I often think about this this strategy as latching on to these kinds of smart money trades that that people are coming to the same conclusion but from a different perspective. Uh, and uh, so I had this funny comment on one of the things where I said misery loves company, you know, in in March. It's, you know, it's it's it is at least encouraging to see that that incredible like I mean Welling as a Citadel's like fixed income fund was down 8%. Um uh uh you know uh Brevin Howard was down six. Um uh I think I have I mean I have a list. I did notice that I I must be looking at a different table, but I did see that he uh or someone at Bloomberg posted a um um a table with some of the multistrat strate um managers that we know well and and you're right, many of them were down um a few up but um mostly down. >> Cton down 15%. Right. I mean wow absolute return down six. Uh Marshall ws Eureka down five. Um uh I mean equity longshore funds obviously if you had more of an international focus you got you got you got slammed but I mean it's it's so and actually also if you look at the the usets CTA space as well again you see a very very wide dispersion. I mean some people really got hit very very hard in in March. Um so all I'm saying is that is that what we're seeing in the CTA space is not what may have happened around the liberation days or something where it felt like CTAs were in certain ways and stopped working. It's actually reflective of the broader, you know, what called the broader smart money space. [music] >> Yeah. Yeah. No, completely agree. Anyways, now that we've done um our usual uh topics, let's dive into some of your [music] topics. you brought along a few and maybe I prioritized them uh in the wrong order, but I I think maybe the bigger one um is based on um something you you wrote. It may not be completely out in the open just yet, but it's something to do about CTA alpha and how simple it is or how complex it is. Um but that's the one I kind of listed as the first thing I wanted to dive into. So, over to you, my friend. >> Sure. So, I wrote an article. It's on actually. So, there's a Hedge Nordic. If anybody reads it, you just Google them. Hedge Nordic. Um, I wrote an article for them. They're doing a series on CTA ETFs, manage futures ETFs. And one of the things if you look at, and by the way, the guys from RPM did a great article as well kind of talking about how different a lot of the the the different ETFs are. I mean, you have a very very heterogeneous population. But but one of the issues that we've been focused on a lot from coming at it from a replication perspective is is the relationship between complexity and excess returns um or or simplicity and efficiency and excess returns. And and we obviously have skin in the game like we think the latter is is we think efficiency is is a is a key driver um if you can get it right. Um but but so what's interesting is if you look at uh the the CTA ETF space is growing a lot. Okay. So there are now 16 funds in that space. Let me grab my data. There are 16 funds in that space. Uh when we got into the space in 2019, there are basically two. Um compare it. There are only 18 mutual funds. Now by the we're using Morning Star data to pull this down. And interestingly, there are 45 USITS funds, but the AUMs of the USIT space is actually lower than the mutual fund space. So, historically, it was kind of it was the biggest category was a was the US mutual fund space. And um so what's happened over time is is now there are 16 CTA ETFs and they've been growing over time and as the population gets more robust you can then start doing comparisons between all ETFs versus all mutual funds versus all usage funds versus all hedge funds and so with the understanding a lot of the data is recent that's we we did that exercise and then put it into this note um and I think when you talk to people about the space in terms of orders of complexity the hedge funds will be the most complex followed by the mutual funds and usage funds kind of on the same level. And in those cases, they're often kind of matching or identical to the flagship hedge fund strategy. So there's often sometimes they're different, sometimes they're the same. But then when people have done ETFs, they've tended to strip out a lot of complexity. And so they've said, you know, this is going to be more of a simple trend volume. We're going to take out some of our we won't do as many instruments. Um and and again it's again as you know in the space there's a wide spectrum in terms of how people have approached it. So you know understanding kind of all the data limitations what's what's fascinating is that most allocators believe that um if hedge funds are are charging a lot more and they're doing a lot more complicated things. the alpha generation of those funds or the sharp ratio of those funds should be greater than the mutual funds which are some of the things have been pulled out and then in turn should be much greater than ETFs and so the looking at the results and again all sorts of caveats about about the data limitations if you look at the past 5 years which I think is about as far back as you can go reliably um the average CTA ETF has done 6.1% % peranom which is 40 basis points higher on an edify basis than the socken CTA index and meaningfully higher than the mutual funds and ETFs which have outperformed the hedge funds. So the first part of that that hedge funds tend to outperform mutual funds and ETFs seems to be true but the second part of it that and ETFs because of their simplicity should underperform does not appear to be true at least on the based on the data that we have and it's not just it's not they're taking more risk actually the sharp ratio is is higher as well and so so where we see when we talk we talked about the different explanations for it so one is this could all be selection bias a handful of funds happen to have launched, happen to have done well, drew a lot of other people in the space and we look back in three years and everybody's the same or or they do worse. Um, I present some evidence that actually that hasn't shown up