Episode #220: Andrew Beer, Dynamic Beta Investments, “Can You Match Or Outperform Leading Hedge Funds, But With Low Fees, Daily Liquidity, And Less Downside Risk?”

Episode #220: Andrew Beer, Dynamic Beta Investments, “Can You Match Or Outperform Leading Hedge Funds, But With Low Fees, Daily Liquidity, And Less Downside Risk?”


Guest: Andrew Beer serves as Managing Member of New-York-based Dynamic Beta Investments, a firm running liquid portfolios that seek to match or outperform portfolios of leading hedge funds based on over a decade of research.

Date Recorded: 4/29/2020     |     Run-Time: 1:04:32

Summary: In today’s episode, we’re talking hedge funds and replication.  We kick things off with some background that includes Andrew’s start in the industry with Seth Klarman’s Baupost Group in 1994. We discuss replication strategies, what Dynamic Beta is doing to try to outperform hedge fund portfolios, and most importantly, how they are doing it.

We talk about the firm’s equity long/short and managed futures strategies, understanding key hedge fund allocations, and what the funds look like right now. As the conversation winds, down we chat COVID and what the future might look like for liquid alts.

Sponsor: YCharts



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Transcript of Episode 220:

Welcome Message: Welcome to the “Meb Faber 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 YCharts, one of my favourite tools for researching securities, monitoring the markets, and doing my homework on investments. I’ve been using YCharts for years and even work with them to add one of my favourite metrics to their platform, shareholder yield. YCharts combines comprehensive data, powerful visualization tools, and advanced analytics to simplify security research and analysis. It’s a tool that every financial advisor should have access to. Whether you’re spending most of your time creating custom portfolios, identifying new and better investment opportunities, or trying to build your book of business, YCharts provides the data, tools, and workflow enablers to do all of that. To learn more about YCharts, head to ycharts.com and sign up for a free trial. Mention my code, MEB, for a 20% discount for new users if you sign up within one month to this show.

Meb: Welcome, podcast listeners. We’ve got an awesome show for you today. Our guest serves as managing member of New York-based Dynamic Beta Investments, a firm running liquid portfolios that seek to match or outperform portfolios of leading hedge funds based on over a decade of research. In today’s episode, we’re talking hedge fund replication. We kick things off with some background that includes our guest star in the industry with none other than Seth Klarman’s Baupost Group in the 1990s.

We discussed hedge fund replication strategies, what Dynamic Beta is doing to try to outperform hedge fund portfolios, and, most importantly, how they’re doing it. We talk about the firm’s equity long-short and managed future strategies, understanding key hedge fund allocations and how the funds are positioned right now. As conversation winds down, we chat COVID and what the future might look like for the liquid alt industry. Please enjoy this episode with Dynamic Beta’s Andrew Beer. Andrew, welcome to the show.

Andrew: Thank you for having me.

Meb: You have a much better view in quarantine out your back window than I do. You can look into Central Park. Has all the wildlife returned? Is there just bears and tigers running around the park?

Andrew: It’s actually really pleasant in Manhattan most of the time right now because it’s quite empty. And so the streets, there’s a lot less traffic, but it’s rough. I mean, it is the epicentre, so people are outside but they’re wearing masks and trying to be careful.

Meb: Yeah. We’re recording this in late April. You can definitely start to feel a little bit of quarantine fatigue in Los Angeles, but I’m optimistic hopefully things are turning the corner. I’m certainly ready for some more sunshine when they open the beaches. All right, let’s get started. First question I wanted to ask you. Did you ever sell any of Seth Klarman books on eBay? Because you used to work at Baupost, and every time I go to used bookstore, I’d look for “Margin of Safety,” and see if I could find it as a young 20-something to sell it. It was going for like $1,200. Talk to us a little bit about your origin story, your background.

Andrew: So, I went to college and I did M&A investment banking, and I went back to business school, and I was on a path to go into the private equity industry. That was kind of what my DNA was. And in my second year, business school, I met Seth Klarman, and I thought what he was doing was just incredibly interesting. It was much more flexible, it was much more diverse. It was complicated. I could really understand where the esoteric opportunities were in what he was doing. And so in 1994, I went to work for Seth at Baupost when it was still small. It was about 600 million in assets at the time. And to show you how much the industry has changed, that was considered a large, probably one of the top 10 hedge funds at the time. Today they’ve got 30 billion. And going back to the book, I actually did recently find my copy along with my Baupost gym bag and my Baupost baseball cap. So, it was great to find those.

Meb: Awesome. Well, I used to joke with the guys at Ned Davis because they put out a couple of great books, one was called “Being Right or Making Money” and the other was “The Research-Driven Investor.” And when I was a young 20-something, those books would regularly sell on a used book site called half.com. Do you remember eBay bought this? So, I used to arbitrage quant textbooks. That’s how I paid my credit card bills in my young 20s. I don’t feel so bad. So, I talked to the Ned Davis guys years later and we pay them a ton of money. So, they’ve been on the show. Anyway. All right. So, you started out, thought you were gonna be a private equity guy, turned out not to be. What was the origin story progression?

Andrew: So, I left Baupost in late 1990s. And what I liked about what Baupost did was Seth would identify an area where there were really interesting opportunities to make money. And I would say one of the things that’s interesting about Seth is it’s more about finding the right opportunity at the space than it is about picking the best guy in the most efficient market. So, if you walked up to Seth and said, “I’ve got a guy who can out-pick everybody else by 500 basis points to the large-cap equity space,” he’d laugh you out of the room. Back at the time, they were buying Russian privatization vouchers, they were buying real estate portfolios that the government was selling off after the collapse of the resolution trust…after the savings and loan collapse.

So, after that, I basically tried to do that in a couple of different forms, but where I’d identify an area where I thought we could make money and then build a business around it because I always liked the idea of being an entrepreneur. And so in the early 2000s, I started one of the first commodity-focused hedge fund businesses, a firm called Pinnacle Asset Management. And again, like a lot of things that was based on an opportunity at the time. And when the business really took off was right after Enron collapsed. And you had a whole bunch of guys who were basically had been making $500 to $700 million a year trading for a firm like Enron, and then all of a sudden had no jobs, sitting in Houston, not knowing what to do next.

So, I brought in a guy and we ended up starting to give those guys money to get into the hedge fund industry. It’s about a $3 billion business today. And they did something similar with the Greater China region because there’d been a collapse in global trading. And so if you were buying shares in Hong Kong or in China and then arbitraging them in different time zones, you could make really stable returns. So, I teamed up with a guy who ran one of the trading desks in Hong Kong to build that business.

