Episode #458: Bob Elliott, Unlimited Funds – A Macro Masterclass – Meb Faber Research

Episode #458: Bob Elliott, Unlimited Funds – A Macro Masterclass

Guest: Bob Elliott is the CEO & CIO of Unlimited Funds, which using machine learning to create products that replicate the index returns of alternative investments. Previously, he was the Head of Ray Dalio’s Research Team and on the Investment Committee at Bridgewater Associates.

Date Recorded: 11/30/2022     |     Run-Time: 1:46:12

Summary: In today’s episode, we touch on rates, the inflationary cycle, the strong US dollar, and how all of these shape his view of the markets and economy as we head into 2023. Then we discuss what strategies are worth looking for alpha in a world where beta is almost free, how he thinks about managers’ performance coming from luck vs. skill, and the benefit of low cost, systematic strategies.

As we wind down, we touch on Bob’s entrance into the ETF space with a great ticker, HFND.

Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

• 1:22 – Intro
• 2:39 – Welcome to our guest, Bob Elliott
• 3:45 – Bob’s macro approach and lessons from his time at Bridgewater Associates
• 9:01 – Episode #109: Matt Hougan, Bitwise Asset Management
• 9:56 – Low cost beta and the poor performance of the 60/40 portfolio in 2022
• 13:38 – What’s a good amount of alternative assets to have in a portfolio?
• 24:31 – America’s first run in with rapid inflation and how it might unfold
• 31:16 – What the next couple of years might look like inflation-wise
• 35:00 – Initial claims around how fast the labor market will deteriorate
• 40:53 – The trends of inflation outside of the US
• 44:04 – Bob’s perspective on the US dollar remaining so strong despite our macro environment
• 47:30 – What will hit 5% first: CPI or Treasuries?
• 49:54 – Bob’s thoughts on alpha
• 57:06 – Differences between discretionary and systematic alpha
• 1:00:16 – Invest With The House: Hacking The Top Hedge Funds
• 1:02:36 – Systematic approaches he finds interesting and launching his new fund
• 1:07:29 – Active strategies he’s drawn towards and which ones he feels are good
• 1:13:12 – Overview of HNFD
• 1:26:07 – Positioning of hedge funds today
• 1:31:37 – Ideas for future strategies
• 1:36:16 – What’s Bob’s favorite macro data point
• 1:37:25 – Something Bob believes that the majority of his peers don’t
• 1:39:59 – Bob’s most memorable investment
• 1:42:40 – Learn more about Bob; Twitter; unlimitedfunds.com

Transcript:

Welcome Message: Welcome to the “Meb Favor Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor Message: Today’s episode is brought to you by Cambria, “Is inflation hitting your wallet at the same time your investment portfolio is performing poorly this year?” Ouch. With one of the worst starts ever for traditional U.S. stocks and bonds, is there a better way? Cambria thinks so. With strategies like global devalue, trend following, and tail risk, Cambria thinks different. Explore why over 100,000 investors have chosen to invest with Cambria. To learn more, email us at the following address, info@cambriafunds.com, or if you’re a financial professional, check out the Contact Us page on our website and reach out to your local representative today. Investing involves risk, including possible loss of capital. Past performance is not indicative of future results.

Meb: Welcome, my friends, and happy holidays. We have an awesome show for you today. Our guest is Bob Elliot, CEO and CIO of Unlimited Funds, which uses machine learning to create products that replicate the returns of alternative investments. Previously, Bob was the head of Ray Dalio’s research team and served on the investment committee at Bridgewater Associates, one of the largest hedge funds in the world. Given the volatile macro environment today, we figured there’s no one better to have on the show to share his view than Bob.

In today’s episode, we touch on rates, the inflationary cycle, the strong U.S. dollar, and how all of these shaped his view of the markets and economy as we head into 2023. We discuss what strategies are worth looking for alpha in a world where beta is almost free, how he thinks about manager’s performance coming from luck versus skill, and the benefits of a low-cost systematic strategy, and also what’s his favorite indicator. As we wind down, we touch on Bob’s entrance into the ETF space with a great ticker HFND. Please enjoy this episode with Unlimited Fund’s Bob Elliot. Bob, welcome to the show.

Bob: Thanks for having me.

Meb: Where do we find you today?

Bob: Downtown New York at our office here at Unlimited. So.

Meb: The Christmas spirit. So, for listeners, we’re recording this at the end of November, beginning of December. It’s always been hard for me to get in the Christmas spirit in Los Angeles. I’m not an Angelino native, and they do tree lighting ceremony here where the tree is at the end of the pier out in the ocean. And it’s a weird experience because it’s 60 degrees, but the one commonality is everyone’s still wearing ski jackets, right? It’s 60 degrees here, which is freezing, whereas in Colorado or New York or somewhere else, 60 degrees is probably shorts and a t-shirt. So, are you feeling the Christmas spirit there, the holiday spirit? What’s the vibe like in New York?

Bob: This is one of those days in New York that’s in the 40s, pouring rain, blowing gale-force wind when you get out of the subway. It’s a perfect Christmas day in New York.

Meb: I love those. I miss it. I need to get back. So, I’m due, I’m thinking Q1 this year. Well, look, man, you’ve been somewhat of a starburst on Twitter and coming on to this, the social scene, which is great to see. We always love having more macro people join into the conversation and dialogue, and we’re going to spend a lot of time on all things investing in macro today. For the people who don’t know about you yet, let’s hear a little bit about, like, what’s your framework, how you approach thinking about the world.

Bob: Yeah, I mean, my career, I’ve been a systematic investor for a couple of decades now, and in particular, a systematic macro investor. And so, when I think about how the world is working, I’m basically going back to sort of core cause-effect relationships, understanding those cause-effect relationships, and from there, putting into context essentially all the things that are going on into what those normal relationships are. And then, from there, trying to predict what’s going to happen, and then, compare that to what’s priced into asset markets. And that obviously creates the opportunity for alpha or new opportunities. And really at the core of that is thinking about basically where we are in a cyclical dynamic at any point in time, which business cycles, they come, they go, they go up, they go down, each one’s a little different, but there’s a lot of commonalities between those. And then, putting that in the context of more secular dynamics like debt cycles, like globalization, deglobalization, things like that, that sort of our underlying…or underlying all of those sort of cyclical dynamics that we’re seeing in a day-to-day basis.

And so, when I look at the world today, it is in some ways feels very new and different than what we…that many investors have experienced, which is an inflationary business cycle in the context of the end of the long-term debt cycle and in the context of a shift from globalization to deglobalization. But those sorts of dynamics, they’ve existed plenty of times in history, just not in our professional careers, most of our professional careers. And so, when I’m thinking about what’s going on, I’m thinking about turning my attention and thinking about those other previous cases where we saw this sort of confluence of events, where you saw an inflationary business cycle, where you saw deglobalization dynamics, where you saw geopolitical tensions, things like that.

Obviously, the ’70s are relevant, but there’s also a dash of the 2000 cycle in terms of the busting of a bubble. Our bubble in the last 15 years is more like an everything bubble that was more a tech bubble, some flavor of the ’70s and maybe a little bit of flavor of back in the deglobalization dynamics that happened after the first World War. So, it’s kind of seeing the combination of all of those different things happening at the same time. And this cycle will be some combination of all of those things intersecting with each other and leading to what transpires.

Meb: So, as a portfolio manager, would you characterize the way you sort of think about the world? Cause you spent well over a decade at Bridgewater, I believe. Was it one where you kind of split the world into a traditional, I’m thinking about beta and alpha, as like a demarcation or you talked to almost every different shop and sometimes shops say, “No, we do four buckets. It’s equities, bonds, real assets, and alts.” Or other people say, “No, we do it into growth, deflation, inflation, recession.” Like, the terms seem to be different. You end up kind of often in the same place. But how do you kind of think about the world? Is it through that Bridgewater lens still or is it sort of a slightly different?

Bob: I think in a lot of ways, most of my career has been generating alpha. And so, creating proprietary strategies that are predictive of what’s going to happen in markets. Beta is a critical component of any strategic portfolio. There are good ways to structure beta, there’s good ways to think about it. I think there are many people who have totally reasonable, maybe different in terms of thinking about exactly how to structure it, but there are lots of reasonable solutions to that. And then, really what I’ve been focused on is figuring out how can I go beat markets? And so, that’s really in that process of trying to, in a systematic way and in a quantitative way, look at the difference between essentially what’s likely to transpire relative to what’s priced in and find those opportunities in all the different ways in which those can be built. And so, that’s really been my career focus.

Meb: Yeah, the beta side, I mean, we talk to investors all the time and actually said this, it was at one of my favorite conferences was in Jackson Hole, end of February, early March of 2020. It was like the last conference of the Covid. I came home sick as a dog. So, it was like anywhere in a ski town was I think ground zero. But anyway, I was on a…giving a talk where it was talking about like, and this is pretty well established. There’s nothing groundbreaking, I don’t think, but I was saying, “Look, I said, I don’t think most investors really appreciate that we live in a world where beta is now free. Meaning, like, you can go get a global rough, almost global market portfolio, market cap weighted, stock bonds, even some real assets, and it’s darn near zero. It’s like three basis points or something.

Matt Hogan, podcast alum, has been on the podcast and he used to write an article every year. It’s like the cheapest global market portfolio. And you watched it over the years go 20, 15, 10, 5, and with short lending, it’s probably negative anyway. I was like, I don’t think the world has really adapted to that fact yet. So you see hundreds of billions, if not trillions, asset allocation mutual funds that are essentially buy and hold funds that charge 1%, 1.5%, 2% still, which to me is insane. But I think they’re going to slowly just ride those dividends into the sunset or when they retire, whichever comes first.

