In this episode, Tory Reiss, the CEO and co-founder of Equi, joins co-hosts Bob Fraser and Ben Fraser to discuss how their proprietary technology is selecting the best hedge funds to invest in. And how they’re building an investment platform to make hedge fund investing more accessible to retail investors. Tune in to hear why our guest believes hedge funds are poised to do well in this current market.
Download Tory’s slides https://www.investwithaspen.com/hubfs/Equi%20ILAB%20Slides.pdf
Connect with Tory Reiss on LinkedIn https://www.linkedin.com/in/toryreiss/
Connect with Bob Fraser on LinkedIn https://www.linkedin.com/in/bob-fraser-22469312/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Ben Fraser: Hello Future Billionaires! And welcome back to another episode today. We’ve got a really fun guest. I say that all the time, but I really mean it cuz these are such fun conversations. And we talked with Tory Reiss of Equi and it just felt. As an observer here between Bob and Tori, just the nerds uniting.
It was a really fun time hearing some of the data and Tori definitely has some great data to share. And he’s in the space of what they call liquid alts or hedge funds. So this is not an area we spend a lot of time talking about, but their whole goal is to make hedge funds accessible to retail investors like you and I.
And it was really cool. So we dive into really the nitty gritty of their strategy and why they believe investment man manager selection is infinitely more important than just the asset class and the strategy. He has some great data to back it up. And Bob, what did you think of that interview?
Bob Fraser: It was so good. We don’t do a lot of shows on hedge funds and so it was great to meet another hedge fund geek and and they actually run a strategy using a fund of funds model where you, they select managers and and I actually really like that strategy for hedge funds. So I think these are, these guys are some great guys.
They’re just brand new startup. I blinked last year, but They have already great track record and anyhow, super interesting conversation. You gotta listen to this if you’re interested in hedge funds at all.
Ben Fraser: Gotta listen to it. And as always gotta give the disclaimer for anyone we bring on that is raising money.
We’ve not done any due diligence. We bring them on purely out of curiosity. So you need to do your own due diligence if it is of interest to you. And again, we always appreciate you writing and reviewing this podcast and whatever platform to listen on. And thanks so much. Enjoy.
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Ben Fraser: Welcome back to the Invest Like a Billionaire podcast. I am your co-host, Ben Fraser, joined by fellow co-host Bob Fraser, and today we have Tory Reiss of Equi. So Tory is the co-founder and CEO of Equi, which is an alternative investment platform. And they believe in Alts just as much, if not, maybe even more than we do here at Invest Like a Billionaire.
And super excited to bring Tory on and share his expertise. He comes from a FinTech background and what they’re doing at Equi is really cool. I’m gonna have him share about it, but it’s really a hybrid of a FinTech platform as well as an investment manager. Tory, welcome to the podcast.
Tory Reiss: Thank you. It’s great to be here, guys.
Ben Fraser: And apparently, this hasn’t happened very often where we have a guest that has claimed to have listened to every episode of the podcast, because I’ve been in all of ’em. I don’t even know if I’ve listened to all of them. So that’s, that, that’s a feat right there.
But this is really fun.
Tory Reiss: Feel free to give me the pop quiz, but I’m a big fan.
Ben Fraser: Awesome. Tory, give us a little bit of background on you and how you came to start Equi, and then I know you have some slides, so I’d like to give the disclaimer, this is a video podcast as well on YouTube.
So he’s gonna share some slides, which we’ll also be able to download on our podcast page. But if you wanna watch the slides that is able to do on YouTube. Tory, give us your background.
Tory Reiss: Sure. I’m the c e o of equity, like you said. We’re a hybrid investment manager and technology platform.
My background is more coming from Silicon Valley, so my focus is on the product side, whereas my co-founder, who’s our Chief Investment Officer, comes from a finance hedge fund background. And I think that’s really actually what makes us unique. We are both a creator of financial products like we, we actually trade proprietary strategies and we use technology and data to identify some of the top managers in the world. And then we provide access through our platform. Really it’s the only place that individual investors and investment advisors and even small family offices can access these investments.