in the data yet. and and and the argument that I've basically made coming at from a replication perspective is that the alpha in the space there there's a a a there sort of there's a disconnect between the signal that's generated from a complicated portfolio because we all agree you should not run a 10 factor trend following model but so in order to get this signal and and I think the value of the signal is that it is basically what you're identifying when you're doing trend following is not is that you're actually identifying you can be early contrarian and right into a handful of big trades. So again my experience of having you know done these portfolios is when we start shorting treasuries in September 2020 okay it's that you know 10ear treasury yields had gone from 50 over the summer 50 basis points over the summer with everybody saying they're going negative right and then they got back up to 70 that's enough of a signal for CTAs to start shorting um the treasuries and ride it for the next two years and uh buying gold below 3,000 after gold didn't work for a decade. Right? Now you're now you're buying gold um uh you know buying crude oil earlier this year shorting the end at 105 or 110 riding it down to 160. So so when I look at the dollars made in the space and things that matter to me it's it's it's not it's not you know P&L from 100 different orthogonal positions. It's it's it's that there you can and so what replication does it basically looks at clusters of this and and looks at the cross asset relationships. So anyway my point is that I think that that from our perspective the alpha generation of CTAs is there it's kind of a two-step process. You need you need a complicated model like a hedge fund QIS mutual fund etc in order to detect this signal. I'm not entirely sure why you have to go from a lot of interest. But the second question is as a as an investor as an alligator should you be basically doing some sort of a PCA or another analysis then take make a second decision is that if I want to be long equities should I be long 15 different equity markets or should I compress that into a long EHA contract or a long EM contract which which because of the liquidity underlying instruments has certain benefits etc etc. So, so I think I think that's the that's that's this is just one element of of the angle, but I think the um I think I think I think the performance data is starting to show up like that and and I'll I'll revisit the data periodically and if if it goes the other direction, I'll I'll you know, I'll tell you. >> So, okay. So, let's let's um let's let's think about this for for for a minute. I mean, we talked about this before uh pressing record because you've obviously had tremendous success. So kudos to you. Um to me a lot of the success clearly comes from how you've positioned and uh the narrative around um replication that it's simpler um that it trades fewer markets, it's efficient and all of that. But what I can't help thinking is about a comment I had on a recent business trip and we talked about these things, right? And the person said, "Well, there's nothing simple about quant on top of quant because that's what replication is. you need the underlying complex quant engines to generate the daily returns that you can then use in your quant model to then extract the the the uh positioning that you feel that the the space has. So, so and I was thinking about that. Well, I mean it's kind of true that it's quant on top of quant. So, so I know that's not the messages the messaging but as far as I can tell you can't unlike maybe in an equity index you you uh where you can put it together like you said um you you have to have the complexity somewhere and of course better to have someone else pay for it um which the managers do in terms of having big research teams um but but is is there a point there that you kind of need the complexity it just you don't need it as a firm but it needs to be there somewhere because otherwise there's nothing to replicate. >> Absolutely. But you could also do it. So I mean but I was talking to one of the guys at the who runs QIS models. Okay. And I I was I was in Barcelona and I gave a talk basically to EQ derivatives, right? I am surrounded by people who who you know I do not want to get into statistical knife fights with. Okay. [laughter] Okay. They will win. Okay, but but I'm I'm I'm quick on my feet. So maybe I'd get away before to reach conclusion. So in look, in a normal investment process, you identify the investment opportunities that you can do and there's a second decision about implementation, right? And this has been going on in the background of the CTA space ever since I've looked at the space, which is, you know, boy, I wish we could, you know, do one day trend models, intraday trend models on this. It was like high frequency trading like like the we have a sharp ratio of seven and and you know, we're trading a 37 times during the course of the day and and and it works with $3 million, right? But it doesn't work with 50 and and God God help you if you try to do with 500. uh you know back when I was doing more portfolio management on the hedge fund side there's also a question it's like that sounds great how much is it going to cost to buy it you know I get let's get 300 basis points of excess returns on this thing but it's going to cost me 300 basis points to to to buy it and there liquidity conditional liquidity on the type like how is it is it still worth it for me to do it so it's not a question that I can answer but but in most things there's a determination of the signal and there's a separate process with a determination of implementation. And so what the guy said to me, he said, he actually used this example. He said, um, I've been looking at the same kind of thing, right? And this guy could beat the daylights out of me statistically. He said, I've looking at the same kind of thing with our with our QIS models is that, okay, so I've got signals with all these different equity markets telling me they need to be long equity markets. But now, next step is what I do on the implementation