And so for the first 12 years or so, in the hedge fund business, it was idiosyncratic and esoteric but it was very much about traditional hedge funds. And then 2007, I became singularly focused on the question that’s basically been my obsession ever since, which is, people have always had this love-hate relationship with hedge funds. And so they used to say at the time that there were two holy grails of hedge fund investing. The first was, “Can you find Seth Klarman in 1982 when he joined Baupost? Can you find George Soros in the 1970s, or Paul Tudor Jones in 1985 or 1986?” I think you mentioned Julian Robertson, again, finding these guys.

And clearly, if you can do that, that’s all you should do. But the problem is no one’s figured out how to do that reliably, so people tend to give money to guys and then they blow up and then there’s a new set of guys who do it. But the second holy grail of hedge fund investing is the one that I focused on, which is, can you match or outperform these leading hedge funds, but with low fees, daily liquidity, and less downside risk? And if you could do that, you were solving a profound issue that every allocator to hedge funds had. And so really, for the past 13 years, that’s been my singular focus. Now, it’s called liquid alternatives, but back then it was just simply trying to solve a problem.

Meb: So, you’ve seen quite a variety of market environments, out-performance, under-performance, blow-ups, Phoenix rising from the ashes for a lot of these strategies over the past few cycles, and they’ve come in and out of favour, but also talking about the umbrella of hedge funds or liquid alts. It’s almost like just saying, “Hey, dog,” right? Where a beagle looks nothing like a Great Dane, which is nothing like a Labradoodle, or you gotta see and it looks like a Retriever in the background. So, long, short equity looks nothing like managed futures, looks nothing like short, focused only. Talk to me, one, just like a little bit about how you think about the hedge fund space in general in 2020, what it looks like today, and as you kind of talk about that, how it’s changed over the past decade-plus.

Andrew: Sure. So, the most important thing is how it’s changed. It’s become an institutional business. When I started in 1994, it was the reason people had a 2 and 20 fee structure was because somebody would leave a high-paying job at Fidelity or some other place and they’d raise $20 million, and the 2% was $400,000 a year, that was to pay for rent and to hire a CFO and to do very basic stuff. But people would swing for the fences because they’d make money on the 20%. Today, if you’re a $10 billion firm, and you’re still earning 2 and 20, you make hundreds of millions of dollars a year just walking into the office in January. And so there’s been a huge breakdown in that is no longer in alignment of incentives, that is…

So, we’ve been in a strange position in that we’ve been very vocal critics of a lot of aspects of the hedge fund industry while continuing to believe that there was great talent in the hedge fund industry. But like a gorgeous house that you still decide to pay two times market value for, you can overpay for talent, and the hedge fund industry has a huge overpayment for talent problem. And so one of the first things I did that was directed more toward the outside world is I wrote an editorial for the “Financial Times” in 2015 or 2016 where we calculate that 80% of all alpha had been paid away. So, the number is probably 100% today if you look at it. I mean, in fact, in one extraordinary example, a fund that I looked at recently had made $2 billion over the past seven years and clients had made zero.

Meb: I mean, and that’s what the academic literature largely says. It says, hedge funds and CTAs are great. And there’s been studies on both. They generate a bunch of alpha, but they just keep it all.

Andrew: They keep it all. Right. Then it goes back, you could write another one. There’s a book that was famous in the 1920s called “Where are the Customers’ Yachts?” about everybody making money but the clients. So, in a sense, what I’ve done… So, the hedge fund industry changed a lot and I’m in an awkward position where I’ve blown up a lot of myths on hedge funds.

Meb: I wanna hear some of them.

Andrew: So, one thing is do you… And I think this is something that you wrote a book on is, do you want to copy hedge fund stock positions? And so we looked at that very closely. We did a big analysis for a consulting firm on it. And we came to two conclusions. One is that, yes, copying individual stock positions works extremely well. In fact, generally, when you cut out the 1 in 20 fees for a guy who’s picking stocks, you have so much of a head start every year that you’ll likely do better than they will. The problem was, and this was harder to assess from the data, was that trade crowding was getting worse.

So, because when you start copying the stocks and a consulting firm that we’re talking to starts copying the same positions and family offices start doing the same thing, you get this massive crowding into stocks, and then when they go down, they tend to go down more than the market. So, I wrote something on LinkedIn recently where I basically pointed out the fact that the reason… So, a typical equity long-short fund in March captured 70% of the downside of the market, which is a lot more than it should, given the fact that its exposure is around 40% and only caught 25% of the bounce in April. Why? Because the longs went down more than the shorts. That’s an example.

We wrote a paper on why no one was making money picking stocks in the short side. And each of these analysis requires getting into the real nitty-gritty of what hedge funds do on a day to day basis. I wrote a paper interestingly. So, we manage an ETF that has a managed futures strategy, but the irony of our strategy is we don’t manage the strategy ourselves. We copy what leading hedge funds do. It’s a weird thing because what we’ve created is almost an index-like ETF in the managed futures space.

Meb: Right. So, we’ll get to the strategies in a second. I wanna stick on the kind of broad industry real quick. So, if you were to summarize just kind of bullet points like the bad is fees is a big one, tax inefficiency I’d put in there too. What are the big positives still that you see for hedge funds as an asset class in general?

Andrew: There are still diversification benefits. Most of diversification benefits you get before fees, not after fees. And it varies by strategy. So, the other big negative is single manager risk. Single manager risk is when you look at hedge funds as a category versus looking at traditional assets as a category, it’s very different. You say, “How did U.S. large caps do over the past 20 years?” You look at the S&P 500 before fees. You can pick a guy to invest in those stocks. You can pick an index fund or you can invest in them yourself. There are lots of different ways you could access it. You say, “How did hedge funds do?” And you’re looking at a pool of high-cost active managers.

There is nothing underneath that you can normally invest in. And that’s a huge problem for investors, particularly in the wealth management space because they decide, they do this analysis where they decide they wanna have a 5% allocation to managed futures. Managed futures has enormous diversification bang for the buck because it tends to have zero correlation to traditional assets over time and tends to do what’s best in bear markets. It’s very little that does that. Again, the problem with managed futures, though, is by the time you get through about 500 basis points in fees and trading costs, what comes back to the client is not that exciting.

If you invest, if you decide that you want to invest and make managed futures a 5% allocation, the mistake that people make again and again is they say, “Oh, I’m gonna pick that mutual fund to do it. I’m gonna pick this guy.” And well, who do they pick? They pick the guy who did well last year, who has a lot of assets. But that’s a little bit like saying, “I want to invest in U.S. large-cap stocks. What stock went up a lot last year that’s big that I know everybody else owns?” You’d never put all of your eggs in that basket. So, the breakdown in the whole liquid alt world has been around overpaying for fees and then also taking on single manager risk. Our business now is very focused on solving those issues.

Meb: All right. So, you identified sort of these ideas mid-2000, started thinking about hedge funds space, a better way to go about it. What are the main ways that an investor could go about replicating hedge fund strategies, hedge fund indices, whatever it may be?