Ben Fraser: Cool. So it, what’s really been happening over the past several years in your kind of at the forefront of this trend is, there’s a lot of capital moving into alternatives, but also the kind of FinTech movement is really helping advance access to alternatives. And so you, like I said, believe as much in pushing alternatives and getting this into the hands of the people, so to speak, as much as we do.
And so what’s really the, the goal with Equi? Is it currently only for qualified professionals or accredited investors, non-accredited? Who does it it kind of meet right now?
Tory Reiss: We’re focused on accredited investors and up. The majority of our customers are qualified purchasers. Our vision really is about accelerating the adoption. Of alternatives by individual investors and their advisors. And that doesn’t mean we don’t have institutional customers because we do, but that’s the reason why we put such a strong emphasis on technology.
Cause I think that really the two have to go hand in hand if we’re gonna, get this into the hands of the next, let’s say 10 million people.
Bob Fraser: If you’ve watched the podcast, I’m a computer scientist, so what’s the tech side here? What’s the tech good for?
Tory Reiss: Yeah. So I do know that’s your background and so I know you you’ll hopefully you’ll see the wisdom in what we’re doing. There is a lot of upfront investment that we’re making on the technology side.
If you’ve ever subscribed in a private fund, you know that it is a endless maze of, representations and documents and signatures and PDFs trading back and forth and, tracking down, whether it’s for capital calls or you’re reporting, getting nabs in the mail. Like redemptions, like the whole thing is almost entirely paper-based.
Our platform has digitized the entire process, so from start to finish, including reporting and reallocating, it can all be done digitally from your phone or from your computer. And we think that’s the future. Not only do we build technology on the front side, but all of our investing is also built on a foundation of technology. We have systematic strategies. How we source our managers actually it’s all driven by data and technology. And we were shocked at how little of that has penetrated the alternatives industry despite how vast it is and how much money is in the space.
Bob Fraser: Okay, so I go sign up. And then I have a list of managers of hedge funds or something, and then I can sign up. And you facilitate the process or what’s it like?
Tory Reiss: When I was first thinking about the idea for Equi, one of the things that I struggled with was I was like many people where I had a spreadsheet and I’ve custom built the spreadsheet over years and it’s 17 tabs and I have one tab that’s like all my investments.
And so I have angel investments and real estate and over time it grew from just, Vanguard funds to having all these alts as well. And I was tracking everything manually. It was a huge nightmare. I think that this idea that an investor should go to a marketplace and say, Hey, here’s 40 deals.
And you, when you’re busy with your normal life, should also become an expert at underwriting commercial real estate deals or underwriting private credit deals. When in fact like that’s an incredibly difficult task even for the professionals. I would much rather trust someone that knows what they’re doing, like Aspen Funds than I would, to expect the average consumer or tech executive to go figure that out.
So when I looked at the marketplace model and I’m like, this really doesn’t make sense. We took a very different approach. The difference between top performing managers and bottom in private markets is almost 10 times greater than the difference between the top performing inequities or bonds.
Because it’s just a much more efficient market. Because alts is more opaque and there’s also far more funds. So what that means is actually all of your energy should go towards making sure you make one really good high conviction investment as opposed to just spreading money around and darts of the dart board.
Ben Fraser: Your average return by doing that is gonna be way, way lower than picking a few yes. They’re all big winners. Yeah. And at I would imagine mean
Bob Fraser: basically betting on the winning horse and the losing horse. You’re just winning horse. And I hope the average passes the finish line.
Yeah, we got it. You got it. Okay you’re curating the best manager, so you’re kinda like a fund of funds. So you’re evaluating manager performance and picking the jockeys that you think have the strategies and the skills to go win and this whatever this next season is in front of us.
Tory Reiss: Yes. So our initial flagship offering is a multi-strategy portfolio of managers, and you’ve talked about it in the past, like the value of an access fund is getting you into all these different managers. What we saw as part of the problem though, is like how do you avoid layered fees? And so we go after smaller managers and negotiate those fees down on average, like 50 to 60%.