side. Yes, you need complexity for the signal. >> Well, the managers do. You don't but but but the managers do, right? >> Well, what if it's it's I mean and and I tell you I don't know exactly why you need more positions for the seasonal and I can't tell you exactly what the right number is. There's an intellectual leap that I see. >> So that to me is because because you you mention our successes as almost like it's like a a a marketing exercise. It's also a performance exercise, right? So, so the replication model that we have was launched in July 2016. There were 20 constituents of the sog CTa index back then. We have outperformed every single one on an absolute and riskadjusted basis. Every single one over that period of time. We've outperformed the overall the average by 400 basis points a year. Marketing is not going to take a mediocre trend product and turn it into something good. what what what resonates is because I can back up the efficiency argument with wi with what I would say is a structural advantage on implementation. Now what that gets back to is what I've called the Voldemort to this industry which is what are the true implementation costs. You know like it's easy to say this is what I'm paying for my round turns. What's harder is to say, you know, I'm I'm how much bid ask how much am I impacting, I don't know, Chinese power markets, you know, the South African soya bean market or whatever. And and again, my experience and I look and I I founded what's now a $9 billion commodity firm where the quants were the dumb money. the quants they were watching they were waiting for quants to come into these markets and and and who was picking them off Louis Drifus Glen Core like and again yeah I'm talking more about the softs and the metal markets where where you know there's more more supply demand stuff >> so to me I believe that when you have a very very complicated model >> where you're trading it a lot all the time and you're that a lot of the that that that that the the ripple effects that you cause in the market add up over time. So you start buying something at 10. By the end of the day it's 10.1 or something. Like now what you see is that your execution price was slightly below where it ended for the day. But you're driving it. It's you. Okay. Now imagine if you and seven people who look like you are doing it at the same time and it goes to 10.2 and and and it ends up reverting. So, so those little frictions again, if you're buying a stock or buying a private asset and doing it once, as I mentioned this example of what's the cost of buying it, it's one thing. If you're doing it, I think what was it the um like a guy who's a senior partner of CTS, he said they do a thousand trades a day. So, as a as a guy who's been in other parts of this business, that's like, wait, what? [snorts] [laughter] Okay. like >> and I agree and I agree with that. >> So, so, so that's why I so my person my my my belief and and I'm waiting for somebody to come out with a robust intellectual defense of the counterargument which I haven't seen. instead people I think just don't want to talk about it is is if you get really serious about the implementation costs of more and more complicated portfolios my thesis is that your implementation costs rise geometrically and and that when you look at these position number 180 or 350 that if you being honest with yourself it's a coin toss as to whether that market is going to trend enough and be valuable enough for you. In fact, I would argue and and that's where that's where you and I have talked about that there are very very smart people who will look at at position number 350 and say I can't make it work. Well, there are very smart people who say it can make it work. And so the question then for an alligator is who's right here. and and um so >> so so so [clears throat] I share I share your thoughts on and and and people will know that if they've listened is that I I'm not necessarily I'm I'm not a believer that trading hundreds of markets is necessarily better. I do recognize that some of my friends in industry do trade hundreds of markets and some of them have done really well. they've been, you know, exposed to certain uh factors that we um at our firm are not and and those factors have actually worked out really well and performance has been good. I can't comment on your numbers. You say we've outperformed everyone by this. I I don't know. I haven't done the analysis and there's also going to be managers who've probably done better, but that's that's how it is. But >> none of the managers when we started have done better. What happens is a manager who is not part of that group has done better, >> right? >> And they get they raise assets, they get included in the index and so they're in the index today, but they weren't back then. And some a handful of those guys have have have done better. But >> yeah, >> but it's a look, I'll send you the data. I mean, it's like it's not it's it's a um in fact, you can actually look at the usage fund, right? The usage fund um uh where they publish the strategy data on it. um uh the uses fund that we stop advis. So it's it's not a marketing story like the market the market I mean yes yes it is market look I think I'm I'm very good at understanding what you're very >> but but it's it's a it's it's the fact that when I went into this business the way that we did it I went in as an investor and I had one investment objective which is I love the sock gen CTA index as a as as as a pool of data as a return stream But if as an alligator and I'm trying to do it in an efficient way, I want to maximize my probability of beating that over time. Maximize our probability of beating that over a one year or a three-year period of time. I couldn't find a way to do it by building our own models. I couldn't find a way to do it by QS products. I couldn't find a way to do it by thinking that I was gonna be better than anybody in this industry has ever been about doing manager selection. The way for me to beat the index over time was to capture the signal more efficiently. And so and so and to create a repeatable