Andrew: There are four different ways you can do it. One is you can buy a collection of single manager funds. So, you can say, “I’m gonna copy what a large pension fund does. I want to have a 5% allocation equity long-short and I’m gonna pick 10 underlying funds to do it.” As a practical matter, nobody does that because in the wealth management space you’re really talking about one fund per bucket, sometimes two. So, you can do it that way. That way doesn’t work very well. Next way you can do it is you can pick single stock positions like copy 13F or other filings. That gives you long-only exposure and tends to have more downside. So, you end up… In a month like March you tend to go out more in the markets. You generate alpha in good periods, give it back in bad periods.

Third is you can have people who copy individual strategies. That’s often called alternative risk premia. Somebody will say, “You know what? Instead of investing in managed futures, I’m gonna build a simple trend model that will give you a similar return profile.” It doesn’t work well because when I build a model and you build a model, after we get through turning all the dials to make it work, they look nothing like each other. So, you’re back to kind of the single manager problem. And then the fourth way, which is the only way that works, in our view works reliably well, is you take a pool of hedge funds, you figure out how they’re positioned today, and you copy it. And the reason that works so well is because when you think of the experience of investing in hedge funds, for every $10 they make, only 5 comes back to you. So, if you can replicate how they’re making the 10 and charge 100 basis points, you’ll get 9, not 5.

Meb: So, imagine the listeners that hear this, there’s kind of two questions that pop up when you’re talking about looking at hedge fund positions. So, one, is it you’re looking to actually replicate what the funds hold? So, A, do you have a database that can see through to that? Or, B, is you’re looking at sort of the statistical properties of the return stream in teasing it out based on the exposures and the daily moves, or is it something else?

Andrew: It’s more the latter than the former. So, basically, let’s take managed futures, which is an easy example. We know from studying actual real-life managed futures hedge funds that they make most of their money in about 10 different core markets. In March, if they made or lost money, it’s because they were long or short oil, gold, the 10-year treasury. It wasn’t whether they were long or short the Thai baht with a 0.5% position or pork bellies.

So, what matters is getting the big positions right. And then we also know that if you analyse recent daily performance, so we look at a pool of hedge funds and index of hedge funds that has daily numbers, that can give us a very, very…using a quantitative model, that can give you a very accurate read as to their long 7% gold on average. It won’t tell you that this particular fund, whether he’s long 7%, 13% or flat gold, but it’ll give you a very accurate picture.

And so what it does is it basically makes the argument that what you’re really trying to do when you’re replicating hedge funds is get their asset allocation right. Because for two areas, not for every area, but for two areas for managed futures and equity long-short, their asset allocation is much more important than their individual security selection. And I’ll just give you an example as to how… So, again, I came at this not as a quant, I came at this as a value fundamental investor, but when I first started looking this in 2006, 2007, what you would see was that how were equity long-short hedge funds generating massive amounts of alpha in 2005 through 2007. It was because they were in emerging markets.

And so you had an emerging markets outperformed the S&P by 30% a year. So, if you had a 30% tilt in emerging markets, and emerging markets were outperforming by 30% a year, you’re generating, just by virtue of your asset allocation, you’ve got 900 basis points of alpha a year. So, the whole golden age of alpha was a factor tilt in emerging markets. So, how did hedge funds see this in advance because a lot of people didn’t see it in advance? They saw it by starting with the footnotes and talking to management teams. So, Tiger comes from descendants of Julian Robertson’s Tiger Management. They were out talking to companies, and companies, they would say, “Well, here’s a company that’s cheaper on a valuation basis. It’s got a much better growth profile because of what’s happening in emerging markets.”

When you took all that together, it didn’t matter whether equity long-short guys were long this stock in emerging markets versus that stock. It’s that they had collectively realized that this was a cheaper, more attractive asset class. And so the goal of these kinds of replication models, whether it’s on the equity long-short side or the managed future side, is if you get the asset allocation right and cut out fees, you come out ahead.

Meb: So, how does that work in practice? So, I imagine a listener hearing this, is it just like a full algorithm blender that you put in these, “Hey, these are the seven markets we’re gonna track and it’s gonna generate…”? So, imagine a listener hearing this may say, “Well, if gold was down five yesterday and the tenure was up five and the portfolio showed zero, how do you know it’s gold and not oil?” Walk us through kind of a little bit…you don’t have to give a secret sauce, but a little more specifics on how it actually plays out, or are you actually looking at some of the fees and strategies? How does the sausage get made?

Andrew: So, managed futures is easy, again, the easiest way to describe it. So, we look at the daily data of a hedge fund index. The hedge fund index consists of 20 underlying hedge funds, so we know it’s diversified. And we will look at the past 20, 40, or 60 days of that index, we’ll add back in what we know to be their fees and expenses. So, that’s the data that we’re looking at, that we call that a target. And then we know that these are 10 core positions over here are what’s been driving the performance of that, not just for the past 20, 40, 60 days, but for the past 20 years because we know that’s what drives performance.

And then what the model does is basically say, what combination of this… What portfolio of these instruments most closely matched the returns over that period of time? Now, it’s an approximation. It’s not gonna tell you down to two decimal places how they’re positioned. But what we’ve been able to show over 13 years that it’s accurate enough that you get the vast majority, and managed futures we get about 100% of the pre-fee returns. So, we literally start 500 basis points ahead, and then we rebalance it once a week because we know what we determined the position today may be different in two months from now. And that’s why our firm is called Dynamic Beta because we believe these betas drive performance and you’ve got to dynamically adjust it in order to be able to capture their asset allocation moves over time.

Meb: And so if you think about with the managed futures, I mean, we’ve actually said this a lot, is that… And I’m not hating on my managed futures listeners, managers. For the most part, they kind of do the same thing. And like you mentioned, they have different dials, different markets and whatnot, and so whether you get long on emerging markets on a Monday, Wednesday, a Friday, or next week, or the following week, probably doesn’t matter because managed futures gets its returns from the big meat of the move. It’s not about picking tops and bottoms usually. So, just being able to pick up the large part of that, it seems like an obvious way to go about it rather than buying 30 of these guys and having to pay the fees.

Andrew: Can I actually address that a little bit? Because managed futures is addressed into two different types of managed futures firms. On the one hand, there are what we call trend followers. And the whole idea of trend followers is they feed off of fear and greed. Markets and assets starts to move, gold goes up 10%, and then people say… Gold goes up 5% and then it goes up another 5% and people start saying, “Somebody knows something. Something is happening.” And then they pile in and then it goes up another 10%, etc. The other half of managed futures funds don’t do that. They do mean reversion. They bet that things will snap back. They bet they have machine learning. They have other various things.

And so a well-constructed managed futures portfolio should have exposure to both of those, because at times one will do better than the other. Back to your point, though, like equity long-short and like a lot of alternative strategies, even if on the surface they say they’re doing the same thing, the numbers can be 30% apart in a month like March. So, yes, they’re managed futures funds, but you have guys who were down 20 last month and guys who were up 10. And so that’s what makes it guys who invest in managed futures professionally call it soul-destroying. The moment you pick the guy that’s been on a tear, he underperforms everybody else by 20%.