So net is still cheaper to the customer. Oh, cool. Yeah. And beyond that, we also look at something that we think is interesting is we wanna be able to see our managers perform like what they’re trading, and then we actually run an overlay risk program on top. So we’re able to hedge risk out of different managers strategies.
Bob Fraser: So there’s tech again.
Ben Fraser: let’s just pause real quick because I think for listeners that maybe are less familiar with the world of what you call liquid alts or hedge fund strategies, let’s just, talk about the types of strategies you’re doing. Cuz a lot of our listeners are real estate, right? That’s what they’ve known.
That’s, the world that they live and play in. But as we’ve talked about, a lot of episodes, especially with the early ones, there’s kind of alternative investment continuum, right? As you move up in net worth, you move up generally in this continuum of stocks and bonds only to adding some real estate, to adding some private equity and then hedge funds.
It’s this, a illustrious area, but people don’t really understand it, right? And it’s reserved for the ultra wealthy. But what you’re doing is taking a lot of these strategies and making them accessible in a platform. And what I’m kinda mostly familiar with are platforms for real estate, right?
Like a CrowdStreet or an EquityMultiple where you’re going on and, you create a profile, you click on accredited and you can see all the deals they have that are active. But to your point, how do I know I’m picking their deal and how do I know that the representations they’re giving?
And we’ve invested in a few deals on the platforms and it has been hit or miss.
Bob Fraser: And one fact, especially in the stock market because a guy had a good quarter or good year, that’s almost a negative correlation to future success sometimes, right? Yeah. So don’t wanna just pick the guy that had the best returns and say, oh, he’s my guy.
It’s I. He is shot us wad, it’s over. He got lucky. He wrote the dice, got lucky. And that’s it. I actually like fund to funds approaches in hedge funds. I think it’s a great model if obviously like you guys, you know how to evaluate the fund managers.
Look at what they’re doing and blend a strategy that’s actually, fits the market that we’re in. And so for those that don’t know, there’s a lot of different types of hedge funds, right? There’s a lot of strategies. There’s called global macro. There’s arbitrage, there’s, there’s short, long short.
There’s lots of different strategies. And they all work sometimes and they all don’t work sometimes. So figuring out which. What time it is, right? For which strategies are gonna work and which managers are likely poised to have the best wins. So how do you curate your managers?
Very interesting, right?
Tory Reiss: That’s the million dollar question. That’s part of the secret sauce. So I’ll tell you a very short anecdote.
Before starting Equi, before we raised funding, before anything, we interviewed dozens. I’m talking dozens of capital allocators from multi-family offices, single-family offices, endowments, pensions, and we were asking them like, how do you source your managers? How do you evaluate them? Every single time, almost like pretty much without exception.
We were told, oh, I’ve been in this industry 20 years. I know everyone. I have the best Rolodex. I go to the conferences. I’ve been in early I know a guy golf with a cousin, that type of a thing. Yeah. And we’re sitting here and I’m like, I’m thinking back to, when you ask, a hundred people if they’re above average drivers, 80% will tell you they are right.
And so it’s, it was a similar sort of a thing where we were like this, hold on. There’s tens of thousands of private funds. Statistically, what’s the probability that everyone has the best Rolodex and just knows the best managers? So we didn’t have a Rolodex, we didn’t come from the industry. So our approach was entirely like, let’s go to the data.
How can we get more and better data and build better technology? And let’s look to the numbers.
Bob Fraser: You’re the money ball of hedge funds, right? It’s let’s go the, let’s do the data, right? Love it. That was it. Great movie. Anybody wants to watch a movie about baseball and Yeah. And spreadsheets.
Tory Reiss: And you’d be shocked, right? We didn’t know if it would work. And lo and behold, we’re like, wow, we’ve been finding these incredible strategies that no one’s really heard about.