So, in that world, if you’re going to charge more and that’s 99.9% of the investment space outside of Vanguard, the death star, you better be doing something different. And so let’s talk about that alpha side because the beta side to me is kind of well wallpapered over. So, let’s start to talk about what you think about how to construct that. And this is going to go a lot of different ways today and we can get deep on any of them, but let’s start to think about that. So, let’s say, all right, I have the basics covered. I got my Vanguard portfolio of the low-cost beta, where do I even begin?

Bob: I don’t want to derail our conversation about alpha, but I do think that a lot of folks are still a ways from beta. Beta may be free, but it’s still the vast majority of investors have poorly constructed beta, very sensitive or very long, essentially low inflation, reasonable growth dynamics. And so, there are lots of opportunities that they can do essentially for free or darn close to free to help improve their diversification. You look at things like gold commodities and tips, all of those things are assets that essentially are unowned by, you know, 95% of typical investors. Not just retail, even institutional, reasonably-sized institutional investors don’t have those positions. I feel like every time I mention the idea that you should hold gold or commodities, I sort of get even relatively sophisticated investors kind of stare at me like I’m a crazy person suggesting that something like gold would be an appropriate asset in a portfolio.

But most investors have constructed their portfolios having lived through an experience of the last 30 years that has been the single greatest period for 60/40 portfolio and haven’t recognized that the unusualness, the fact that you’ve lived through a 95th percentile positive outcome of 60/40 over the course of years and years. And that in the majority of times, or certainly a large plurality of times, that portfolio isn’t that great in the grand scheme of things. And what we saw in this period over the course of 2022 at some level is not that surprising. It’s actually quite normal, the fall in 60/40. It was a large bond selloff, certainly one of the larger bond selloffs in history. But the general picture of how 60/40 is performed, it’s not a particularly unusual outcome. And one where, frankly, most investors are quite poorly prepared for an environment where the Fed and other central banks may end up not containing inflation as effectively as they may say they want to. And so, that’s why positions and things like gold and commodities from a more strategic perspective could be valuable.

Meb: Yeah. So, it’s interesting, and I think you hit the nail on the head that investors, I mean we look at our age demographic, the person that was managing money in the ’70s probably retired, right? Like, there’s not that many people that is probably still experienced kind of the ’70s and are still doing it. So, you have this entire regime of investors who are conditioned to one sort of outcome or environment.

And we see the same thing, look, on the beta side. And this year is sort of like a slap, it’s like a backhanded slap, not necessarily front handed slap, palm slap, but backhanded slap because investors, we see most portfolios are very specific to U.S. stocks and bonds with the exception of our Canadian and Aussie friends. They tend to have the real asset component down. And so, it’s funny because we’ll get to this later when it comes to the alts, but I love the idea of doing a CIO lie detector test or a CIO blind taste test like the old Pepsi Coke where you say, “Okay, tell you what, you know, we’re just going to give you a menu, and all it’s going to have is the risk-return numbers for the past hundred years.” And you have to choose from that. It doesn’t say what it is, right? And so, go do your optimization and sure enough, it’s not going to be U.S. stocks and bonds only, right? It’s probably going to have a big chunk.

Bob: And it’s certainly not going to be 70/30 U.S. stocks, right? It’s certainly not going to be that.

Meb: Right. So, for the people listening who probably don’t have any gold, any tips, any commodities, like how much? Like, most people say, “Okay, I’m going to go put half a percent or percent in these.” Like, what’s the amount that they need for it to make a difference?

Bob: Yeah, I mean, these sorts of assets, they don’t necessarily have to make up the vast majority of your portfolio. Like, you get a lot of diversification and a lot of protection, incremental protection from allocations, like 10%, say 10% to gold or 10% to commodities. And part of the reason why that is is that they perform…typically, will perform uniquely well in environments where you need the protection the most, right? And so, commodities this year obviously performs pretty well and particularly well if you think about them as a diversifying asset class, right? In the sense of, you know, commodities did quite well earlier in the year when stocks and bonds did quite poorly as particularly stocks have rebounded a bit, commodities have come off. But the through-time picture of a commodity…diversified commodity position over the course of the year is pretty good and would have alleviated a lot of the stress that you would’ve had along the way.

Gold is, in many ways, people have said, “Well, inflation was up, why didn’t my gold perform?” And I think in part that’s a…people have a bit of a myopic view of the range of plausible outcomes that could happen for an investor. Gold, in many ways, you could think about it as non-interest-bearing money, and so when interest rates rise, interest-bearing money outperforms non-interest-bearing money.

But the key thing to remember is that it’s also protection against both geopolitical risk and high inflation environments. Things like 5%, 10%, 15%, 20% type inflation environments, which if you look across the developed world over the last hundred years in something like 10% to 20% of rolling 12-month periods, you’ve had inflation in that sort of range. Or actually gold does very well in deflation, very significant deflationary environments. And so, gold does particularly well there. And so, when people are looking at gold today and they’re saying, “Well, it hasn’t done that well.” Well, first of all, it’s done a lot better than stocks and bonds have this year, right? You know, it’s essentially flat on the year, a lot better than stocks and bonds. So, you certainly would’ve preferred to hold some gold, but it does particularly well in that sort of tailed environment. I like to call it the smile of gold, which is it does very well in extreme deflationary environments and well in high and extraordinarily high inflation environments. And so, those happen 20% of the time in the developed world, they happen 40% of the time in emerging economies. And so, the idea that you would allocate 10% to protect you in those tailed environments seems prudent.

Meb: Yeah. It’s funny, even if you go back to, I mean, and obviously, this is a cherry-picked date, but if you look at gold, I just did like this century gold stocks and bonds. Since 2000, gold has beaten stocks and bonds, which is I think would surprise many investors. And then, you know, REITs have actually beat all three. But you know, we did… I love my polls on Twitter. I probably do more polls than anyone I know, but we did a long poll this summer. We were asking people, you know, what do you own? And my audience is probably going to be biased towards systematic, going to be biased towards trend people and value and globally diversified already. But even, the vast majority of people, I think it was two-thirds said they don’t own any commodities. And, of course, everyone owns U.S. stocks and the like, but gold and commodities are really a tiny subset, which is odd because if you did the CIO lie detector blind taste tests, you would own some. There’s no scenario you own none.

Bob: Even just a simple optimization since 1970, since, as you say, 2000, if you just kind of did whatever what the optimal portfolio allocations would be and you even went a quarter of the way there, you’d be holding some of these assets. And so, in some ways I think part of it is also that how many people are out there pounding the table as the beneficiaries of gold, right? We’ve sat here, we’ve talked about gold for a little while on this podcast. You’re not going to make a dime on gold. I’m not making a dime on gold, right? We’re not like really incentivized to talk about a diversified commodity or gold portfolio in the way that there’s plenty of people out there with their various iterations of stocks and bonds and alphas related to that. And I think part of that is the story that there aren’t that many advocates out there for things like diversified commodities in gold.

And those that exist don’t have a sort of institutional credibility, let’s say, that folks who are talking about stocks and bonds do. And so, I think we’re going to start to see, like, if you go back to the ’80s, you know, the ’70s and the ’80s, there were a lot of people talking about commodities and gold and things like that because they were burned by traditional financial investments. And so, over time, this conversation will become more normal and more normalized for many investors. But we’re very early in that process of people coming to the realization of the benefits of those assets in their beta portfolio.

Meb: Well, a year like 2022, particularly if it ends up being a year like 2022, 2023, 2024 has a way similar to the internet bubble for I think a lot of whole generation of investors has a way of informing that taste for a long period going forward. Hopefully, it’s not a everyone chases the hot investment after the fact, but it’s hard to see a portfolio optimally as not including real assets. And we’ve loved them for a long time, but we come from a sort of farm real asset background, so that speaks to me at my core as well.

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So, as we think about the real assets in a portfolio, one of the big takeaways seems to be this concept of balance where if you get off on one foot with portfolios, is it probably okay over very long periods? Yes. Is it probably okay most of the time? Sure but it is a hard path cause there are years like this year, one of the worst years ever for 60/40 that it stings. Before we leave the beta land of the Disney asset allocation part, any other thoughts on beta before we start to really move into your wheelhouse of all things alpha?

Bob: I know, I mean nothing… The main thing is like get started, right? It’s like, there is actually incremental benefits to 5% allocations, 10% allocations. Like, you can get started in moving in the right direction without, for instance, creating massive peer risk or other tracking error and incrementally improve the diversification of your own or client portfolios. And the 60/40 experience that you described, the slap in the face over the course of the last year, like shouldn’t be, by and large, what you experience, right? That should be an extraordinary outcome, not something that you’re experiencing regularly. And so, why put yourself through that if you can find ways to increase diversification, particularly as we look forward into a period where a lot of that, just a little bit of shifting to a bit of an alpha view and a more tactical view.

But like you’re looking at a period on a forward-looking basis where a lot of the disinflationary forces that were so beneficial to the economy, to credit creation, to assets like stocks and bonds, like that disinflationary dynamic that was so prevalent, it was almost so prevalent that we all forgot about it. Like, we all forgot that there was a time when goods were not, by and large, produced in China. We forgot that that’s how the world could work. And we forgot that the massive disinflation was because hundreds of millions of people came off, went from the farm to the factory in East Asia. We’ve forgotten about those things. That is a big force that’s basically reversing, that huge disinflationary force is basically reversing and there’s a lot of things that come with it.

It’s probably higher structural inflation. If it’s not higher structural inflation, it’s tighter money in order to deal with the fact that the underlying inflationary dynamics are worse than they were before. And so, preparing yourself for the end of the era of easy money for an era that might be more inflationary, an era that you might almost probabilistically will have more volatility, like, all of those things. I think 2022 was a great slap in the face because it should wake you up to thinking hard about how do you make sure that you don’t feel that again over the course of the next 5 and 10 years and you could take actions now to help prepare yourself along that dimension.