Meb: Yeah, I know. I own some of those.

Andrew: [inaudible 00:24:06]

Meb: It just seems like a reasonable concept. What’s been the major pushback, reluctance from allocators? When they hear an idea like this, what’s their main concerns?

Andrew: Well, if your job is to pick funds, most people hate it because… And a friend described it to me, he’s like, “It’s like, you’re John Bogle walking into Fidelity in 2003 with an index fund booth,” because this business is built on behavioural and career biases. If somebody gives you a job to select funds, you go select a fund. And if that doesn’t work, then you spend your time explaining why the next fund that you pick is gonna outperform. But what we know empirically and it’s the same thing true with active management, we have 40 years of evidence. At best you’re 51, 49 making those kinds of calls.

Going back to where we started this, like, when you think about what… Again, I was fortunate to be part of a firm that was doing really interesting things in 1994. Nobody else was doing these things. How many firms were putting together the teams of people to analyse real estate portfolios coming out of a government-mandated auction of properties that they’d cleaned up in the savings and loan crisis? You had very few buyers, incredibly complicated investments, and just huge supply as far as you could see. That’s how you buy something for 30 or 40 cents on the dollar.

In fund selection, it’s efficient. You look at the track record, you see who’s done well, you see who’s done it or not, but if you look at it scientifically, what you see is that there is no persistence of returns on average, but still, 80 or 90% of the money gets steered into funds that have done well recently because that’s our behavioural biases. Those are human instincts to… And it’s selling a story. It’s you wanna believe that this guy is the next Warren Buffett, you wanna believe that this guy who did 20% last year that it’s gonna continue. And so it’s hard. I mean, in a sense, we are going into one of the parts of the industry that has the most strident believers that they can identify the next Seth Klarman or Julian Robertson, and as a result, in our view, they’re often impervious to evidence. We are, I think, the only liquid alternative firm that over 13 years has outperformed actual real-life illiquid hedge funds.

Meb: And it’s interesting, you’re starting to see the cracks. So many of these institutions, and we’ve written a few articles on this, they have such impossible mandate where say you’re an endowment and you have competing forces of alumni and current students and faculty and boys of the school and future, and all this stuff mixed in, and then you see these allocations where they’re investing in dozens, hundreds, thousands of managers, it seems like this sub-optimal situation. And you had a great example. We’d love to hear you expand upon when you talk about the role of the consultant and how they play in. Many institutions will rely on these consultants as sort of a go-between, as a protection for their board, or maybe just job security. What’s your thoughts there?

Andrew: I have a lot of friends that I have an enormous amount of respect for a lot of people in the consulting industry. I think one of the truisms of asset management has been a push toward complexity over the past 40 years. Nobody wins a consulting mandate by walking in. I mean, Warren Buffett has a great quote. Somebody asked him, “If you didn’t have Berkshire Hathaway, how would you invest?” And he said, “I would give 95% of my money into a low-cost S&P index fund and I’d sit on 5% cash.” And he said, “Why would you do that?” He said, “What am I doing? I’m buying an interest in 500 companies where you’ve got motivated CEOs, good businesses, etc. And then I’m not overpaying in fees.” You don’t win investment mandates. You don’t win consulting mandates by doing that. There is this inexorable push toward complexity. And sometimes it can backfire.

So, sometimes you can take a portfolio with 50 different asset classes, change everything around, you end up in roughly the same place. So, I think a lot of this industry is struggling with some of these issues in terms of, for instance, when is it worth it to pay high fees? It’s always worth it in retrospect. If you find a guy who was up 20% over the past 5 years, who cares what he charged? He delivered 20%. The problem is finding that guy in advance or figuring out in advance the fee structure that you wanna pay.

And so I think there really has been a really positive movement, like, people understand that you don’t have to only invest in 2 and 20 hedge funds. A friend of mine runs a $25 billion hedge fund portfolio, they would never consider investing in a 2 and 20 because they’ll walk in and say, “Look, do you want $1 billion or not? Well, then you’re gonna do it on our terms. And we’re not gonna take the big flagship fund. We’re gonna take your five best ideas and put them in here.”

I think there actually has been great growth and sophistication. I mentioned where we get a poor reception from people on the institutional side, and by the way, I think that’s changing a lot. But another where we get very positive reception is in people who build model portfolios because when you build a model portfolio in the wealth management space, what you’re basically saying is, you know, following Paul Samuelson’s quote that the only free lunch in finance is diversification. They believe that if you add… And I think just like if you add managed futures to a portfolio, you will have a smoother return over time. You will have lower drawdowns. You can improve your Sharpe ratio from doing it.

The whole liquid alt space was designed to solve that problem. The problem is that the products that were built in liquid alt space don’t solve that problem because they’re all single manager vehicles and they’re too expensive. We’ve had conversations with people, they’ve said, “Literally, it’s like you designed this product for us.” And I say, “But you don’t understand. We designed this product for our own use, for our client portfolios that we were building because we were trying to solve the same issues that you’re struggling with. We just happen to have a different set of tools to try to solve it.”

Meb: Yeah. It’s interesting on sort of the conflicts and how it fits in. I mean, you mentioned complexity and this concept of people whose job it is, like, a consultant to have fees to validate. They love hedge funds because their fees are higher than the consultant’s fees, where they don’t look so bad, our fees in comparison, but also, the job of picking single managers seems like such an impossible task, particularly in the discretionary fundamental space, it seems, like you mentioned, obviously, in retrospect. But typically when they go through periods of underperformance, the literature suggests that institutions aren’t very good at it. They tend to fire managers that have done poorly recently and hire ones that have done great recently, much to the detriment of the portfolio. But if a manager is going through a divorce, or are they just having a rough patch because small caps in value have done poorly, or are they getting content in their wealth and just wanna go race race cars? It’s a really tough task.

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Meb: You mentioned another reason that people still like to allocate to individual hedge funds. Now is sort of the Southern billionaire example. Could you give us that story?

Andrew: People invest for a lot of non-economic reasons, I would say. I know family offices, for instance, where they invest in hedge funds and they invest in private equity firms and all sorts of other things because it’s a source of information. They get these investor letters, they get unique views on the market, etc. And in some cases, it’s as cynical as, “I want to… Boy, we’re investing in hedge funds, I have to go to that conference down in Florida to beat new hedge funds.” So, I had this great meeting with a southern billionaire who’s been invested in… He was friends with Julian Robertson and invested in a whole bunch of Tiger Cubs. And what we basically showed him that by replicating his specific portfolio, that we could improve his performance, lower his drawdowns, and at a much lower fee and probably more tax efficiency as well. So, it was kind of win, win, win, win, win.