investment process that has that is grounded in a structural advantage that leads to excess returns and and so and that was the idea and and what what sold it to me as an investor, right? I believe in probabilities, right? And so as I hope, right? And [laughter] so and so so when I look at a decade and a half of data back in 2015 2016 and I asked a simple question what's our probability of outperforming on that on that one week rolling rebalance one week and it was 54%. It with plenty of noise right we'll overshoot by 73 basis points on average we'll undersshoot by 70 but but 54%. Okay you get me a stock picker with a 54% chance now. So like like it's either going to be you're either have a higher probability of winning or you're or or you know you'll have some great skew when you win. We don't have great skew in that. Um but but we do have a higher probability of winning which is the it's we're accurate enough with enough of a a a structural advantage. And as you know we don't know exactly how much that is but it's a big numbered. Um and so if you have a 54% chance probability you just keep doing it again and again and again over the course of a year you're at 80 or so. over the course of three years, you're well into the 90s. And I have the advantage of it being a something that could be put into different kinds of vehicles to broaden the investor base. And in particularly the and and the you know the real the real thing was I wanted to do this with an active ETF where you could see my positions. I wanted to I wanted to make a new a new category, new industry, which is which is where we started this conversation. >> Yeah. No, absolutely. And and and just for the record, because we talked about this before uh we pressed record, I I as I said to you, for me it was a combination of a great narrative combined and backed up by performance, which of course uh is is absolutely true. Even though of course as someone who's spent decades in this industry, 5 years, 10 years of data doesn't say much about the future. Um but so far and this is all we've got. Have you ever I mean I I I don't know if you ever thought about this. Um do you worry that your success makes the underlying hedge funds who pay the millions for their research to do the trade that they at some point will say hang on why are we publishing this every single day for other people to to outperform us? Have you ever have you ever thought about it? >> Yeah. So, so look, I mean the the we we we use a broader range of data today than when we started. When we started is all is all hedge fun data today. But >> yeah, >> look, you can't Okay, so every hedge fun there's 20 hedge funds out there that could could say we're not going to publish our data anymore. >> Yeah. >> Um they run mutual funds. >> They run useless funds. >> You you can't I'm sorry. You can't tell the SEC um you know, we're annoyed at some guys in Greenwich, Connecticut, and and therefore we're you know, we're just going to give you monthly numbers at this point. Um and you know so ironically actually if you look at I I actually think the cleanest data on the space overall from a signal perspective is a multi-manager mutual fund in the US >> uh and it's uh and basically because they have >> hand selected a bunch of managers that is themselves representative of the broader space it's a subset of the broader space but you know but one of the issues you get with for instance the stock CTA index is um you know is markets go haywire in the US at 3 p.m. a lot of European managers have already closed their books. >> And so, so you get these kind of you can get this kind of delayed factor autoorrelation of returns um in the index which from a replication perspective can make the the data a little bit foggier basically the signal foggier um but but look you can also do it with QAS products as well. M >> uh you can do it with uh we could build our own series of you know basically trend we run our own trend volume following models we just don't invest in them but we do use up the risk management tools it's it's um uh so there are a lot of different ways of getting access to data but I would say what I said it before and I think part of the the the next part of the conversation will be about the rest of business is not going away a lot of allocators are in the game of spending their days trying to figure out whether you are better than AQR or better than NHL are better than this, are better than that. And their clients go to them asking them to do that. And sometimes they will do it for hedge fund products and sometimes they will do it for mutual fund products or usage products. But if if a to use the analogy from from the passive and active debate, right? I mean, if if if everyone said mathematically, where am I going to have an incrementally better return over the next 10 years and how can I minimize my fees? there would be no active US management in business on the on the stock selection side, right? It's it is statistically the the debate is over, right? An S&P 500 three basis point S&P 500 ETF is simply a better investment than trying to pick long only managers at 50 or 75 basis points in the in the US. Um, and yet I think the latter is still much bigger than the former. >> Not I mean that's an interesting point. We'll we don't have to talk about it today but um actually Goldman Sachs just recently uh published a paper that um I think I sent you the link because there was something about you know something about alpha uh QIS related um stuff and um and there was a chart in in that paper about the flows uh in terms of what has gone into active what has gone into passive and yeah maybe still there is a little bit of a an overweight on on the active side but certainly from a flow point of view it's It's abysmal for the active managers. The flow goes into passive, >> right? It's been devastating, right? You've also had rising markets over that period of time. >> Yeah. >> And and I don't I haven't looked at the data recently, but but last time it's But when you hear about passive and ETFs and everything else, there's there's so much noise around it