Meb: Yeah, well, the funny thing about the inflation that we need to caveat kind of the beginning of the conversation where I was like, no one in our industry has experienced it in the past three decades. Well, that’s true in the U.S. That’s not really true in the rest of the world, right? Where you go visit our friends in Brazil or many places and they’re like, “What the hell are you guys talking about?”

Bob: Brazil, Argentina, Mexico, Turkey. You don’t have to look that far to find what an inflationary cycle is and what does well and what does poorly and how it affects assets and savings and the economy. They are there to study.

Meb: Yeah. And real quick while we’re on this topic of inflation, you’re seeing obviously high numbers in the U.S. and you’ve been a great voice of reason. Listeners, you got to check out Bob on Twitter. It’s, what is it, @BobEUnlimited.

Bob: You got it.

Meb: Bobeunlimited, and we’ll put it in the show note links but he’s a great follow, but he had been one of kind of the sane voices of reason talking about inflation, particularly in the U.S. and we’d love to kind of hear your spyglass binoculars outlook for kind of how you think this might proceed in the ensuing months and quarters in the U.S., but then also we can talk about the rest of the world. Cause we’ve been seeing some big prints in Europe lately, and Europeans, we talked to our friends in Germany and elsewhere, inflation is something that is a lot more close to home they don’t want to deal with than probably our U.S. counterparts. But mic to you, what’s that look like to you?

Bob: Yeah, I think when you look at…and sort of going back to the conversation about how to sort through the overall framework, like what I see today in a lot of ways is a pretty typical inflationary cycle when you look at historical inflationary cycles. And of course, we sort of got into it in a way that was a bit different. It’s not all the time that you have the sort of monetary stimulation that we had combined than with the magnitude of the fiscal stimulation in order to get the economy roaring back post-Covid. But if you look at that, that basically created an economy that was very tight and that put money into the hands of people to start spending particularly post-Covid.

And that that kicked off this what I call a typical inflationary cycle, which is that you have spending power that exists, you have monetary stimulation which leads to spending power, which leads to rising prices, which feeds back into increasing things like wages and other compensation, which then provides more spending power even as the monetary or fiscal stimulation starts to moderate. You still have the benefit from the higher wages exacerbated by the tighter labor force, the tight labor force, which allows the spending to continue at the same sort of nominal paces even though you start to withdraw the monetary and fiscal stimulation. That dynamic that I’m describing, which is a typical upswing in an inflationary cycle is very normal. Like, I would just emphasize that. I taught a intro macro class for 10 years.

Meb: Where was this?

Bob: At Bridgewater? I taught the…

Meb: We need to get you online man, let’s get…

Bob: Yeah, you should put me on YouTube for that. But part of that experience was students would come in, and I’d say, “Well we should really go back and we should look at the ’50s and the ’60 and the ’70s and look at those cycles because those are the quintessential business cycle and particularly quintessential inflationary business cycles.” And they go, “Oh no, no, no, that’s not how it works.” Like, what happens is there’s QE and then, it goes in and it comes out. We have more QE and less QE, and that basically drives everything that happens. And like, “Why are we studying what happened in the ’60s to understand what’s going on?” And I say, “Well, you know, I think there’s going to be a day, a day sooner than you think that we are going to have an inflationary cycle and understanding how they work, the sort of classic elements of inflationary cycle are so important to then being able to visualize how things will transpire.”

And so, what we really are are we’ve got the emergent inflationary dynamics, we’ve got the tightening and response to it in terms of fiscal simulation has withdrawn or meaningfully lessened. Monetary simulation has shifted and is now getting tighter. But what you have in these cycles is a very, you have a, I wouldn’t necessarily say it’s a self-reinforcing or it’s not a spiral, it’s just simply a dynamic that maintains the high price level, the growth and prices, which is you have prices that are rising, which feeds through to wages because most prices in the U.S. economy are services, most services are wages, right? And so, what happens is you have the prices rise, which leads to increased incomes, which lead to more money in people’s pockets, which leads them to spend again more nominally, and so on.

And that cycle doesn’t break until you shift the labor market dynamics and start to bring down nominal income growth, which then slows that maintenance of the inflationary cycle. And so, what you see in that dynamic is we’re just…I’d say we’re just getting started. Like, it’s not really clear exactly where we are in that cycle. There’s lots of differences in the sensitivities of the U.S. economy to tightening than there was in previous cycles. And there’s some ambiguity about exactly where we are, but, like, unemployment’s at secular lows, initial claims are basically at secular lows. I mean, even we’re still adding jobs, it’s something like ADP comes out and it’s a little lower than people’s expectations, but overall labor force growth is actually very, very low in the U.S. And so, you still have…you don’t have to have that many jobs to continue to have relatively tight labor market.

And so, we’re still…we haven’t tightened enough or the tightening hasn’t flowed through enough to start to really deteriorate the labor market which would then deteriorate the wages, which would then deteriorate the spending, which would deteriorate the earnings, you know, which would start to bring down the prices. And so, we’ve got a long way to go in that cycle. Like, when you look at typical cycles from the point of the peak and stocks, to the labor market starting to deteriorate as 12 to 18 months, to then inflation coming down is another 12 to 18 months. That’s how these macroeconomic cycles work. That’s three years of conversation about inflation being elevated. That’s a typical or a normal cycle and we’re really in that context like in the third inning of that overall cycle.

Meb: Well, people probably don’t want to hear that. Third inning sounds like a early part of the game. And so, best guess, this is a happy hour question. This isn’t a hold you to a question, but like what’s your best guess of the sort of couple of years glide path? Is this something where we hang out up at seven, eight or four, five, or I think the consensus every time I poll and ask people and seemingly in the media and investment shops is like, we’re coming back down to two pretty quick. What’s your best guess? What do you think is likely to transpire?

Bob: Well, I think typically when you see these cycles, inflation is a lot stickier than people expect. And even in environments like that had large secular disinflationary forces like in 2000, if you go back and you look at the inflation dynamics there, it took a long time before inflation actually came down towards the 2% target, and that was a very different secular environment that was going on at the time. And so, on a year-over-year basis where are we at in the seven to eight range right now that’s probably going to moderate more into the five, six range, give or take, maybe a touch below that. But part of the way that you’re going to understand where that’s going to settle out is by looking at the wage growth. The income growth is going to help you understand where that’s settling out.

Most people almost always are will say, “Well, isn’t the labor market the most lagging indicator of the economy?” They’ll say that all the time. And in credit cycles, that’s definitely true because what you have is you have credit booms and credit busts which are the primary driver of spending, which then creates a situation where that spending shifts say credit shifts, spending shifts, and then labor shifts. But when you look at inflationary cycles, you have not a credit problem, you have an income problem, right? An income problem, meaning you have income growth that a nominal income growth that’s too high relative to the productive capacity of the economy. And so, what ends up happening, what ends up driving that dynamic, it’s not the labor market, it’s not the lagging indicator, it’s the indicator that tells you whether or not you’ve broken that inflationary cycle, right? That maintenance of inflation through the continued growth in incomes leading to the continued growth and spending.

And so, people get those two things confused because basically everyone’s experienced credit cycles in their lifetimes or asset cycles like the 2000s bubble, and basically, have never experienced income cycles or inflationary cycles. And so, that’s why it’s so important to be focusing on what exactly is happening in the labor market cause that is going to help us understand what’s going on. Right now, you’re getting moderation from extremely tight labor markets, extraordinarily tight labor markets, you’re getting some moderation that will take some time to flow through. And then, from there, you’re going to have to get some weakness in the labor market before you start to get weakness into overall wage income. And so, then…and you need weakness and overall wage income in order to finally get the slowing of spending and the slowing of prices.

And so, that’s a relatively long-winded way of describing like what’s inflation going to be? Well, it’s going to look like nominal incomes given where the tightness of the labor market and given where we are in the cycle, probably we will see income growth continue to be 4%, 5%. It depends on your preferred measure of exactly what you’re talking about. And that will lead to inflation that is in that order of magnitude, too high relative to target. And that will continue until you get enough labor market weakness in order to start to break the spending cycle and the wage cycle.

Meb: So, you had a hot take on Twitter as hot as macro takes can be, but it was a hot take where you were talking about recession, and I feel like, on one hand, people think inflation is going to go right back down to two, but also they think like the recession is here. The media always is ready, like the recession is here. Let’s call it a recession. But you were kind of talking about, things may slow but this could be further out than people expect. Is that an accurate representation of your thread a few days ago? And what sort of job number…was it jobs that we need to get to?

Bob: I was looking at initial claims just to try and get a sense as to how fast the labor market has to deteriorate. The initial claims I like because it’s weekly, it’s timely, it’s relatively standardized, and I also like it cause it’s real in the sense of it’s measuring people actually filing claims for employment versus people being surveyed or being asked what’s going on. I like those measure. But really you should look at kind of the complex of all the different measures in terms of what’s going on within employment though. Kind of an underlying story that’s going on right now is that sentiment is being affected by inflation and so indicators of actual activity are slightly more indicative of what’s happening than various sentiment indicators, which can be influenced by people’s views on inflation.

So, yeah, I mean basically what I was talking about was labor markets are like a huge tanker ship, right? Like, what’s happened is the Fed is sort of like thrown out an anchor and it’s like starting to drag a little bit on the tanker ship of employment, which is moving forward at a pretty good pace. And so, you’re getting a little bit of slowing but it’s like moving a tanker ship, which is it takes a long time to slow the tanker ship down or you have to tighten incredibly in order to slow it down or have a crisis.