And I got to the end of the meeting after and it was one of the clearest responses I got, which is he said… And I’m not gonna do a southern drawl on this one because I’m sure you have a lot of faces. He said, “Look, you sound very smart and I get this, but these guys are like my dogs. And my dogs may pee on the carpet, they may tear up the furniture, they may do all sorts of different things, but they’re my dogs, and I love my dogs. And yes, you’ve got a robot dog over here, some sort of a [inaudible 00:33:09] that maybe marginally better from behavioural perspective than my dogs, but I still love my dogs.”

And I think the human side or how people end up making decisions in this business is fascinating. I mean, you mentioned something around consultants. There is definitely something where if you’re a consultant and you’re investing in funds that cost 4% a year, it’s a lot easier for you to justify a 20 or 30-basis point advisory fee because that feels like low-cost insurance. You ask the same consultant to what they should earn on a 75-basis point portfolio and it’s 5 basis points, so they don’t really have a huge incentive to look at a manager and say, “Hey, you’re 2 and 20, I think you should be at best 1 and 5. We’re pulling all of our clients’ money.”

A lot of wealth management firms get paid when their advisors who make the recommendations share in the economics of the funds that they invest in. And that’s something that 15 years ago in the traditional space was much more prevalent in terms of 12b-1 fees and other kinds of economic arrangements. It’s largely been stamped out of the business. I think you do ETFs and it seems to be much less so in the ETF world. But in the alternative space, if an advisor recommends a private equity fund to you, you really need to go with a very, very sharp pencil to figure out how the economics affect them. And so those kinds of things, there’s a lot of work to be done in the alternative space before this stuff really gets cleaned up.

Meb: The beauty of the internet is that it does shine a light on and become a great disinfectant for a lot of these practices. The problem is they’re pretty slow to die because a lot of people still have their tentacles in these cash flows, and you’re seeing it crumble one by one, you’re seeing it with all the fun fee platforms that it’s happening, and in that case, it happened over the course of a week and it’s gonna cause a lot of fun complexes to go bankrupt and out of business. I would argue that many of them just don’t know it yet, but they’ll hold on to those fees as long as they can for the time being, but hopefully, we’re moving in the right direction. Okay. So, we talked about managed futures. You guys also do other type of hedge fund replication as well. Tell me about the other strategies and funds.

Andrew: We have two different strategies. We have three strategies in total. And I think one of the things that I learned from Seth Klarman back in the mid-1990s is some of the best decisions you make in asset management are what you don’t do. And so in 13 years, we’ve only launched 3 strategies. And every one of the strategies that we’ve launched has outperformed the actual hedge funds. That’s a unique characteristic in the liquid alternative space because usually in liquid alts, you give away a lot of liquidity. So, we do it with a multi-strategy portfolio which covers a broad range of hedge fund strategies. We do it specifically for managed futures and we do it specifically for equity long-short.

And so in December of this year, our partners launched an equity long-short ETF. And there we track 40 leading equity long-short hedge funds. And we’re not trying to tell whether Renaissance owns this stock or that stock or this manager owns this stock or that stock. What we’re trying to do is figure out what are the key asset allocations that is driving their returns, and then copy it in the most efficient way that we can. So, in a sense, it’s an index-like product, but because we’re aiming again for pre-fee returns, we won’t get some of their true security selection alpha, but there’s such a difference between what they pay and the amount of alpha that they generate that we still often come about 100 basis points out of that.

Meb: So, for the managed futures, it’s very obvious that you use future contracts or long oil or short oil, probably long gold futures, whatever. How does it work with a hedge fund ones? Is it still using futures and asset level like emerging markets versus bonds or is it doing individual securities and their characteristics? How does it work?

Andrew: We do with futures on indices. And so, basically, if you look at alpha generation, we have an expression which is, “Security selection leads to alpha-generating factor tilts.” So, what’s interesting about it when I first started looking at this space, I talked to a lot of quants. I’m usually the anti-quant in the debates because I think quants can tear me apart when it comes to Greek…if we’re battling on Greek letters. But if we’re battling on what actually works well from an investment perspective and what makes sense in the context of how the world has changed, I’ll beat them every day. And on the equity long-short side is interesting.

So, we saw, coming out of the crisis, guys who were looking at doing it from a purely quant perspective, say, “It’s obvious what hedge funds do. They’re long value and short growth. They’re long small-cap, short large-cap.” Okay. Yes, that’s true in 2000 through 2002. It was not true in 2009 or 2010. So, one of the problems with a lot of quantitatively based strategies is they look at three decades and tell you what tomorrow’s gonna look like, but the last five years of the last three decades could have been completely different.

Meb: Let’s stick on that for a second. So, I imagine the managed futures positions and exposures changed quite a bit. You mentioned you rebalance weekly, and this month is probably quite a bit different than three months ago. How often does the hedge fund exposure change that rebalance weekly, quarterly, yearly? Any insight into what it looks like now?

Andrew: So, first of all, we rebalance once a month, and that’s entirely subject to when we have good data from them. So, once a month we get updated numbers on all these hedge funds and we could rerun our analysis at that time. The interesting thing about it is what we saw with hedge funds in 2000, really, after beginning of 2018 when we had the mini-crash in February, hedge funds were broadly very conservatively positioned. It was a very low conviction portfolio. Overall equity risk had come down, and they didn’t have any strong views on, “We like tech much more than small caps. We like this much more than that.”

And what it really reflected and what we do, which is, again, very unusual for somebody who has quantitatively based models, is we spend a lot of time making sure that what we’re seeing in the models actually make sense in terms of what hedge funds are actually doing. So, in that case, as we read hedge fund investor letters, as we talk to people in the industry, what we see is that hedge funds believe that global growth was gonna be slow and there were three big macroeconomic headwinds that made people think that they didn’t wanna be far out over their skis. So, they didn’t wanna be… So, you had trade wars, the Fed was tightening, and then you have a possibly ugly Brexit.

Meb: That feels like five years ago, by the way.

Andrew: I know. I know. But the crazy thing was in November, December of last year, risk started dialing up. People said, “All right. Trade wars are over. We have the Fed is easing and we’ve made it through Brexit.” So, part of the disappointment, I think, in hedge funds, in some strategies this year, has been people were leaning out over their skis right into the end of January and February. And so now, interestingly, we haven’t seen a big change in risk. I mean, one of the things you have to be very wary of when you see headlines about hedge funds is that there’s a lot of hyperbole. I saw one yesterday that said, “Hedge funds have materially reduced their exposure from 200 to 185.” That’s not a big change in the context of things without understanding, first of all, what’s in the 200 versus what’s in the 185.