in the press that you think everybody's just investing their portfolios in it. And then if you look at the actual dollars, as last time I looked, it was like I mean, active was still much bigger than than than passive. And and look and this is this is a human business, right? Part of our success as a firm is I think we try to humanize and try to think about the the act of allocating to this space which is you know if you're totally honest it's a quantitative long shortter base black box and and so you're trying to get people who find that scary and risky and try to help them look past that to how it can make their lives better. And on the allocator side, there are people with whom our story resonates because they want something that looks and feels like a, you know, they they're like fees matter to them. Things like uh the fact it's an ETF like matters to them. Um there [clears throat] are allocators out there who don't like that story because they want everything else. and and um and so you know I look I hope we're at a point right now the ET active ETFs are basically uh including us it's now 31% of the mutual funded ETF business in the US so they've grown a lot the overall space mostly it's because mutual funds have been coming down over that period of time and um again I just don't see it going away um but uh but you know the question because again you look Outside of it, I think mo a lot of people who are managing those mutual funds still have huge hedge fund franchises. And honestly, their clients in general don't like us because it's not what they feel like their job is to do. I mean, it's it's a it's a it's a terrible principal agent issue for their clients. But, but fund selectors are not rational value maximizer, sharp ratio maximizers. They are also very focused on you know what do I like you know what fund selection makes me look good like part of AQR success right is how do you go wrong investing in AQR [laughter] like like they like check every box smart like like you know here's a 70page academic paper justifying the investment you know I get to fly to Greenwich and see them and and you know and sit across a table from five PhDs they have incredible numbers over the past several years. They got a million different products. Like it's that's not hard for one of these guys. >> Actually, to that point, I think I read an article today or yesterday about uh how their old business had doubled last year [music] or in the last 12 months or it's fantastic. Um well done. [music] Now, in the interest of time, Andrew, um because there were several points um in in in our exchanges, what would you like to talk about um before we we wrap up? Um there are several things we could talk about. >> Well, I I would love to talk about the QIS space. >> Okay, let's do that. >> Um because I think I think one of the QIS space is one of these areas that everybody talks about, but it is so opaque and foggy. The idea that trend following is an easily definable beta I think is generally on thin ice uh for the following reason. If you and I and 10 other people say here is a beta and we all go to calculate it, we should be close to each other. You say US large cap stocks, you pick it, I pick it, somebody else picks it. We're not going to be that far off. M >> you and I you and I and all these people have different trend models or pick different QIS products and you're 20 points off you know you could be 30 points off um and so so in a sense the beta just like the S&P 500 the stocks can vary wildly but there has to be some sort of agreement so around what it constitutes now what the QIS products were sold at are basically we're the beta like we're trend following beta but They're not really because and so I wrote I I first looked at this back in the mid 2010s when we were thinking about replication verse of it. I I I went and spoke to investment banks um at the time and I was I was really disappointed with what with what I heard. Um so and I was looking at again more broadly about merger AR replication and other things like that because I was thinking about as an investor like should I should we include these in what we do? I can't. Our factor models don't do a good job with something like merger R, but there's a very low net. But if I could buy a QA product with merger R, well that could be actually kind of cool. I could bolt it on to what we do. And I wrote a series of paper. If you really get bored, you can go look them up. But but but it was basically that this whole idea that you can build a single model that's going to be identifiable beta just isn't borne out by the evidence. And so I started with the merger arms base and I said by the time we specify all the different parameters, you know, I'm going to be very heavy in a few deals in the US, you'll be very heavy in a few deals in Japan. It's like it's all about kind of specify you 35 different parameters, we're going to end up with very different results. Um, and so then on the trend side, I wrote a paper in pension investments in 2018 where again I said now let's look at it on on the trend side. And there just weren't that many products that you could point to >> that had a live and what what so what do I mean by a product? So investment bank creates an index. >> Okay, >> if you launch a fund, okay, you're up on Bloomberg. The fund starts on day one and you start to build your track record at that point. Five years later, you've got a 5-year track record. You launch an index and on day one it has a 20-year back test. And how do you get exposure to that? And why would an investment bank do this? They do it because these are, you know, this could be value versus growth. This could be merger AR. These they build these strategies and they you can get access to them through derivatives, swap, structured nodes, etc. And and and the space really took off in I would say 2012 2013. And it was in part because the broader hedge fund industry was had really embarrassed itself in the GFC. Like it wasn't supposed to go down. It went down 20. And you know, you're supposed to have reasonable liquidity terms and everyone's getting