And so, basically, I was just penciling out like if you look at normal labor market dynamics, it’s going to be a while. It’s going to be a while. Even the most sensitive sectors of the economy to interest rates like housing, even there, what you see is that it typically takes a while between when interest rates rise, when housing activity starts to slow, like transaction activity, which obviously we’re seeing a fair amount of. But before you actually start to get a slowing of construction, it’s not just a slowing of construction cause you don’t fire everyone instantaneously when demand slows down, it takes even longer to wait for construction employment to slow down.

So, construction employment, just to be clear, has been positive, right? We haven’t had a disaster in construction employment yet, we’ll see in subsequent months. But if you think that housing is the first, is the most interest rate sensitive part of the economy, and it takes a while for that to flow through to actually start to hit the labor market, right? We haven’t even gotten to that point, let alone slowing down the totality of the economy, all the other sectors, and all the other areas of the economy, we’re just getting started in that process. And so, I think the thing that’s going to be interesting to people, I think it has a lot of impact on asset prices over the course of the next 12 months is this idea that we may very well have a late recession, something that takes that the U.S. economy is more durable to interest rate rises and, frankly, the macroeconomic linkages, just even if they took the normal amount of time, we would be talking about actually like meaningful weakness in the economy a year from now.

And if that’s the case, I think it’s very important when you think about, of course, it has implications for stocks, which earnings might be a bit better than people expecting a recession. It has implications for bonds which monetary policy might be tighter than people are expecting. I think it also has a real impact when you think about how inflation psychology and expectations start to transpire because that dynamic, it’s a little… All of us like try to quantify exactly how inflation works. Like, it is somewhat quantifiable with that connection between wages and prices that I described. But it’s also a bit of a psychology thing, which is the longer it goes on for, the more likely it gets written into contracts and starts to affect people’s expectations of the future. And so, I think there’s a really interesting dynamic going on, which is the longer it takes to get that slowing in the recession, the more the inflation psychology becomes…starts seeping into people’s minds and the harder it is to break the inflation dynamic, right?

If inflation happens for a month, nobody cares, right? You just look through it, you move on. It happens for a year, even there, you’re like, well, I won’t reset my wage expectations cause I know in the future it won’t happen again. But if it happens for years and that’s really this tale of the ’70s, which is years of inflation. Or frankly, talk about other emerging markets, like that’s really the tale of the Mexico, Brazil, other Latin American economies, years and years of persistent inflation that then starts to affect lots of other things and becomes embedded, like, the baseline shifts from being a 2% baseline to a 5% baseline, and that’s very, very hard to break. It’s going to be a race to the finish here. Like, I don’t know whether inflation expectations are going to become ingrained or if the fed’s going to do enough to break the back of the economy in order to slow inflation before it becomes so deeply entrenched in our minds. It really is a race to the finish.

Meb: And so, as you think about that, is kind of everything you said rhyme with the rest of the world or is that like a whole different bucket of issues and situations? Like, are they just kind of trailing what’s going on here or is it totally different?

Bob: Well, I think you mentioned Europe, and I think the thing that’s so interesting about the European context is going back to a typical inflation dynamic, what we’re actually seeing is very normal in the sense of you get a big… You often, in these dynamics, get a big supply shock in some form or another, whether it was Iran cutting off the oil back in the ’70s or other supply shocks that happen, and you get a spike in primary input cost energy in the case of Europe to the extent that that persists, which it obviously has persisted for a period of time, that starts to trickle into all the other elements of pricing.

First, very closely connected to energy type dynamic, something related to the transport of goods or things like that, trucking prices or shipping prices or something. But then slowly but surely, it starts to work its way all the way down to the pure services economy. And when you look at Europe, you’re starting to see that process happen. You’re starting to see increasing breadth of high inflation across the economy. Over something like 70% of categories in the European CPI are rising faster than 3%. That’s not as bad as it actually it is in the U.S., but it’s starting to show that it’s starting to permeate through the economy. Core inflation is at 5% and remains elevated. And so, you’re starting to get that dynamic. And the ECB is in a really critical moment, which is do you respond to that to try and slow aggregate demand to help reduce the inflationary pressures flowing through to the rest of the economy in order to ensure that you don’t start to get into that inflationary mindset? Or do you hope for transitory inflation? And by and large, the ECB is just running monetary policy on hope.

The idea that in a 10% inflation environment or even a 5% core inflation environment, that 3% interest rates as a terminal rate is appropriate monetary policy is bordering on irresponsible in terms of their mandate and in terms of what they should be doing. And so, I think one of the big surprises may be in the course of 2023 is that the European economy…first of all, it’s a little more resilient than we all expected. Like, if you talk to most people in the U.S. they’d say, “Oh Europe, it’s in a depression.” And you look at the stats and you’re like, yeah, Europe is like kind of moderately growing. It’s kind of okay, you know, it’s not great but it’s like okay and inflation’s a 10%, you could easily see the sort of repricing of the expectations of monetary policy that we saw in the U.S. start to flow through Europe. And I think that has lots of other interesting second and third-order consequences in terms of bond market investing and exchange rates over the course of 2023.

Meb: Is that one of the reasons we kind of have seen the dollar-wrecking ball romping and stomping? Like, what’s your perspective on the dollar in currencies where we stand versus most of the pairs?

Bob: Yeah, I think you’re seeing a combination of two things in terms of the dynamics. The first thing that you’re seeing is that the U.S. has a couple of structural forces that are very supportive to the dollar, and the two main ones are the shift from the U.S. being a big commodity importer to being neutral, basically, no longer sensitive to energy prices. And, obviously, in an environment where energy prices went up a lot, that made the U.S. much stronger, the U.S. external balances much stronger than they were in Europe and the UK who are obviously big energy importers.

Part of the reason why the dollar has softened particularly against the pound and the Euro over the course of the last couple of weeks is because we’ve also seen energy prices come down, right? So, in the same way that dynamic was beneficial to the U.S. and to the dollar earlier in the year, it’s detrimental to the dollar in the back half of the year. So that’s part of the dynamic that’s going on. The other part of the dynamic is that the U.S., in general, is less sensitive to interest rates, particularly relative to places like the UK and Australia who have much more short-end borrowing sensitivity from households. And so, the U.S. can run tighter monetary policy than can many other economies in the world because we mostly have long-dated mortgages that are not resetting in price. And so, what you’ve seen there is that has allowed the U.S. to get ahead of many of those other economies in terms of monetary policy. But we’re now reaching the point where the U.S. is not going to tighten another 500 basis points from here, right? So, that is not in the cards. The US is going to probably tighten a moderate amount, additionally, probably more than what’s priced in from my perspective given the dynamics I’m describing, but not radically more than priced in.

Whereas when you look at some of these other economies, places like the UK and Europe in particular, you could easily see, given the inflation and economic conditions, a meaningfully tighter set of monetary policy and a shift in the bond market, which would be advantageous for their exchange rates relative to the U.S. And so, probably what we’re going to see on the margin is basically the dollar wrecking ball is kind of behind us, not ahead of us. And we’ll probably see some softening from high levels. Probably not a huge shift, but you’ll see some softening from relatively high levels from this point, assuming that, frankly, the Europeans and the Bank of England take the appropriate steps to manage their monetary policy consistent with what the domestic economic conditions are.

Meb: Yeah, the dollar, great time, listeners, if you’re an American, go travel. But on the purchasing power parity, it’s certainly on the higher side versus a lot of the world. So, get your travels in.

Bob: Though if you travel, you try and go to Europe, that inflation is not helping the circumstance. In dollars, even with the dollar, I think you’d find that the cost of services in Europe is actually pretty high certainly relative to pre-Covid levels.

Meb: Yeah, so travel and travel cheap. So, that’s the way to do it. The old Anthony Bourdain way of travel. So, we had a Twitter poll, I remember. It went something along the lines of, “What do you think is going to hit 5% first, CPI coming back down or two-year bond on the way up?” What would be Bob’s vote?

Bob: Oh, a two-year bond is going to hit. Yeah, for sure. I mean, depends on exactly what you’re going to book as CPI, but if you look at it year-over-year CPI versus the two-year bond, yeah. What you have in the curve right now is you have cuts starting in the second half of 2023. My guess is that that’s going to get mostly priced out as the economy is stronger than everybody expects. And monetary policy continues to rise, not as aggressively as it has been rising, but it will probably continue to rise and be higher for longer than people than it’s currently priced in. And so, that would be my expectation is something like that. Whereas it’s going to take a little while, I don’t know, five precisely, I’d certainly take that bet on four.

Meb: Right. As usual, like my poll’s part of it is just curious and a lot of its sentiment, but certainly, most of the people answered that it was certainly going to be inflation. So, we’ll see.

Bob: Yeah, we’ll see how that one works. I mean, that’s part of the story is you got to be… In order to make money in markets, you got to be out…non-consensus, right? If you just assume that things are going to play out as they’re priced right, you just assume that inflation’s going to fall to 2% consistent with what’s priced in, you’re not going to make money in markets, and so part of the… You might be right or you might be wrong, but you certainly can’t generate alpha if you just go with the consensus. And so, part of the strategy is to look for those opportunities where the risk-return of positioning in a certain way is to your advantage. It won’t be… No bet is greatly to your advantage and anyone who tells you differently is misleading themselves or trying to mislead you, but you’re just trying to build a bunch of little bets that are a bit better than 50/50 organized in one direction. And so, as an example, I think things like longer two-year bonds or short rates in the second half of 2023 probably will be higher than it’s currently priced in. So, on the margin, that looks like a good bet. It certainly looks like a better bet than just taking 2%…expecting lower than 2% inflation on a forward-looking basis, That seems like not a great bet.

Meb: Yeah, and this kind of whirlwind we’re in, most people listening to this and when I say most, I mean probably 90% because when we did our poll, we asked investors. I said, “Are you up or down in 2022?” And it was like 90% said down, which isn’t surprising cause 90% of ETFs are down on the year, maybe less today cause the markets have rallied a bit over the last month or so, but most are certainly down. And so, it’s been a rough year for most people.