But we haven’t seen it, and I think part of that is because the market came down very fast, but I think what we did see and there are two big risks that we tried to control for in the equity long-short space. The first is what I described before about this drawdown issue of single-stock positions. So, one of the things that was very striking about February and March was the very, very most popular hedge fund names, particularly those that had an activist component to it, went down double the rest of the market. Why? Because if all of a sudden people are hoping for a subsidiary to get sold or some sort of a corporate reorganization, that was off the table. Those stocks dropped 45% at their worst. And a lot of single stock names got run over because once people start to head for the exit, it’s a very crowded door.

But what we haven’t seen is a lot of people throwing in the towel and say they’re going to cash because, again, part of it is just that it happens so fast. And you have to remember the mentality of most of the guys who manage equity long-short portfolios is they’re fundamental guys. They might analyse a company for two years before they ever buy a single share. These are not guys who are likely to read something in the “Financial Times,” that the mortality rate is slightly higher than they thought and then liquidate their whole position and see what happens. They’re betting on companies, and that moves slowly. So, part of our job is understanding what strategies it works for. Like, it doesn’t work for credit, for instance. It doesn’t work for liquid strategies. And then how to best implement it in a way where we maximize every dollar of return while minimizing every potential risk.

Meb: Can you give any insight the broadly speaking at the end of April? What’s the sort of portfolio look like?

Andrew: On the equity long-short side, we’re still probably about 0.6 exposure to equities, more of a bias toward tech, interestingly. So, that’s been a winning trade for hedge funds for a long time. I mean, that really started when people talk about things like quality stocks and then you talk about what we do. We saw the wave into quality stocks because we could see that’s what hedge funds were doing on a stock by stock analysis. Quality stocks, tech stocks. There’s a lot of overlap between some of the most popular tech names and what hedge funds are doing. But we still have a little bit of international and a bit of emerging markets, but all within historical reasons.

Meb: Yeah. It’s funny when you talk about the labels and factors. I mean, I remember looking back, and this is years ago at this point, but at one point in time, everyone assumed and I was looking at a lot of value managers, and then you go, took their holdings, put it into like an x-ray from Morningstar or whatnot, and looked at the underlying characteristics of many of the holdings and they actually looked a lot growthier than a traditional value. And so you get sort of those deviations from what most would, I think, expect to be… I think they think in terms of like factor base, but really a lot of the discretionary guys can be a lot more complicated. So, let’s say you’re an investor, CalPERS, who’s listening, Harvard, maybe it’s just your local investment advisor, corner office guy at Merrill, they have a traditional portfolio, traditional exposures, how much does one allocate to hedge fund and managed futures replication?

Andrew: I think it’s between… I mean, depending upon the risk level of the portfolio, it’s 5 to 10% per asset class. I think the really important thing, I’ve been interviewing a lot of people on the asset allocation side, there really is a Hippocratic Oath in asset allocation, which is, first do no harm. And I think the objective of a lot of the asset allocation models is not to be a hero. But to show you, if you were focused on optimizing your risk-adjusted returns, we built a European fund for a big U.S. asset manager named SEI Investments. And in that case, we had a 40% allocation to managed futures. But again, that’s because they gave us very, very, very high risk-adjusted return targets.

Meb: They didn’t take that recommendation, did they?

Andrew: They did. Yeah.

Meb: No way. I don’t believe you. I’ve been asking this question for years where I was laughing because I was reading a Goldman report that said, essentially, “What is the optimal allocation if you include managed futures and other indices in trend and stuff?” And it ended up being, like, they had to constrain it because they said, “It’s not practical for a trend to be such a large component of the allocation, so we have to constrain it.”

Andrew: I should clarify. This was a one-stop alts solution for them. So, as opposed to being 20% of alts portfolio or 15% of an alts portfolio, it was 40% of the alts portfolio. But it’s also, we wouldn’t have done it with managed futures if we couldn’t invest in managed futures the way we can invest in managed futures.

Meb: So, your answer to institutions is 5 to 20%. What’s your answer if you’re totally unconstrained? Say, “Andrew, you do this with your own money. You got to put together your ideal portfolio.” Does it get bigger? Does it stay 5, 20%?

Andrew: I’d go a little bit bigger. I have to say, I haven’t really thought about it as much from that perspective because that would get me into a long conversation with myself about what I think about Ford equity market returns, which is where most of the risk is gonna come from, and I think that requires a re-examination post-COVID. But I think what I’ve become very much convinced about is that the most reliable way of outperforming a benchmark of hedge funds is by cutting out fees. And there are two ways to do that. One way is somebody gives you a $25 million bath, and if you’re a CalPERS listening to this, CalPERS can come in an entirely different fee structure arrangement.

They can hire teams of people to go into a credit manager and find exactly what strategies they want, set it up in a single fund, etc., 99.9% of investors in the alt space can’t do that. The other end of the spectrum is replication. And those 2 outperform indices buy anywhere between 100 and 400 basis points. And we have an expression that fee reduction is the purest form of alpha. So, you’ve got synthetic fee reduction, you’ve got real-life fee reduction, but then in between, when you have normal wealth management products, single manager, mutual funds with 2% expense ratios, multi-manager products with 2.5% expense ratios. In that middle ground, investors don’t do well because 200 basis points of additional returns or 100 basis points of additional returns when an asset is earning for overtime, cuts out a third of your returns or up to half of your returns.

Meb: Yeah. I mean, the fee thing is something that we’ve been talking about for a long time, and I think the smartest thing Wall Street ever did was put fees in terms of percentage of AUM and then performance because, unlike a doctor or lawyer where you’re paying thousand bucks an hour, whatever it is, for a senior partner, you don’t feel the pain. You just sort of see it gets skimmed off and you sort of see most investors… And same thing with taxes. A lot of these funds that are really tax-inefficient, hedge funds being one, it’s the least sexy part of our entire industry. Talking about whether you’re long or short and what your long and short and why and the conviction and the contrarianism and who you allocated to, super sexy. But talking about, I generate alpha through low taxes, low fees is a much harder one for people to get excited about. As you think about a new decade, as you look forward to the horizon, I imagine being an entrepreneur your main focus is growing this fun line-up. But what’s got you curious these days or, worried? Anything or interested, what’s on the brain?

Andrew: That could be a separate for our conversation.

Meb: Well, we have to do it again in the coming months.

Andrew: I think the whole COVID response has been fascinating because, on the one hand, in the initial phase of the response, everybody was lined up against it. Basically, everyone agreed on travel restrictions, everyone agreed on monetary easing to plug holes in the market, everyone agreed to… They want a massive fiscal response. I mean, if you had told most serious investors that we’d have something like this, the markets would go down as much as they did in that short of a period of time, we would have locked downs, and then within a week, the Fed would commit $4 to $5 trillion to support the markets by everything from junk bonds to ETFs, to anything they could find, and that the government would, in a week, come out with a $2 trillion fiscal stimulus package.