gated and suspended. Then you have made off on top of it. I mean, it was like it was about as bad as you could go. So by the time you get to the the early 2010s, you've got people saying, "Well, in my hedge fun bucket, why do I have all these things doing 2 or 3%. I want something that the things that are lower cost and more liquid." And so investment banks come in and they say, you know, we'll give you these strategies and and the allocators loved it because you're a big pension plan. You can say, you know, we're getting $500 million of exposure to XYZ strategy. You can present this back test that goes back over a long period of time. And it it gave the people who were doing it a role like you're not just you're not just giving money to somebody else. You're basically a PM. It's a new principal agent issue. It's it's it's it's you're you're you're arming them with basically macro quantitative macro weapons. And and when I looked at the space, I was just I was sort of stunned by how little live data there was. And so I would sit down with him and I would say like, "Okay, so G10 currency carry, what do you have?" And I say, "Oh, we've got a 25-y year track record." I say, "Okay, so when did you actually start?" "Okay, a year ago." Okay, so you got 24 years of back test. What's the sharp ratio on your back test? 1.4. What's your sharp ratio live? 02. And and as I looked at the space more over time, then I'd go back and ask that 6 months later, I'm like, can I see that one again? They're like, sorry, that one's gone. We have a new G10 currency thing. So, so as an allocator, it's unless you really want to do it. It's sort of a nightmare because products come and go. Um the the the definitions are incredibly like you know you might have four different indices of the same strategy with different vault targets. You'll have excess return versus total return. It is extraordinarily difficult as an allocator to make sense of all this. Um but but I I've been interested in it recently because I've been we've been doing now we have an index on what we do um which is again is grounded in live data. So it's very unusual in this space. But but there's also just to for for full transparency, there's also a long back test to that index. Yeah. >> Yeah. Yeah. Well, I mean I should I mean in technically the whole index is back tested or from the date we launched it, >> but usually it's just made up stuff, right? It's you know I wish 20 years ago I had done the following trades basically. Um and and people tend to turn the dials and so so um but but the reason the reason I bring it up is because the hedge funds in this space have faced competition from QIS products. >> Oh yeah. >> Right. And and and we always talked about it. We say like we were talking about before. It's like you know I I've heard the hundreds of billions of dollars of trend. You know there's x amount in manufacturers products but there's hundreds of billions of dollars in in QIS products and things out there. and and and and I would tell you for as I'm learning about the space, the buyer base is a little bit different. The there's often a fund selector guy who wants to outsource it to somebody who's a fiduciary and then there's a somebody who basically wants to be a PM and wants to use these as tools. So there's a even within a lot of pitch plans, it's a little bit of a different constituency, >> but but so what we decided to do is basically say, look, we know we track about 17 of these QIS trend products. Okay. um you can generally get the data on Bloomberg on them and and and we know we've been tracking them long enough we know when they went live like what their back test is what when they went live and and and like you know like a quick summary is that um this should be a central marketing point of every managed futures hedge fund out there. they should do this work because you have a multi00 million pool of capital that as far as I can tell has done 200 basis points of excess returns less than the sog CTA index that where the the drop from the insample sharp ratio to the out of sample sharp ratio is 90%. That the dispersion among products in some years is up to 40%. So, so to me, if I were working in a hedge fund right now who has institutional clients, I would be trying to take back the night and basically argue, of course, you can look at these different products and you can do that and bolt them together in some sort of integrated package. But but but but but somebody should be doing in the same way that I'm trying to do it with hedge funds versus mutual funds versus us funds versus ETFs. Somebody on the hedge fund side since this has been a far bigger threat to them than us because again you do you do a swap on a product you can also basically report zero fees. you're basically get exposure to trend from banks for zero fees and you can layer it on you can do portable alpha you can layer on top of other assets like >> but but if if what you're getting is 200 basis points worse and the and the disrion you're picking up anyway so just throwing it out there so >> so let me ask because I'm not an expert and in fact I don't know much about the Q space at all um but I have learned a lot from from from Nick of course um but You once told me that for example you have an index now right and that when you have an index you're not allowed to change the model you have to stick with the model so you don't have to do any research you have to stick with it is that the same for QIS products so that if if XY set bank launches a trend uh product QIS based on an index that they cannot do any new research they can't add anything to it or So >> that strikes me when I think about all the research we do and and and like a quarter of our company is is in research and we do make upgrades. We do believe that our product today is better than what we had 10 years ago. Um I would be surprised if I [laughter] mean if if we weren't allowed to do any research how you know >> so so one is um better question to ask then um so so in theory you launch you're not supposed to change it right okay and so >> but under extreme circumstances