Bob Fraser: Yeah. That’s awesome. So have you beat the market?
Tory Reiss: Yeah, actually pretty handily. Last year the flagship portfolio did a bit over 1%.
Although, which for a liquid strategy puts us in a very unique category because almost everything liquid lost money last year. And then our internal strategies, cuz we also offer return enhancers which you can add on to the core multi-strategy portfolio. Our proprietary strategy did 22% actually as part of that.
So that was the top performer.
Ben Fraser: And that, that was in 2022. It did 22%. That was And what was the what benchmark
Bob Fraser: in 23? It’s gonna be 23%. Is that what you’re telling me?
Tory Reiss: I think it’ll, I think it’ll do better, frankly, because that was a partial year. It was, it went live in May. So between May and December, that’s what it did.
But we think this year, now that we have a full 12 months to produce returns, we’re pretty confident in that sort.
Bob Fraser: Let’s jump into the slides. Let’s see what you got.
Tory Reiss: So here’s what I prepared for you guys. Our investment team has been looking at, all sorts of models, a lot of data.
You guys did a macro episode not too long ago, so this shouldn’t be news to anybody that, year over year and consensus estimates are showing that the economy is slowing. We’re entering a period of contraction.
This is actually, if you really zoom out, it’s one of the largest deceleration of real economic activity and that’s of all time.
Right now things operate in a lag, but if you look at M2, which is, or really the rate of change, which is a very significant indicator that what can help predict asset price returns. We’ve seen a huge deceleration and growth right now is negative. Okay, so none of this is news.
Bob Fraser: So he’s looking at money supply growth. Yeah.
Tory Reiss: Correct. Yeah. Which is negative, right? Which means liquidity is actually also being pulled out of the system. There’s quantitative tightening happening.
Reminding everyone the formula. You don’t have to memorize this, there won’t be a quiz. But real GDP growth is a function of total factor productivity growth plus labor input, plus capital input. And if you look across all those factors, and I include some stats here, that’s what’s on the screen.
That we’re in a multi-decade decline on productivity growth. And labor, both the growth rate of the working age population is going down. US life expectancy is going down. Employment growth rates down, the capital stock is going down and inflation the IMF is saying it doesn’t think we’ll get down to target until 2025 if that.
So realistically what we’re concluding from this is when we zoom back out and look at equity markets. If you look going all the way back to, 1900, that there is this concept that we call lost decades, where, market can basically produce no returns for 10 or even 20 years.
And that doesn’t mean you won’t see many bull rallies in many bears, but from peak to peak, you’re not really making money for a decade.
Ben Fraser: This is a pretty compelling chart. This is something that goes against every, traditional concept of, efficient market hypothesis and all these things where, oh yeah, it’s always a good time to buy.
It’s always time to be in the market. The market has averaged, whatever the number is. 6, 7, 8, 10% per year since 1900. That is true. Yeah, but averages don’t show you these different time periods. If you break it down, like you’ve done really great on this chart, right? You can see there, there’s periods of basically just sideways movement for many years.
Bob Fraser: I love this chart. When Ben went to school, he studied finance and he was, sitting at the feet of these professors and learning efficient part market hypothesis and modern portfolio theory and all these things. I said, Ben, I.
They don’t know what you’re talking about here. And I gave them a book by John Malden called Bullseye Investing. You remember that, Ben? And I said, you’re gonna read, they’re gonna read this at the same time. Didn’t have this exact chart, but very similar, right? So if you invested in the, October, 1929, put all your million dollars into the stock market.
You didn’t recover that for, what, 70 years, and so it matters what time you invest and, over averages. It, they’re right. The stock market does go up, because it’s investing in America. It’s investing in business and in ingenuity and productivity and innovation.
Yeah. But timing matters. You very well could be right that we could see a pause. My one question on that, just a little bit of pushback as an economist given the amount of money coming in and the amount of liquidity and inflation if they continue to ease.
We could see more growth, but you absolutely could be right here. And and I’m well aware that there’s big pauses on economic growth and and so good point. So if this is right, you’re predicting a pause, what happens then?