We talked about the beta and kind of how to think about it like having that a little more balance. Let’s talk about the fun stuff now alpha, the secret alpha juice. I used to own that website. I think I probably still do. I have a lot of domains for the…

Bob: Thesecretalphajuice.com?

Meb: No, no it’s not…its just Alpha Juice. And I have a handful of domains that I bought for the sole purpose of gifting to a friend and this was… I had a friend who used to joke about his secret alpha juice in markets, and so, I was going to give it to him. And then I had someone try to buy it from me who was going to do a website targeted solely for selling steroids or something. So, Alpha Juice is slightly different demographic.

Yeah. So let’s talk about markets. When you start to get away from the beta, what does that mean to you? We can go through the lens of your newly launched strategy or we can come back to that, but how do you think about alpha in general? The toolkit is essentially now everything, and then, also now it’s also long and short, so you just doubled your chances to be right or wrong. How should we think about adding alpha to a traditional sort of buy-and-hole portfolio?

Bob: Yeah, you think about beta, let’s start with beta cause I think it’s a good framework to think about. Like, beta is pretty reliable in the sense of you hand people money, they give you a return on your money over time and they hand it back to you, otherwise, you would never hand them your money. And there’s different forms of that bonds and stocks and things like commodities and things like that. And so, you basically credit things like that. You expect to earn money over time for it to go up and to the right. You just want to kind of create the most balanced or at least a moderately balanced version of that. But the problem is that the risk-return of that is not that great. It’s better than not being invested given that you’re going to get positive returns, but there’s reasonable volatility.

Alpha’s pretty different, and the reason why alpha’s pretty different is because as you say, it opens the aperture to make bets long-short. And from making those bets, you can make money or lose money. And on average, when you take into consideration transaction costs, people are losing money. And so, the key thing when you’re thinking about alpha is thinking carefully about who you’re betting on. Because that’s what’s happening when you do alpha, is you’re betting on manager skill. And so, you have to think very carefully about how do you…who do you bet on in terms of manager skill? And how good do you expect any particular manager to be when you’re thinking about that? And so, I think one of the things that is probably…before we get into all the interesting nuances around strategies and opportunities and things like that, the biggest thing I would say when you think about alpha is, by and large, people are totally under-diversified in alpha, like, very, very under-diversified.

If you think about most, you know, most RIAs that I talk to are trying to get their clients into a variety of different strategies. They may look at one or two or five, let’s say five managers would be a very diversified set of portfolios, or they might have a couple of actively managed ETFs or mutual funds. That’s just a handful of different managers. And given that any manager, even the best managers are wrong in 40% of months in their views. Like, what ends up happening is if you only concentrate in a couple of different managers or a couple of different strategies, you’re not flipping the coin enough to actually have it land in your favou0r in a way that’s consistent enough.

And so, what you end up seeing, most people when they think about alpha, they shy away from alpha cause what they see is they see the returns of beta, and then what they see with the alpha manager is like a lot of this. And maybe over time a lot of this for those listening is a lot of chop, a lot of up and down, a lot of above and below benchmark. And when it’s above benchmark, it’s good, but then it’s below and then you have to sit there and you have to have a conversation with someone about why it’s below benchmark. And that’s a miserable experience as we all know, anyone who’s been in this industry knows that that’s a miserable experience.

And the problem is if you just have a handful of managers, you’re going to have a lot of that volatility, you’ll be forced into those conversations with some regularity. And the result is, frankly, that a lot of people basically say, “Ah, instead of holding alpha, I just forget Alpha. Like, I want nothing to do with Alpha because it’s a pain.” Rather than doing what they should be doing is looking for diversified alpha. Because if you can get diversified alpha, you can get a high-quality return stream that is beneficial to a portfolio.

Meb: Yeah. So, the discretionary managers, which has kind of long been the pedestal or the news story of the last 50 years, right? The Peter Lynches of the world that the media really focuses on is sort of my nightmare. Like, being at one of these big institutions and having to like sift through these stock pickers. Like, it’s a hard job, I think, for a lot of reasons, but there’s a great thread we’ll add to the show note links about not necessarily just any active manager, but also I think it applies to strategies, as well as asset classes. But it just talks about investors chasing performance and the streaks, even if you’re a top decile active manager, just how many years you actually underperform and how many years you can underperform in a row, and lining that up with a traditional allocator’s time horizon is woefully mismatched.

Most people operate on the 0 to 3 years if that, and really in my mind it’s like 10, maybe 20 years for a lot of these, which of course no one’s willing to wait for. But on the systematic, it’s a little bit easier. It’s still hard, in my mind, picking systematic strategies. But talk to us a little bit now about, okay, let’s say you’re going to do some active. I feel like you opened up the Pandora’s box, right? A lot of advisors say, “Well, hells bells.” There’s 30 different categories, there’s global macro, there’s long-short, there’s on and on and on and on and on. Like, where do I even begin? Two hard bucket, like, I can’t even deal with this. It’s too much. How should people think about it? Like, as they start to open the toolkit from just long only beta to all of a sudden, they got this whole new world of alpha systematic opportunity?

Bob: Yeah, I think you draw a good distinction the difference between discretionary and systematic alphas. And so, discretionary alphas are painfully impossible to evaluate. Let’s be perfectly frank. You can’t really know whether or not someone can consistently generate alpha if they’re trading in a discretionary way. And the reason why that is it’s very hard to get enough sample size to separate luck from skill. And we’ve all seen, if you flip a coin enough times like somebody’s going to get all heads. That’s just the way it works. And so, when you invest in some…a particular manager, it’s not about the backward-looking track record that might be right, it might be wrong. Who the heck knows? Particularly from a discretionary perspective, like, the only thing that matters to you is the future. And if you can’t differentiate the backward-looking dynamic based upon whether it was luck or skill, then you can’t have confidence that it’s going to deliver returns in the future.

And so that’s why, if I was suggesting to a manager, like, should you use a discretionary alpha manager? I would say like, “Why put yourself through that when what you can…one of the things you could do is you could look at systematic alpha managers.” Now, to be clear, it doesn’t necessarily mean that just because it was a systematic process that has worked well in the past that it will be certain to work in the future. But you could have a lot more confidence in understanding what the nature of returns are, what the patterns of returns are, what the consistency of returns is, whether or not…what the range of plausible outcomes are. Whether a particular manager’s outcomes are consistent with that plausible range of outcomes or inconsistent with them. Like, systematic alpha strategies are much easier to manage from an allocator’s perspective because you can actually define and understand what’s actually happening there.

And so, I think that that’s most, if you look back through time, like the vast, vast majority of strategies that are out there are of, I should say, of true alpha. This isn’t just like sort of smart betas, I’m talking about true alpha managers that are trying to generate uniquely differentiated returns. Most of it that’s out there has been discretionary. Of the trillions of dollars in actively managed mutual funds, the vast, vast majority is essentially discretionary in one form or another. And that does not make any sense to invest in relative to finding systematic strategies.

Meb: We wrote a book on 13F tracking years ago. Listeners, it’s free to download online called “Invest with the House.” But we talked about like, you know, these discretionary managers and I said one of the hardest problems is like, “When do you sell ’em?” Like, they go through a rough patch, you’re like, “Okay. Well, is this just cause value is not working? Or is it because he bought a jet and is hanging out in Monaco? Or is it because the manager got a divorce? Is it because they are now buying sports team? Like on and on and on. Or they fired their main analyst who is responsible for the…like, it just like, “My God, why would you put yourself through that anyway?” So, it’s hard certainly, but the systematic, you at least have a sort of a foundation or a rudder to compare to as we often say.

Now, it may be different from that. And one of my favorite jokes we talk a lot about, I say, we have over 130,000 investors now, and I certainly get emails where people are like, “I bought this strategy, I bought this fund, it’s done worse than I expected, we’re selling it.” And yet to this day we’ve never had someone say, “It’s a systematic strategy. I looked at it relative to its past, it’s done way better than expected, so we have to sell it, Meb. I’m just letting you know. It’s out of the range of what we expected. You crushed it, well done. Goodbye.” Someone sent me that email one day, I’ll love to receive it cause I’ll smile. But I like the systematic, again, because you can compare it to expectations and then come up with a plausible reason. Hey, is this fit within expectations? Is this okay? Is this not okay? What’s going on? And the conclusion may be, we sent out an email this week where we were talking about a similar scenario where we have a strategy that’s done poorly, not surprisingly it’s global deep-value stocks

Bob: That’s about as bad a strategy as is out there, right?

Meb: Yeah. And thank you for rubbing it in. But we’ve come to realize that when we appease the market gods with humility and honesty, we’re often rewarded. And when we do the traditional banging our chest and trying to say how much we’re crushing it, usually it takes us to the woodshed. So, I’m airing on the side of talking about what’s not working.

Anyway, systematic, I 100% agree with you. Now, granted that’s sort of a loaded audience. So, let’s talk a little bit now about, okay, like what does that mean like this, this kimono, this open buffet of available choices. What are some of the areas or systematic approaches you think are really interesting or conducive or great diversifier to a traditional portfolio? And we could certainly use, as a case study, your new strategy, which launched. Congratulations.

Bob: Thank you, I appreciate it.

Meb: Bob is now in the ETF game with… You guys know I appreciate a good ticker, HFND, a hedge fund ETF, and hopefully, lots more to come. So, I’ll give you the choice, you can talk about strategies in general or you can talk about this strategy specifically. Where do you want to go?

Bob: The first thing I think for most managers in terms of thinking about systematic strategies and you just want to think about it more generally, like we can talk about how we’re doing it with HFND, but more generally, when you think about systematic strategies, the key thing that many allocators or investors don’t recognize is that the purpose of building a systematic strategy is not to knock it out of the park. Like, that’s by and large not what you’re trying to do. What you’re trying to do is get repeated incremental edge.