I think everybody would thought you were insane. So, something really has changed since. And a lot of the conversations are around, what are the real long-term changes? What percentage of restaurants are able to get back into business? What happens if this goes on for six more months and restaurants stop paying their rent? And I think somebody… I saw something saying that 50% of mall tenants had stopped paying rent in April. Does it fundamentally change how people view the obligation to pay a rent or to make a mortgage payment? Because what drives compliance is the view that if I don’t do it, I’m gonna be chased, they’re gonna take me to court, they’re gonna win, I’m never gonna get a loan again.

But if we have 10 million, 30 million, or 40 million defaulted bars around the same time, does that fundamentally change how people think about all of these cash flows that goes with the whole system? What does it do to various kinds of fixed assets over time? We’ve adapted incredibly well in our firm. I mean, it’s easy for us because we’re small, but we’ve adapted incredibly well to working from home. And in a sense, we spent a lot of time talking about the upside of it. Like you and I are having this conversation. It’s really personal. I didn’t fly across country to see you. You didn’t fly across country to see me. You’re comfortably in your bedroom.

I’ve got a picture of my dog up here, your kids will walk in, my dog… It’s like there is something actually in some ways it’s more personal than sitting in an office setting. So, what does that do to commercial office space or how offices are configured? I mean, I’m not at the view that we’re going to have these crazy outside scenarios, like, no one’s gonna travel again and we’re gonna have travel shutdowns for three years because I’m a New Yorker and I’ve lived through 9/11. And right after 9/11, there were a lot of people who were never getting on a plane again. People were moving out of the city. We expected dirty bombs and all sorts of horrible things happening.

So, people do adapt and they get used to it. But this is happening in a period of time when there are also already profound changes going on. What does it do to globalization? So, we’ve already had… I mean, if you told people four years ago that we were gonna have a president who was basically gonna be an anti-globalization president, and then on top of that, you get a virus that causes people to think in terms of the vulnerability of global supply chains, and then what’s likely to come then as resource hoarding if this continues.

So, all of these countries that were aligned together are now gonna be fighting for various resources. What if one country wants to open travel but the other countries don’t want to? I mean, so you’re gonna see this kind of fracturing globally. And I think the view of most hedge fund guys is it’s probably gonna be really bad. And there are gonna be a lot of material dislocations out there that may not affect Microsoft and may not affect Amazon in the same way and maybe Zoom stock will go up another 50 times. But for a lot of basic industries that have already been under some degree of pressure, take asset management. I mean, a lot of firms have lost 30% of their revenue in 3 months. The Fed has come back and bailed it out in an extraordinary way.

The other thing that I’ve been looking at is how different it is today from 2008, because in 2008, like 1994, when I started with Baupost, most professional investors were on their backs because areas, family offices that had money sitting in the muni market all of a sudden couldn’t get it out. They tried to sell this, they couldn’t get it out. They tried to get other hedge funds, they couldn’t get it out. So, there was just, like, this cascading liquidity issue. Ten years later, every sophisticated investor is talking about how to lean into this. Going back to CalPERS, I’m sure CalPERS has a dedicated team saying, “How are we gonna capitalize on this dislocation in the mortgage market?” And that is…

So, this whole Buffett idea, economic storm cloud broken and it rains bars of gold. And by the way, when it does, grab a bucket, not a thimble. That has been indoctrinated into every professional investor. And so there was a period in March where every hedge fund was grabbing every bucket they could, and then the Fed ran outside of the swimming pool and caught all the bars of gold. So, it’s a very, very weird time because we don’t know how long that can continue for.

Meb: Yeah. As always with investing, it’s uncertain. It’ll be interesting to see, for sure, the coming months. It’s been a long decade already. It’s only been four months in.

Andrew: Four months. Yeah.

Meb: From an observer participant in the hedge fund world, is it just an acceleration of the trends we’ve been seeing for the past 20 years? What does the future look like for hedge funds and liquid alt space over the next 10 years?

Andrew: Look, I think there’s gonna be… Most of the criticisms of hedge funds is talk, not action. So, people have been railing about hedge fund fees. I had a guy from a consulting firm on a panel at a big industry conference and he was thumping his chest about how he’d used $40 billion of client assets to drive down fees. When I cornered him on it, it was 10 basis points. The wealth management platforms that participate in the fees of hedge funds get paid by the hedge funds, and therefore, have an incentive for the hedge funds fees to remain high. So, they actually used their buying power to maximize their own profits, not to get returns back to their clients. I mean, back to your point about the internet, I think a lot of these crises and things will shine a light on practices like that.

But I think on average, I think allocators are getting smarter and more sophisticated and more critical. I remember five years ago, I had a conversation with a guy who told me confidently he could pick only the top quartile hedge funds in advance. His job was to find who was gonna be in the top quartile next year. When I pointed out, that meant he was earning 30% a year with no down years, and that was the equivalent of saying you’re only picking stocks to get up, I don’t hear those conversations today. We have consultants really engage with us for the first time about what we do because, on a risk-adjusted basis, it’s simply better.

And so when people criticize hedge funds and they say, “The first quarter was okay. It wasn’t spectacular, but managed futures was flat to up, which is great, considering where we started the year.” Some strategies like credit got hit a lot more, but the question is, “Where do they put the money if not there?” Are people gonna sell $3 trillion of assets and load up on more equities? I don’t think so. I think the bigger issue is the liquid alt space because the liquid alt space is farther behind the learning curve and has made the same mistake again and again and again, which is, they decide they want a 5% allocation to a strategy and pick one fund.

And so if you have guys from CalPERS who are listening to this, you know, the analogy that I’ve used is, imagine if CalPERS said, “We’ve got a $400 billion portfolio and we’re gonna give $20 billion to this one equity long-short manager because he’s had a good 3 years.” And so the liquid alt space, I think, needs to connect this whole idea of building a model. You build the model, what you’re basically saying is you believe asset allocation, prudent asset allocation is what’s gonna maximize your risk-adjusted returns over time. But then, within the context of that, what it means is when you’re selecting things for buckets, they need to be index-like. When that issue gets solved, people will be much happier with liquid alts.

Meb: People listening would probably even said, “Would you just own five stocks in your portfolio?” Most would say, “No, that’s crazy.” But then when you talk to only a few single managers, they seem to be much more okay with that idea for whatever reason. I don’t know why.

Andrew: Because they picked the guys who are up. And if you’re an advisor and you’re telling somebody that you’re adding something to their portfolio, it’s a lot more exciting to say, “I’m giving you a guy who is up 20% the past 3 years,” than saying, “Here’s an index strategy that cuts out fees and does 100 to 200 basis points better.”