let's say they have lots and lots and lots of you know swap contracts out there tracking the same underlying index yes you can change it but there's a process that you go through you It's not like it's not like we just decided to change things so we're doing it tomorrow. Um >> uh I I think the general business strategy though has been to launch new indices >> and new indices and new indices and new indices. So the research happens right and Nick is awesome, right? I mean Nick Nick I think does some of the best research on the space of anybody that I talk to. But the tendency tends to be we have thought of something new to enhance it. >> Here is our new here is our new index around it. >> Right? So it's a it's a constant series of launching new indices and look and there there's a company called called Premier Lab which we don't use but they have a lot of I mean they basically try to aggregate all this stuff and you can go in as an allocator and they just sold for a lot of money or they brought investors or something but but um uh so so so there are people who are who are trying to get a handle on it but but I think rather than the energy being about hedge funds versus replication um if I were them I would say, yeah, we're quants, but we're investors and we're fiduciaries and and you give us money. It's in a fund and we have a responsibility to manage that fund in a certain way. >> But wouldn't it wouldn't wouldn't the QIS market um wouldn't that be an even better market for you to go after, so to speak? um I mean you as a replicator because there your outperformance might be even even greater and and you would have a maybe an even stronger story. >> So so so I it's a market I'm learning about. Um there is as usual as we've talked about I don't think about a market in in you know in all caps. I think about distinct segments of different markets. Um, so where where where the index and the derivatives is most valuable to us I believe over the long term is for it to be used by people who are running usage funds, mutual funds or ETFs. Um and so uh about two months ago a a 12 billion 13 billion u uh US ETF company Simplify launched an ETF that's 35 basis points >> reported >> index based reported right um 35 um uh index based and meaningfully more tax efficient than any other product out there that I can see um and that's that's the power of of of having a derivative at basically being able to do a derivative. So I think and and we have a a fund that's going to be launched um a usage fund that again another partner is going to launch in May that will be a sub50 basis point swap-based product with a fall overlay >> right again but this is and and I'm sorry to to bring it up but I do I do think it's interesting it's this thing about when people say yeah it's going to be a 35 basis points product or 50 basis point well it's on top of the 85 basis points they you I mean this is where I find it to be a little bit weird that with all the regulation we have nowadays that you can essentially and and I guess we could do it as well. I'm not saying you I'm just saying generally you can just do a product use a swap and then you don't have to report any fees. I I think it's completely crazy uh with all the transparency that is being imposed on on us. We can't even talk about you know back test this back tested data. We can't talk about even our real track records in public forums. Um and uh we certainly ought to disclose the fees. Um but if it's a swap, we don't have to mention it. >> You disclose incentive fees. >> Yeah, we have to disclose incentive fees. If you if you run if you have a fund, >> if you if you get the end of the year in a usage fund and you have points of incentive fees, >> does your expense ratio for the prior year? >> Yeah, you have to adjust it. I don't know what the name is, but you have to adjust it. There's all these different uh [clears throat] reports you have to do. >> What about trading costs? >> Yeah, >> I think I think the the the flaw in what you're saying, Neils, is that you see us managing DBMF, right? And DBMF is 85 basis points, >> right? >> With essentially zero transaction costs, right? You're we're competing with 170 basis point mutual funds out there that probably have 200 basis points in trading costs. you you will you will electively ignore those 200 basis points. >> No, I think apples apples comparison between 170 and any >> No, no, I think that's a fair point. I think I think it's a fair point and I think people should disclose the trading cost as well, but I I'm all for that. >> But again, it's also it's subject to manipulation of the rules around reporting, right? But this it happens. So if you look at most of the usage funds out there, okay, the usage funds in Transund wrote a great article on this actually about how flawed the usage fund transaction fee calculations are. If I if I start buying an asset in a usage fund at 10 and I buy it, I buy it, buy it, I buy it, and by the end of the day, I've pushed it up to 10.2, that's a negative trading cost because I'm comparing my execution price to the settlement price at the end of the day. Okay? So there are complicated usage funds out there that report zero transaction costs. >> Yeah. >> Zero. Okay. Like like I mean that's not we know that is off by probably from my calculations be off by a couple hundred basis points. So, so if you did not see an 85 basis point ETF and somebody came along and because I had never done that and I'm just getting into the business for the first time with a swap, somebody is is doing a product on on us and we're not a subadvisor to it. They're doing a and and they're buying a swap on what we do. Would you really want to dig into the underlying swap costs? No. You just say it's 35 basis points. They're going to have costs associated with it. And that's that's true across the asset management industry. There are products out there with hundreds of basis points of trading costs. Nobody cares. So, it's just it's it's just it's the look, I've been with consulting firms where they're bragging about having zero and 40 share class 40% incentive fee share classes