And so, a lot of these different strategies that show positive returns, positive alpha over time, are about sort of weighing that coin slightly in your favor each time that you trade it, and then having a bunch of different…a bunch of sample sides each day is a new incremental bet on that particular strategy or that way of decision making. And all too often people, in general, are return chasing, but in particular when they’re looking at alpha strategies, what they’re worried about is I want to find the best alpha strategy, I want to find one that’s going to be the two sharp ratio strategy for the last five years. And the answer is like, things that you can rely on are kind of good. Like, you can rely on kind of good strategies, you cannot rely on very good strategies because they almost certainly aren’t true in terms of the reality.

Meb: And they end up in a bunch of option selling, right? Like, it’s like the…

Bob: And they end up just not delivering on what your expected returns are. It’s like you see somebody hit, you know, 750 in the big leagues for 3 games and you’re like sitting they’re trying to extrapolate that that’s going to exist in the future. The answer is no. Like, what you want is a team of hitters between 300 and 350. If you can put together a team of hitters of 300 to 350, you’ve got World Series champions. Investors don’t think about alphas in that way and particularly don’t think about systematic alphas or systematic managers in that way. And the thing is, if what you can do is you can get a bunch of incrementally pretty good strategies that you can rely on over time and you can diversify them through time cause they all have a bit of edge, but some do well and some do poorly at different points in time, then what you can do is you can basically put together that diversified return stream that is so much better and, frankly, a lot more reliable of plausibly delivering a pretty good return in the future than if you try and pick out the particular strategy.

So, like, your value fund, the point is you shouldn’t just be investing in your value fund. You should be buying trends, you should be buying value in other sectors, you should be buying all sorts of other different strategies that are out there. Global macro strategies, other equity long-short strategies, individual stock picking strategies, like you buy ’em all. Like, that’s the idea is buy ’em all, they all have edge, and as a result, you’ll get a pretty high probability of a pretty good return. That’s what you’re trying to do as a manager, a pretty high probability of a pretty good return.

Meb: So, let’s find some pretty good returns. It’s the endless seduction where, I mean., we have an old post starting to show my age and the nice thing about having a blog in Twitter for over a decade now is you can always go back and say something we talk about, but there’s an old post. It was, like, where have all the sharp ratios of two gone I think is the name of it. But basically, looked at a lot of the active strategies and you have sort of like a curve where, over time, yeah, you may have a amazing sharp ratio strategy that high for like a year or two. And listeners, if you don’t know, sharp ratios, risk-adjusted return for an asset. But anything over one, which is, like, world-beating often should elicit more warnings maybe than excitement because often those things aren’t sustainable. If they were, we would all do it and be zillionaires.

So, okay, let’s talk about some specific ideas here. Are there any particular active strategies you’re drawn to? You mentioned a few of my favorites, valued, you mentioned trend, my number one probably, but how do you think about which ones are particularly pretty good, as you would say?

Bob: Reliably pretty good. Yeah, I think when you’re thinking about the strategies, I think you sort of want to intersect style, which I think is an important consideration. So, are you talking about equity long-short, or fixed-income arbitrage, or global macro, or trend, or managed futures, or however, exactly wanted to call that. So there’s sort of the style version of those different things, and then you want to think about who is implementing them, right? Because, ultimately, alpha strategies are matters of skill, and in order to get the skill, you have to have the skill in creating the insight about what’s likely to transpire in markets. And so, you always want to think about sort of what are the attributes of the strategy and how much skill does it take to deliver that strategy? And you want to basically create the best portfolio, which gives you the highest probability of success reflecting both of those different elements.

So, as an example, if you think about something like trend, that’s just a simple strategy. From a skill perspective, there’s some art in crafting the particular nuances of trend in terms of how exactly you want to do it or how you want to weigh the portfolios or things like that. But at a big picture level, trend is a core concept, a core systematic strategy that exhibits a certain set of attributes. So you’d put trend and trend strategies as something that is, I don’t want to say easy, it’s not simple to implement, but it is an easier strategy to implement than say certain other strategies, but is moderately good as a function of…it is a moderately good reasonably high conviction strategy that’s reasonably easy to implement in the scope of all alpha strategies. I want to be clear. I’m not trying to say, “Oh, it’s just so easy, you just implement it and you snap your fingers like that.” There’s skill in it. But on that scale, it’s easier.

Then, you go to something like global macro, let’s just say, which I find sort of on the total other end, which is very hard to implement. Like, lots of people have views on macro environments, everyone has a view, but to actually rigorously systematically develop a great global macro trading business is challenging. Like, trust me, I did it for almost 15 years, I know what it takes. It’s incredibly challenging, but if you can do it well, your probability of delivering a high-quality alpha, a low correlation, high-quality alpha is pretty high if you, if you can do that well. And so, when you’re thinking about that sort of range of different things in terms of the alphas that you’re creating, you want to sort of balance those two different pieces. I think what you end up seeing is that in some ways the market sort of works itself out, which is that the easier-to-create strategies are a bit lower performing but you’re more confident in them, and the better strategies are definitely higher performing but you’re a bit less confident in them.

And so, the main question then becomes can you get access to the best people, essentially the best managers in each one of those different strategies, particularly in the ones that take real skill. Are you getting access to negative selection bias managers? Are you getting access to the best managers? And if you get access to the best managers, you know, what you sort of see is like, what’s the right answer? It’s like kind of all of them, a little bit of everything, is kind of what I’d say if you can get access to the best managers. And so, that’s sort of the question and the sort of the access that you want to think about when you’re thinking about them. And it basically leads and it actually what you do is if you go look at the most sophisticated managers in the world, like the big pension funds, the big endowments and things like that. What you basically see is that they hold a market portfolio of alphas, cause they basically invest in all of the top 50 let’s say and all those top 50 have a bunch of different strategies and you work it all out and you basically say, “Well, basically they hold an equal weight of the main big strategies, big alpha strategies.” And like that’s the answer, is kind of everything assuming you get access to the best.

Meb: That goes along with a line of people often… I’m getting this question now in 2022. I wasn’t getting it for probably the decade prior, but people would come to me and they’d say, “Meb, I’m interested in manage futures suddenly, but you know, which one should I buy?” And as I always tell people, I say, “Look, I’m not giving you advice. Are you crazy?” Number one thing, like I don’t recommend funds, but I’m like as long as these pass to me your criteria. I was like you don’t have to just buy one. Everyone always assumes you have to just like go, which is the one, like, tell me the one. I’m like buy… I don’t say buy all of them cause there’s some that are I think either way too expensive or poorly designed, but to the extent, you make it down like your final list and there’s five. I’m like, “Just buy all of them. What’s wrong with that?” Because, inevitably, there’s going to be an outlier to the upside and outlier to downside, but you kind of want that exposure, and I think that’s totally okay. Like, the average of that is still pretty great. You end up with a lot of kind of decent ones and they may be a little different, but to me that’s better than picking one and flipping a coin and hoping that’s the one right, which is marriage, which just describes a lot of life.

But anyway, so, okay, so we have this huge buffet, there’s a lot of great choices out there. Why don’t we talk a little bit about your recently launched strategy, cause I think this is super interesting. Tell us a little bit about…I saw it holds Australia, big upset today, Australia making it into the next round. By the time this publishes, Australia will probably long gone from the World Cup, but at least for today, my Aussie friends, congrats. So, tell us a little bit about the strategy and why’d you decide on this one to be kind of the first market?

Bob: Yeah. In a lot of ways, what we’ve tried to do with HFND is consistent with what we’ve been talking about, which is to create that diversified portfolio of hedge fund style strategies, that instead of having to go buy 20 or 30 different strategies that are out there or managers that are out there, try to give advisors who are busy and have a lot of different things on their mind, try and provide them a single diversified hedge fund style exposure with all the advantages of an ETF wrapper. And the way that we do that is what we’re trying to do is close to real-time, look over the shoulder of the biggest, most sophisticated hedge funds in the world, see what they’re doing, see how they’re implementing their portfolios. And from there, basically, take that understanding, translate it into a set of long and short positions in low-cost index ETFs and other assets and base and package that into the ETF wrapper.

With the idea of being that we can provide investors…the goal being we can provide investors a product that looks to replicate basically the gross of fees, returns of hedge funds, diversified pool of hedge funds, which is a great return stream that most investors want to have. It’s returns on, if you look through time, back through time, returns on par with stocks. About half the volatility, about a third of the drawdowns, that’s a return stream that you’d be interested in having in your portfolio. That’s what we’re trying to track. But instead of charging 2 and 20, which is what most of those managers charge, we’re going to charge 95 basis point management fee, which is considerably less. And then have it in this tax-efficient wrapper of ETF. Of course, I don’t have to convince you about why ETFs are the best wrapper for investors, but in particular, in this space, most of the options that are out there for investors are LP-type structures, which are super tax-inefficient, illiquid, frankly, involve a whole lot of paperwork, which we talked to advisors and it’s the paperwork.

Meb: Oh my God, we used to have private funds and trying to present someone with, here you go, here’s a 70-page private placement document, whatever it’s called. I don’t even remember three of ’em read this, sign it like you’re, forget it. But also, so we ended up in converting those straight up into ETFs, which is a trend you’re seeing a lot. You’re now seeing the big floodgate with the mutual fund to ETF conversions happening. DFA being the big one with, I don’t know, 50 billion or so. But you’re also seeing it with the hedge funds and I said this probably on Twitter, who knows, maybe on the podcast years ago. But I said, “If I was a hedge fund LP and I was taxable, I would say, ‘Look, it’s not some weird crazy strategy.’” Like let’s say I’m allocating Maverick and I say, ‘Lee, buddy, you got to launch a long-only version of this as an ETF. Cause your alpha juice, your long-short, 2 and 20, maybe let’s keep it over here because you can’t get carry in an ETF, but hey, you know what, you’re kind of vanilla version that I’m going to be sitting in my taxable portfolio. You got to do it as an ETF or else, sayonara.’” Because it’s a huge… I mean it’s like a 70 BIPs just on the tax alone benefit to the structure.