Meb: It’s not just individuals. Institutions, we love to look down on individuals and say, “You’re so irrational.” I mean, I was chatting with a well-known investor a couple of years ago and he was asking me about funds. He’s like, “Well, Meb, what’s your best fund?” And I was like, “What do you mean by best?” He’s like, “Oh, no, no. I’m not some noob. I don’t just want the best performer, like, the best risk-adjusted returns over the past three years.” And I paused and I said, “I assume you’re asking me because you wanna avoid that one and invest the one that’s done the worst, right?” And he says, “No. Why would I do that?” I said, “Well, okay.” I just paused, took a deep breath and said, “I see where this conversation is going.” It’s certainly always easy to market what’s just been the best trailing performance, but often that’s, like you said, may not be the best place to be. What’s been the most memorable moment over your multi-decade career thus far, all the different spots? You got any fun stories, memories that stick out in your brain?

Andrew: I think the one thing, and it’s happened multiple times. But I think that there is an expectation that somebody has perfect knowledge. And so one of my favourite books that I read after the financial crisis was “Too Big to Fail.” And there, what was fascinating about it was that you had the heads of all the investment banks and the Fed and the Treasury and everything else who basically knew they were gonna be interviewed, they knew they were gonna be part of history. So, they all took copious notes and made themselves available when the book was written. But what was remarkable is they had no idea what was going on.

And there was a great story when Hank Paulson who was the treasury secretary at the time is standing there and an investment banker comes up to him and said, “Are you talking about Lehman Brothers and saving Lehman Brothers?” And he said, “Have you been paying attention to what’s happening at AIG?” And he said, “Why? What’s going on at AIG?” And AIG was in the process of starting to unwind, and that’s what really almost took down the financial system. And so I think part of what makes the investing world so exciting and constantly challenging is everybody’s dealing with imperfect information. And on top of that, we’re all dealing with our own human biases.

Like, when you talk about retail investors versus institutional investors, I’ve not seen them in this kind of hierarchy. Rather what I see is that everybody makes the best decisions they can in the context of very clear constraints. And if your job is to maximize revenue, if your job is to protect the business, if your job is…whatever your particular economic incentives are, that’s gonna drive how you invest. And in a lot of cases, so it takes a lot of evidence to overcome that, a lot of understanding.

And so I think what I really look forward to on the liquid alt side is our conversations are evolving. I’m not trying to sell them a product. I’m trying to convince them, “Look, this is what I think is the critical issue that we face, that you face at your position. This is how we’ve designed what we think is the best way to solve that. Maybe not the only way. But when we look at all these criteria, we think this is, on a risk-adjusted basis, that solution. What do you think? How would it fit in your portfolio? How would you…” And those kinds of conversations are… And by the way, I’m having them on the institutional side as well.

So, I think there is a growing level of sophistication in people. They’ve seen more, they’re challenging. I think “Thinking Fast and Slow” in Kahneman’s book has gotten people really thinking about, “Great, we’re not the most rational creatures,” and then thinking about how to improve everything, but also then being very aware of the constraints. So, I mean, I’ll tell people when I’m talking to them, I’m like, “Let me be very clear. I publish a lot of research on hedge funds, but you should never forget that I’m self-interested in what I choose to write, what I research, what it is. This is not for charity.”

I try to maintain a very high intellectual standard or high integrity and honesty standard in terms of what I’m willing to publish or not publish, but I have those biases. And when I point out that every academic in finance has their own biases, because a lot of them work for asset management firms, nobody gets rewarded for publishing a paper that says, “I looked really hard for two years. I didn’t find anything.” I think those kinds of frameworks, I think, are also very interesting when you look at how people will look at the COVID crisis because there is this dichotomy right now where you’ve got people saying it’s the scientists on one side, and the politicians or U.S. government or governors or whatever on the other side, and the scientists are somehow of a higher moral or ethical or intellectual standard.

And I don’t think it’s that simple. I mean, you have immunologists on the science side who have been shouting into the wind for 20 years about the dangers of a pandemic, and now they’re on centre stage. You have a media that will look for the outliers. “On one study you said that there’s gonna be a million deaths. Here’s a study that says 2 million deaths.” And then that gets propagated, and then every media outlet has their own incentive to then take that and spin it again and again.

Look, if I have to judge a debate in terms of who had better knowledge and a better ability to make decisions, I’d probably lean on the side of science in this case, but by no means should you think that these are purely objective individuals who have no skin in the game on the outcome because they’re ultimately not responsible for the impact of a lockdown, but they are responsible for getting the number of fatalities wrong. And that’s a direct analogy from… That’s something I… Looking at it that way, it’s something I learned from the asset management business.

Meb: Yeah, yeah. Incentives matter. That’s for sure. What’s been your most memorable investment?

Andrew: Oh, boy. I’ll give you a good one and a bad one. I think one of the ones that I’m really proud of is focusing on the commodity space at the right time. It fit the parameters of everything that I like, which is, take pieces of information from 50 different sources and weave it into a mosaic of a thesis. And then, even though… And this is sort of the Baupost, a Seth Klarman model. Each of the people in those individual spaces will know more about those spaces, but to be able to see a better holistic picture. If I knew 50% of what each of these people knew, I could draw…we have a better picture. So, that felt like a huge validation.

Sometimes it doesn’t work. I mean, in 2006, the worst deal I ever made was I invested in second homeland in the Carolinas. And I thought that buying something at 50 cents on the dollar through a clever structure was my way of protecting myself. I didn’t spend enough time thinking about whether it wasn’t worth anything close to $1 to begin with and how quickly it goes to zero and how much leverage there was in it.

Meb: Where in the Carolinas was it? Outside Raleigh, East Coast, mountains? Do you remember?

Andrew: Asheville. North of Asheville. Yeah. So, I spent a couple of years down in Asheville a lot.

Meb: Well, the good news on that investment is there’s tons of great breweries around there. You can go to Oskar Blues in Sierra Nevada, you can go fishing and hiking and mountain biking. At least you got some good entertainment, I hope.

Andrew: The area was gorgeous. I love the mountains. I got a picture of me up in the mountains with my dog up here. All of that was great. I love the area. I got the valuation wrong by 5X.

Meb: Hey, the answer there is you just got to give it a long enough time horizon. It’ll grow into it in 50, 100 years. Andrew, this has been a lot of fun. Where do people go to find more information, your firm, you, what you’re writing, what you’re up to?

Andrew: So, the easiest one is just to reach out to me on LinkedIn. It’s Andrew Beer, the firm…Beer is spelt like the drink. It is Dynamic Beta Investments. Our research is published on our website, so you can see some of the white papers we’ve written on it. With respect to the ETFs, the managed futures ETF is… Again, these are…we sub-advise these ETFs. One of the tickers is DBMF for managed futures and DBEH for equity long-short. But that’s it. I mean, I’m starting to write a lot on LinkedIn because I’m finding that some of these data points, there’s a community of people out there who want to engage on some of these issues, and so it’s been an exciting time.

Meb: Very cool. Listeners, we’ll add links to all the spots on the show notes at mebfaber.com/podcast. Andrew, thanks for joining us today.

Andrew: You are the best. Thank you very much.

Meb: Thanks for listening, friends, and good investing.