because they can report the zero, not the 40. >> So, it's it's the pearl clutching around this point, right? The reality is that we have however we have hundreds of basis points of an efficiency advantage. That's the question. >> Yeah. >> And and and whether it's worth if I was point. >> Sure. No, no. And and of course um uh investors um obviously who who are at least uh want to dig a little bit deeper, they they should of course look at the net returns and then totally exactly no, you know, completely completely absolutely >> your job to ask and and I think I think it's even the pro p prospectus of what of what of what the expected costs are. I mean >> but but then let me ask you this thing though um and then we'll we'll wrap up for today. If someone then buys a product that is based on your index, right? But they pay another 50 basis points, 35 basis, whatever on top of of your cost. Why don't they just buy your product? I mean, why pay the extra 35 or the extra 50 if they can buy your product? >> Ah, good good point. Okay. because they they because here you're talking about two identical products >> with the same with identical all-in cost. That's you know who I am Neil, right? I'm not going to come out with some garbage higher cost product that cost 50 basis points more cuz I can tell people it's cheap, right? Take that to an extreme, right? Why don't we do why don't we layer hundreds of basis points into the swap and do a zero and we'll subsidize the cost of somebody's ETF. It'll be a zero basis point ETF, right? >> I'm not going to do that. Okay. [laughter] Because >> No, no. I'm I'm No, I think you misunderstood. I'm thinking if if people say, "Okay, I can buy this product A and it's up 10% and product B is only up 9.4% because there are some but they're exactly the same product. Why wouldn't they just buy the product that gives the best net return? >> So when I when I wanted to simplify with this idea, >> okay, I said we are only doing this if they have essentially the identical all-in cost. >> So your fees plus the swap costs must equal DBMF fees plus implementation costs. >> Uhhuh. >> And and and so DBMF makes 10. This other one will make 10. >> Okay. >> And but I can save you up to 150 B potentially. I'm not a tax adviser blah blah blah. But I I I am I am I am a taxpayer and hence motivated to try to think about this stuff. >> We're all taxpayers. >> But maybe, you know, I think I think an investor might save 150 basis points in in in debt after tax returns over time. >> So So So to me, look, the way that I thought about it was DBMF in a sense, I felt like I got it to to third base. And but the new product to me brings it home around two issues that again when you break down the market there are a lot of allocators out there who sold their clients on ETFs that are passive >> very very low visible fees and generally more tax efficient >> those three buzzwords are now even though I have a three plus billion dollar active ETF that I subadise it's 85 basis points it's active and It's look, it's tax efficiency. I mean, we sort of have actually bent the curve toward more tax efficiency by getting people to trade more futures in in in the entity as opposed to down in Cayman subs. But um but again, those are those are but but still that works very very well for a specific constituency who's who's buying it, right? And these are these are model allocators who are comparing it to 170 basis point mutual funds. They never think about taxes because everything on the alt side is is tax inefficient. But, you know, Simplify and I are going to focus on find me a guy who's got a model portfolio, >> desperately needs diversification, but his all-in expense ratio is 25 basis points. He's told his clients that, you know, passive and and and and kind of all these all these buzzword words around it. I want to build a product where it's easy for that person to make this a three or a 5% allocation. And that and that and that requires spending a lot of time on product engineering >> and and and basically so you know I spent two years kind of again you know me like I'll talk to everybody I can't I will track down people left and right and get them on the phone and say [laughter] you know help me like help me think through these issues and um but again it is address it's addressing different parts of the market. >> Yeah. Yeah. No, I mean it's great and we obviously um love these conversations so people can better understand um what the options are and and also how the how the space is evolving. It's super interesting um and it'll continue to evolve. So can't I can't wait to our conversation in 20 years from now besides the uh the global geopolitical issues uh what what product innovations has happened uh since then. Um I'll be I'll be rolling in my wheelchair by then. We we we're getting to negative costs maybe. Who knows? It's uh we'll we'll we'll see. Anyways, this was awesome, Andrew. As always, I really appreciate uh your time and the preparation that goes into to these conversations. And for anyone listening out there, um if you want to uh show your appreciation for Andrew and what he does, uh why don't you go to your favorite podcast platform, leave a rating and review. It helps uh us understand uh what you like and not like, and more. It helps more people um get to uh familiar with the uh podcast and the information that these uh amazing co-hosts share every single week. Speaking of that, next week I will be joined by Rob Carver. So that will be uh another uh chance to uh for you to send in some questions for Rob and uh and he usually gets quite a few. So uh be sure to be early on that. Um, and you can have as as usual send them to info@ toptradersunplot.com and I'll do my best to make sure we get them in front of Rob next week. From Andrew and me, thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other. Thanks for [music] listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to your favorite podcast [music] platform and follow the show so that you'll be sure to get all the new episodes as they're released. 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