Anyway, let’s talk about it. So, theoretically, yes, sounds great. We’d like the exposure to the best hedge funds out there in a tax-efficient ETF structure. But devil’s in the details, how does one actually replicate that?

Bob: Yeah, I think the way that we approach it is by basically combining our decades of experience having built proprietary hedge fund strategies in across basically this whole range of different styles in a systematic way with modern, basically, machine learning techniques. And basically, what that allows us to do is to look at the sort of returns that various hedge fund strategies are producing in pretty close to real-time and compare that to what they could plausibly, the types of exposures they could plausibly be investing in. And then, say, well, given that understanding, given what we’re seeing them, how we’re seeing them return relative to what they could plausibly invest in, we could start to solve for what portfolio of positions is the most likely portfolio of exposures that explain the returns that we’re seeing. And cause we get the returns information pretty fast. Like, there’s some daily information, some information comes out a few days after the end of the previous month.

Meb: Where does one get that sort of information? Is that like, Bob’s got a pseudonym, or you just subscribe to all the hedge funds and be like, “By the way, I’m now going to kick you out as LP,” or use the databases? Like, where does one find all that info?

Bob: There’s a bunch of performance aggregators. Like, the part of the thing coming from the hedge fund space is you kind of know where does everyone report their hedge fund returns? Because there’s various benchmarks and you’re constantly putting yourself against the benchmarks. And so, there’s lots of different aggregators. There’s the places like Bloomberg or Barclay Hedge or places like that that bring together reasonable, often pretty extensive representative samples of all the different funds and how they’re performing. And really, what we’re doing, we’re not trying to predict one particular fund or the other. We’re kind of looking at styles and sort of extracting the wisdom of the crowd, is kind of how I like to say it. So, what do equity long-short managers, how are they generally positioned? Or how are global macro managers generally positioned?

And essentially, what you’re doing is you’re creating a portfolio, a diversified portfolio of all the different global macro managers and what does that infer and all the different equity long-short managers, what does that infer? And then, you’re diversifying it further because you’re taking those portfolios and you’re putting them all together in a way that should be more consistent over time because it’s relatively diversified compared to any one particular strategy or any one particular manager. And what we’re doing really, like the machine learning, it can kind of sound very blackboxy. I mean, all we’re really doing is we’re doing what many people would do if you just like looked at the returns that are being posted, like global macro did great in the first half of the year. You kind of know in your gut that they were short bonds, short rates, long commodities, long gold, etc. Like, you kind of know that that’s the only way they could have produced the returns that you’re seeing. And so, all we’re doing with machine learning really is just doing that in a much more computationally rigorous and systematic way than me just looking at a return and saying, oh, it’s obviously, you know, they’re short bonds in their portfolio.

Meb: Yeah. And so, how many funds do you guys kind of look at. Is there a way you sift through all these funds? Is it ongoing? Is it a one-time list? Like, how do you kind of arrive at the crème de la crème of who you guys are looking for?

Bob: Yeah. I mean, we use constructed indices which cover basically all 3000 plus funds. And part of the reason why we do that is because you can’t predict which funds are likely to be successful in the future with any reliability. You can’t predict which strategies are likely to be successful and you can’t predict which funds are likely to be successful. And so, you could easily have emerging funds at periods of time do very well relative to well-established larger funds. At other points in time, well-established larger funds do better than emerging funds. And so, by replicating an index rather than trying to pick, we’re doing basically what many people have learned with beta and the S&P 500 is you don’t know which company is going to do particularly well or particularly poorly, so why worry too much about that? Just buy all of the companies.

We’re doing the same thing here in terms of hedge funds, which is some will do well, some will do poorly, good ones will do well sometimes, good ones will do poorly sometimes, bad ones will do well sometimes and poorly sometimes. But since it’s so hard to pick which strategy on a forward-looking basis, which strategy or which manager is going to outperform, as long as you believe that all of them have edge in aggregate over time, which I think is, you know, pretty compelling, like hedge funds, particularly before you start charging crazy fees, they’re the smartest, most sophisticated investors in the world. Like, yes, you would expect them to have to generate alpha over time. So, as long as you can sort of bet on all of them, which is what we’re trying to do at a reasonable fee, you can build a pretty good diversified portfolio.

Meb: All right. So, let’s say we’ve settled on the thesis that we want to incorporate the alpha of hedge funds, we’d want to pay this giant carry, and we want to do in a tax-efficient structure. We establish we’re going to kind of replicate it. How do you actually implement it? So tell us, are you using swaps? Are you looking through daily? Is this something that updates and has like 10000% turnover? Give us the recipe.

Bob: Yeah. I mean, what we’re trying to do is capture the most important and most explanatory exposures that those funds have on at any point in time. And so, the way that we do that is through positions in our universe is roughly 50 of the largest, you know, liquid asset markets as well as, you know, stock sectors, geographies, factors, things like that. And so, that’s really the universe. We express it today mostly using low-cost index ETFs, long and short positions. It’s nice. You talked about how cheap beta is, like how great is it that Vanguard and iShares have done all the work for you in creating nice packages of securities that directly reflect exactly the concepts that you’re trying to do at deminimis cost, and also, in a very liquid structure cause in many cases the ETFs might be even better to hold, more liquid to hold and more cost efficient to express than if you’re trying to buy individual stocks at the size that you have to in order to implement these things.

And so, that’s what we’re doing as long and short positions and ETFs. I think part of the…over time, we may add exchange-traded futures, swaps. We may buy some physicals depending on exactly what makes the most sense from a liquidity and cost perspective for the investor. But for right now, that’s primarily where we’re focused. And I think what it speaks to in some ways, having sort of my career has been as a macro investor in a lot of ways what I see is whether it’s making a proprietary alpha bet or developing this process to infer what managers are doing. I really believe that a lot of the outcomes that you see really come back to core macroeconomic exposures, whether it’s exposures to liquidity, or interest rates, or sectors, or things like that. You might be trading something that to you looks idiosyncratic or to a manager, they could say, “Oh, it’s idiosyncratic? It’s idiosyncratic off-the-run versus on-the-run bonds.”

But in reality, all the different things that allow you to take advantage of that opportunity, things like interest rate costs or credit conditions or liquidity conditions or things like that, those are things for more bespoke strategies that you can basically explain a fair amount of understanding the sort of macro dynamics that are at play and the macro exposures that are at play. Particularly if you start to diversify across managers and across styles, you can really extract a lot of the understanding of what the effective positioning is of these managers through those sort of macroeconomic concepts.

Meb: So, what are these hedge fund titans putting you in today? What’s the exposure broadly look like? Are there some general themes we can tease out?

Bob: Yeah, yeah, for sure. The thing that’s most interesting about how they’re positioned right now is they’re basically as conservative as they’ve been in the last 25 years outside of some of the most acute crisis periods of ’08 and ’20. And so, that’s pretty interesting, right?

Meb: When you say conservative, what does that mean? Just as far as equity exposure or just long exposure to anything or what does that actually mean?

Bob: In general, they’re taking basically the lowest risk, the lowest VaR that they have over the last 25 years. So, their aggregate positions are very small relative to historical aggregate positions. And then, even within that, let’s say what you see is that they’re holding effectively a lot less equity exposure. This is, again, managers in aggregate, a lot of the equity exposures through long-short equity managers, as well as some global macro managers. Even the stock pickers, when you look at what they’re doing, they’re running much lower risk than they typically would, and even within the risk, the dollar risk that they’re taking, what you see is that they’re positioning to lower risk sectors, so much more value-oriented, consumer staples. Like, frankly, very boring, the sort of boring businesses, you know, versus being short growth type stocks. And then, you see, in general, also a relatively diversified set of positions, like not just holding equity exposure but positioning in credit and higher short-end credit, higher rated credit. So, looking for those sort of high strong balance sheet opportunities.

And then, also holding positions in things like gold and commodities. Part of the reason why we’re having this conversation about betas is recognizing that the most sophisticated asset managers in the world think that holding gold and a diversified commodity exposure is a good tactical bet as well as a good strategic bet in terms of those positions. And so, that whole package is pretty conservative all things considered. And I think that makes a lot of sense. Like, if you’re living through a cycle, first of all, tightening cycle, you want to be very careful about adding risk in a tightening environment so you can preserve capital for better liquidity environments. And then, also, we’re seeing a cycle that is basically totally different than any cycle that we’ve seen in our professional lifetimes. And when you see that, it makes sense to be pretty conservative with your positions.

Meb: No, well, it lines up with my trend follower heart, and look, we look back on the craziness of 2021 really peaking, I think, in February. We have a Twitter thread, listeners, you can look up, it’s called What in Tarnation. And man, that was a weird time. There’s like 50 charts where we just kept adding and adding and they got weirder and weirder and crazier. And I’m like, “Man, look back on it. Like, what were people thinking?” They weren’t, I guess. But a lot of that is kind of obviously getting exposed today. So, listeners, check out that fund, it’s super cool. The nice thing about ETF’s score, you can download the positions and check out what’s under the hood. How often does this update? Does this update daily, weekly, monthly, quarterly?

Bob: We’re updating it regularly when we get incremental information about hedge fund performance, which comes in…we have a bunch of different sources that we use to track that and so whenever we get that in. And then, to some extent, when market conditions adjust and change will be in there, but it’s a couple of times a month sort of in terms of shifting the positions around.