Tory Reiss: Yeah and I think you actually hit the nail ahead, which is, we can’t predict will there be a full fed pivot and they’ll actually start printing again.
That’s why when we look at this, we say probabilistically 60 to 70% likely we’re moving into a lost decade. So we’re preparing for that, but we also have to be prepared for the possibility. That, the Fed injects another round of liquidity. Again, they might just be kicking the can though, at that point.
And you have to be aware and prepared for, what would be an even more prolonged pause. To your point, what then? That’s the great question, right? And so when we look at the Yale Endowment and David Swenson, whose books I’ve recommended to countless people, they’ve actually dropped their equity exposure to record lows.
It’s low single digits of their portfolio. This is, to me, a shocking chart that shows the difference between 1985, where they’re allocating close to 60% to equities to 2022, where it’s low single digits. And the reason I think this is significant is we agree with this view that like the risk return in equities is the lowest for me, it’s like the lowest in my lifetime.
And if most portfolios, which are just stocks and bonds, if those are the two return drivers, you have your entire portfolio driving its growth. That might mean you have to be prepared for low or no growth for a decade or more. And that’s why, again, back to the vision of accelerating adoption of alts, we’re now getting to the punchline here of okay, how do we do that?
Let’s talk about alts and that’s like the next half of the presentation. I talked a little bit about alternatives. This next slide, what it was to me, this was so eye-opening. I remember reading this report when I was originally doing the research prior to starting Equi.
And you look at this, difference from 2016 to 2019 going from 21,000 private funds in existence to 26,000 private funds in existence. And this is across hedge funds, private equity, real estate, venture capital. That is a staggering number when you consider that there’s only 3,643 stocks listed on Nasdaq, right?
So compare the amount of analysis and energy and technology that goes into just analyzing 3,600 securities versus what is required to navigate. Through 26,000. And these are also far more opaque, like less reporting requirements, like more sophisticated strategies. So this is, I think, one of the most important slides for understanding why investing in private markets is a difficult task.
And now this one, Bob, I know you’re a data guy, so I think you’ll love this. I absolutely love this chart. This is showing in that the dispersion or the spread between the black dot here is the median, and then the colored is the bottom quartile or bottom 25%. And then the gray is top quartile.
And then the candlesticks show like the difference between top performers and bottom performers in the category. This is 30 years for many of them and it’s about a decade. So it depends on the asset class.
So where the data’s available, it goes back to 1990. And for okay, for some of the asset classes, it’s it’s goes back 10 years. You’ll see the spread is extremely tight on fixed income inequities. And when the spread is that tight, meaning the difference between the worst performers and the top performers is fairly insignificant, you’re better off buying the market than picking, because your odds of picking correctly is extremely low.
It’s very difficult because again, the spread is so small, and that’s bonds and stocks, right? But now if you look at hedge funds, private equity, private debt, and real estate, you can see the spread between bottom managers and top managers can be the difference between negative 30% returns or as much as 90%.
It is staggering just how much of a difference manager and security selection makes it,
Bob Fraser: Makes a lot of sense if you’re a venture capital investor, right? And the guy knows what he is doing. He’s gonna make a whole lot more money than a guy who’s rebalancing the, S&P 500 slightly and trying to get some returns there, right?
So it makes a lot of sense that certain categories, I guess our show showcases for managers or the other way, right? Not, yeah. Face plants for managers. Yeah, this is excellent.
Tory Reiss: Again, this goes towards this insight of the detriment of the marketplace model, right?
And I was asking myself this question, so again, when I go back in time, I did a year where I was just studying real estate. I was in on Bigger Pockets, I was reading all these books and cause I wanted to start investing in real estate and I was doing it and I was learning and I would go and I’d be reading these deals and getting into the prospectus and going deep and like wanting to learn, understand the capital stack.
