Bob Elliott, the former investment committee member at Bridgewater and current CIO of Unlimited Funds, has a goal to bring hedge fund strategies to regular investors at a fraction of the cost. His fund’s goal is quite simple – offer a portfolio with return characteristics similar to the hedge fund industry’s gross of fees returns and aim to outperform by charging comparatively lower expenses. He sat down recently at the Inside ETFs conference in Florida to discuss his strategy and his views of the current environment.
Elliott explains that the real exciting thing within the industry today is seeing how active ETFs are the future (and not just factor ETFs or slightly active ETFs). Issuers are bringing more sophisticated strategies to the market, such as long/short, that were previously only available to high-net-worth investors and marrying them with the tax efficiency of ETFs. Advisors have tended to experience pain trying to get these into portfolios because the existing forms currently available are often expensive and illiquid. The ability to access these within an ETF structure is attractive.
We’ve been waiting for the active story to play out for more than a decade, but it is still unclear if it will stick this time. Active really shined in 2022 when there was a deep correction in equities and previously out of favor areas of the market did really well. The flows are there right now, but will it last if the market turns bullish again? Issuers need to make sure they are not just reinventing or recycling old ideas.
Elliott’s fund uses a rules-based approach that has a goal of replicating the gross of fees return of the hedge fund industry, but doing it cheaper and more tax efficiently. The systematic process generates views across 60 different markets and creates a good replication of what hedge funds are doing in aggregate. By drawing on the wisdom of the crowd instead of just incorporating personal views, it removes a degree of volatility and should generate better returns over time. His company is trying to provide accessible macro level research.
Is the guessing game around where interest rates are headed or what the Fed is going to do either healthy or useful? Elliott says that you don’t want to be overweight one particular outcome or another. He feels that a lot of investors today are probably outweigh the era of easy money. If you feel that we’re either in or entering a period of low growth, high inflation, and tighter monetary policy, you should probably be scared if you’re invested in stocks and bonds exclusively. There are periods where real returns are zero for years. The question is whether or not your portfolio is prepared for this possibility.
With artificial intelligence booming right now, there’s a possibility to add this as a tool in the complete portfolio management process, but not as a replacement. Hedge funds spend billions of dollars a year figuring out how to beat the market. When Elliott looks at AI, he sees it as another tool of innovation that hedge funds will use to help beat the markets. Just using AI on a set of data and expecting that to be durable or persistent won’t work. The best people see these as tools or techniques in the same way that Monte Carlo simulations or regressions are tools. They need to be augmented by people who understand how the world works. AI doesn’t understand that and if you use AI alone, you’ll end up with meaningless optimization instead of insightful observation. You need to have investors doing the work, not technology, to provide the best chance for optimal outcomes.
Elliott explains that he sees hedge funds positioning as very balanced in aggregate in terms of outcomes. There are a lot of factors that are unusual in today’s environment. Under the hood, he’s seeing some small tilts – lower duration, lower U.S. stock exposure, favoring value over growth. These small modifications are a reflection of uncertainty. We’ll probably get more clarity soon on rates, inflation, and recession. That could result in some bigger shifts.
Other key takeaways:
- What are advisors looking for nowadays? There’s a lot of interest in alternative strategies, including how to work these into client portfolios without creating too much confusion & complexity while offering the benefits of an ETF wrapper.
- Elliot’s fund is about 50% equities/fixed income and 50% alternatives – some absolute return, private equity, venture capital, etc. Elliott says that maybe a 20% allocation to diversified alpha strategies is a good target to aim for.
- Elliott explains that there are three sources of return – cash, beta and alpha. Absolute strategies try to combine the cash return with the alpha while considering both the cost and the risk of the strategy.
- Elliott sees emerging markets as an area of selective potential. In Latin America, you have falling inflation, reasonable growth, and a lot of interesting opportunities, such as in Mexico and Brazil. In Asia, some of those elements are less attractive.
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