Meb: But do you notice it actually make pretty large changes that much or does it tend to be kind of incremental turning the dial over the course of months?

Bob: If you think about it, like in the context of the wisdom of the crowd and these managers and you think about how their views change over time, it’s the sort of thing that will change over the course of 6 or 12 or 18 months. And so, it’s any one position change or any one incremental set of information, You might not even notice. And then, you look back, like as an example, we saw equity long-short managers, really long tech and growth coming out of Covid. And then, by the beginning of this year they were very long value and essentially short growth, right? That kind of gives you a sense, it took 18 months. They went from being very high beta positioned to essentially being very low beta positioned. That’s pretty normal in terms of how you’d expect this to evolve. So, if you looked at every incremental change, you’d probably not see something that’s a huge difference. And then, you know, over longer periods of time you see more substantive changes.

Meb: What’s sort of the max exposure this can have? Can it have leverage? Like, does it get more than ever like a 100% net long or short?

Bob: Yeah. I mean, we’re in the context of the various regulatory constraints in terms of the leverage that we can take in the ETF, it does have the option of taking leverage both on the alongside as well as holding short positions in the portfolio through time. And so, we’ve got a set of risk controls that I think are institutional quality risk controls that are well within the tolerances of our sort of regulatory constraints and to make sure that we’re not taking undue risk through the course of the process. And risk controls are an important component of any systematic investment manager to make sure that you’re being prudent about the strategy over time. But we do have leverage in short positions in the portfolio.

Meb: Give us a peek to the extent you can and you can say I can’t, if that’s the reality, but do you have future strategies that you’re considering as well? And what’s missing in the toolkit? This is a great broad first one, but what else has Bob got kicking around his head?

Bob: I started an Unlimited with a basic idea that 2 and 20 asset strategies are pretty great for managers and pretty terrible for investors. And that’s because the managers are pretty good at generating high-quality returns and also pretty good at taking it away in fees and putting it in tax and efficient structures. And so, having sort of spent my career across the 2 and 20 landscape and the team in aggregate doing that in both the public side and the private side, I think what we’re really excited to do is to bring to market a set of sort of diversified low-cost index style funds, ETFs that provide the everyday investor with the types of returns and exposures that you typically get in holding 2 and 20 products. So, hedge funds being the first, but also private equity, venture capital, private credit, etc., and bring those sort of index-style ETFs for the 2 and 20 world out to everyone. And so, in a lot of ways, in the same way that Vanguard revolutionized stock and bond investing, what we’re trying to do is bring the same sort of diversified low-cost index ideas here to the world of 2 and 20 and really democratize and make it available for every investor.

Meb: And you launched the first one with our good friends at Title, [inaudible 01:33:15], which are podcast alums, listeners, Michael Venuto. It’s a good old episode, we need to get them back on, good people. The concept that you’re talking about is really transforming some of these strategies and exposures into what we would call investible benchmarks, right? So, the cool part about what you’re doing and we like to see this development and, hopefully, continues in a lot of areas is because you read “Wall Street Journal” story or all of a sudden now every hedge fund on the planet, it’s not necessarily comparing it to some arbitrary benchmark that no one can invest in. Be like, can you beat Bob’s fund? And if you can’t, CalPERS, you better have some justification for why you’re paying performance fees when there’s an investible benchmark that does better. So, it’s a cool idea and a cool concept,

Bob: And I think that’s where this world is going. Like, part of the world of 2 and 20, what we had was years of monetary fueled high returns where people didn’t really carefully look at the types of fees that they were charging. And increasingly, I think there’s going to be a rationalization of the fees on a forward-looking basis. The world of tight money is going to create lower, in general, returns, and it’s going to create a real examination of the $700 billion of fees that are being paid to 2 and 20 managers every day. And I think what we’re going to find is that the vast majority of those 2 and 20 managers aren’t worth the fees that people are paying. And as you say, the investible benchmarks, if we can create great investible benchmarks that are imperfect but capture a good portion of the composition of returns at a low fee, I think what it’ll do is it’ll really start to create an examination of all of those fees that are out there, and it’ll start to create a much more, frankly, bifurcated market, which is, there will be managers, they are great managers, they justify the fees that they earn because of their skill. That’s great. They should exist.

Investors should go invest in those managers that can justify their fees. But the vast majority of products that don’t justify their fees, I think what we’re going to see is we’re going to see investors pretty happy with investible style benchmarks, particularly when they’re paired with tax efficiency, liquidity, transparency, all of those different things. I think there’s going to be a lot of investors that are going to look at that and say, pretty good. In the same way index investing in stocks and bonds is pretty good. It’s not perfect. You wish you could get better, but it’s pretty good and it’s low cost. If we can bring that to the world of 2 and 20, I think investors will be much, much better off than they are today across the board. Both those that are investing directly in those 2 and 20 products as well as the everyday investor that frankly doesn’t really have access to these sorts of strategies.

Meb: Yeah. As we start to wind down here. Look man, we’re going to have to have you back on because there’s….macro is a never-ending playground that we can hang out and talk in.

Bob: It’s so easy running macro Twitter, right? There’s like new how many stats everyday, always very interesting dynamics going on.

Meb: What’s Bob’s favorite data point in the macro world that you track? It could be obscure or standard, but if there’s one that you’re, like, man, this is mine, this is my indicator or my data point. Is there one that really sticks out?

Bob: If anyone follows me on a regular basis, initial claims. I love initial claims. It’s timely, it’s concrete, it’s actual activity. I mean, today it’s sort of at the critical juncture of all of the different dynamics that are going on. So, you might find me every Thursday reminding people that the U.S. labor market is still secularly strong after initial claims comes out. It’ll be a moment when that repeated refrain starts to change. But that’s what I’m…I’m always looking at that. That’s an exciting part of every week for me.

Meb: So, kind of two final questions. One of the ones we started asking people and I think it’s particularly interesting for someone like yourself is if we look at our peers, and I have a running Twitter thread that’s up to almost 20 now, but the topic is, what is something I believe that the vast majority of my professional peers don’t believe? So, not just macro peers, but just investing professionals, real money asset manager, or real big institutions CIOs. What is something Bob believes at his core that the vast majority of his peers do not? Vast majority is like three quarters

Bob: Well, I think that if you look at how the world manages money relative to how we’ve had this conversation, I think the biggest difference is I believe that the key to success is diversification. And that’s just all there is to it. It’s all about diversification and there’s so many. The value of diversification. Diversification is certain, right? Edge is uncertain. Diversification is certain. And people who ashoo diversification as if it’s a bad idea, it’s as if they’re saying gravity doesn’t exist. I never seeks to amaze me in how many places in asset management people have the choice to gauge in diversification, and they consistently time after time after time choose differently.

And so, I think that’s the biggest thing. I think part of the challenge of picking diversification is also recognizing…is having the humility to recognize that you a lot you don’t know. And if you don’t understand a lot, the most confident choice you can make is to put a bunch of bets on the table and try and create a little bit of edge and try and diversify over that. And you’ll end up getting something that’s pretty high probability of being pretty good. And if you could do that, you’ll make a great business. It’s the reality. But at a core, it’s about diversification.

Meb: There’s even a few areas that outside the traditional set that I still would be super interested in. So, if you’re ready to launch a catastrophe bond ETF, I would be the first one to invest. Farmland is a little hard to do in this structure too, but both of those are…I would love to add a tiny position in. You got a long career, a lot to go. We’re both still young ins. What’s been your most memorable investment so far, Bob? Good, bad, in between, anything stick out in your mind?

Bob: Probably the most formative investment of my career was back when I was just getting started in 2005, and I became very interested in trading natural gas. Now, what did I know at 22 years old about natural gas? Nothing. Not a lick about natural gas. What I did know, it was volatile and there was…and as a result you could make a lot of money trading natural gas. And I got a good life lesson early in my career by being lulled into a series of being long natural gas, getting some cold outcomes as a function of that and benefiting from that. And then, getting burned terribly when the weather changed. And that trading environment and recognizing that, frankly, I didn’t have edge trading natural gas at 22 or 23 years old was probably one of the best lessons I could have had.

I basically lost my first year’s bonus as a result of trading natural gas and losing money, and in particular, like levering up what I thought I had edge and I was making money and then getting burned on the backside. Like, how many experienced traders have been through that cycle before. And in a lot of ways, I was lucky because I got to do it not 10 or 15 or 20 years into my career where it was ruinous. I got to learn that lesson early in my career where it was painful for sure, but not ruinous. And I think it really became a core part of my day-to-day investing strategy and experience and really sort of drew me to ideas like diversification, systematic processes and moving away from discretionary. I learned those lessons real early, and so, losing a boatload of money on natural gas would be the best trade of my career.

Meb: Yeah, that’s like if there’s a way we could ensure that all young traders get attracted to commodities or FX, I guess crypto and meme stocks will do it and the cycle, but get attracted, nuke all your money, learn the lessons, get the scars, get the stitches cause that’s a pretty valuable thing to look back on. And I had the same thing, a slightly different sector being options in biotech, but same story, different characters, same ending. Bob, this is awesome. I’ve already kept you way too long. Where do people go? They want to check out your new fund, they want to check you out on your email list, which I highly recommend, your updates. What’s the best places?

Bob: Yeah, you can check me out on Twitter for all my macro hot takes and weekly updates on initial claims. It’s @BobEUnlimited, my handle, and I’m pretty active there. If you want to learn more about Unlimited and what we’re up to with the HFND ETF or check out our blog and subscribe to pretty regular newsletter about various investing topics, it’s unlimitedfunds.com. From there, you can get to all the information you’d want to know about what we’re up to.

Meb: Awesome. My man, this has been a blast. Thanks so much for joining us today.

Bob: Yeah, thank you so much for having me. It was really great time.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love this show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We’d love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.