And I’m looking at this and I’m like, what am I doing? I’m like, there are people who spend their whole career doing this and still make huge mistakes. And so that, that was why when I would be in my class and I’d be telling people, Hey, you should look at alternatives. I didn’t feel like I could actually give them say oh, go look at this marketplace.
Because if you just stumble in and be like this has a high return, so I’m gonna invest in that. You’re not being appropriately rewarded for the risk that you’re taking. Cause you don’t even know what risk you’re taking.
Ben Fraser: This kind of plays into a concept we’ve talked a lot about, if you have the idea of a jockey and a horse right?
You assume that the horse is the most important part. Basically the investment itself is the most important piece of this, and that’s what most investors focus on, right? Is they’re looking at what is the deal? What market is it in? And what’s the rank growth or what’s, whatever the drivers of value are in that type of a deal.
And they’re not spending as much time on the jockey or the operator right into your point, and that, that chart encapsulated that point so well. Is that is the bigger driver of returns in these private markets, is the jockey is picking the right manager, the right operator to operate the deal.
Tory Reiss: And this actually goes towards both your point and Bob’s last point, which is, if you look at this, maps that same data, but if you look at the spread and you map it by type of strategy, you’ll see that the more complex, the strategy, the more important, the wider, the spread is between the top and bottom managers. And so that means if you’re in the domain of, municipal bonds, it’s not that big of a deal, right? Like you’re buying a muni bond. You look at the coupon, you know what you’re getting, right?
But then you look in the upper right, if you’re looking at a private equity buyout fund or special situations private debt. Or you’re looking at distress debt or any, like all the hedge funds are clustered right there around the middle too.
The, you’ll see that the more complex it gets, the wider the spread and also the higher returning the greater the spread. This is the most counterintuitive point that I would want to leave people with, is that your instinct might be to chase higher returns, but you should be aware that the higher returning the investment, the greater the difference between the top and bottom performing managers, meaning there, there is actually an enormous amount of risk that you might not be aware you’re taking, because if something’s promised you 30% returns, you better be extremely convinced that this is a top manager that really knows their stuff and you have made sure that you’ve touched bottom on your diligence.
Otherwise, it can blow up in your face. And so that’s something that we I think is really important cause like we need to all be aware of the data.
Bob Fraser: Something else that this chart points out, it’s how us small cap equities, us large cap equities, just, the markets, how, what a winning strategy that is.
So you’re, you have a pretty high return with not a lot of dispersion and they’re beating venture capital. Returns. And so all these smart guys are not beating the market, right? The basic on average. Yeah. On average. And so you’ve got all these people that are trying so hard and just they go backwards, right?
This is great data, but there is a time not to be invested in the stock market. And, and you pointed ’em out in that growth chart there. But there really is a good strategy of just a pick index funds.
Tory Reiss: Something I think you, you’ll find interesting is when you look at this next slide, when we think about how we structure. Our portfolio and this is what I encourage, I think there’s lessons in this for any private market investor, whether you’re doing, li liquids like we are, or you’re thinking about other parts of your portfolio.
So there’s an old adage, there’s two that we love, right? One of them is “diversification’s the only free lunch” and that’s Markowitz. And then there’s another one which is: ” Asset allocation is everything.” So when you think at a portfolio level know where am I looking to get high returns in my portfolio?
Where am I comfortable going for slow and steady low risk, things that are just really drive my portfolio overall. And being able to get a balance between those high upside and maybe you’re okay with a little bit higher volatility in part of your portfolio, but then you want to be safe with, a larger portion of your portfolio so that you’re not losing the money you’ve worked so hard to create. That’s something that I think this slide illustrates really well where we’re not looking to swing for the fences with every manager or strategy. And actually by percentage, the majority of the portfolio are slow and steady strategies.
Bob Fraser: I love it. As we run debt funds and we love debt funds. Honestly, you can get almost equity returns with debt funds with a tiny fraction of the risk, tiny fraction. To get that extra couple percent returns you’re taking on 10-20x the risk.
It’s just not worth it. And so debt funds are great and debt funds are great in times like this when you don’t know what the equity’s gonna do
Tory Reiss: just to illustrate this point, if you look at, this is like the breakdown in our, multi-strategy portfolio.
You’ll see the allocations broken down by the actual strategy, and you’ll notice that it’s very diversified across the different strategies. What I think is a good lesson for any private market investor is when you look at a year like 2022, you’ll see that there’s some strategies that were okay taking a lot of, there can be a lot of downside volatility in those managers.
There’s one strategy that did, you know that lost 24% last year. But we know that this is a manager that has a lot of volatility and they can, they’ve a, they can have years, they’ve averaged for almost, eight or nine years, they average around 50% annualized.
Bob Fraser: Time to invest in that guy.
Tory Reiss: But what’s key, and this is why we try and communicate this to everyone is you’ll notice one of the top performing strategies of 22 was acqui hedging. And so what you’ll notice is it’s almost identical, the return of acqui hedging to the return of some of the losing strategies.
And that’s because what we do is our team is actually putting overlay. Hedges because we anticipate that downside volatility and then it neutralizes it. And so I actually what I would say is that for people that are taking like that wanna dip their toe into liquid alts, I do think you need to think actively.
Like when is a time you want to either go into a manager or redeem and it’s a little bit different than, invest a manager and let it compound for 10 years. Unless you have, someone that’s actively managing the liquid strategy. The short strategy like Dynamic alpha can return 22%.
That’s the proprietary strategy I was telling you about. That’s ours. But that’s because the way that strategy is structured is it’s a blend of both discretionary, macro, like you mentioned, and systematic. So itself is already diversified.
Ben Fraser: Yeah. This, this is super cool. Talk a little bit about, what kind of role does this play in a portfolio? And just again, dumbing it down for folks that are not familiar with hedge funds, not familiar with liquid alts, because generally we’re talking about, private investment into real estate or private private equity, right?
Where you’re investing into a manager through a PPM. But what you’re doing is you’re investing in hedge funds that are, private in that sense. But they’re trading on the market they’re having whatever strategy it is. And these are buying different securities through the public market.
So it’s a different end result, but you can provide liquidity. But, so what kind of role does this play from your perspective in a portfolio for an investor?
Tory Reiss: I think that was why it was important to show that slide of slow and steady versus high returning. When I think about, for example, something like an Aspen Income where I think about that as okay, that can provide current income and that would fit in my personal, let’s say, portfolio as a slow and steady type strategy.
What do I wanna do for the part of my portfolio that I want equity like returns. So where we started, were with strategies where even in our multi-strategy, the target for that fund and what we’re targeting annualizing at is between 12 and 14%, right? So that’s equity, like returns, but the volatility that we’re targeting is a small fraction, 5%.
When we think of a core holding, you want something that’s low volatility. Cuz you shouldn’t trust a large part of your portfolio to something that isn’t highly diversified, diligenced.
Bob Fraser: The first best way to make money is not lose money.
Tory Reiss: Exactly. So that, that, that’s a key tenant of what Itay calls the equity investment model is: don’t lose money. He says, at the end of the day, And this is the nature of geometric losses, which you guys have also talked about before. It is much harder to get back to zero than it is to compound from a higher cost basis. Exactly. So in a year, like 2022, my personal portfolio, for example, I have half in, in our multi-strategy I didn’t lose money last year.
I’m now compounding. So like this year if we performed at Target, I’m compounding from much higher cost basis than someone who, let’s say lost 20% and now has to make much more than that to get back to zero. But the other role that these type of strategies can play in a portfolio. So if you put low volatility or low risk on one hand, and those, again we’ll call those like core holdings.
Return enhancers. This is another concept from, the capital allocation world, but a return enhancer is something that you know, is less diversified. It’s shooting for a higher target return and you, and it comes with greater volatility. But you’re okay with that volatility because you might only put a small portion of your portfolio, maybe you put 5%, maybe you put, 10%.
And so then you’re okay accepting a little bit of volatility because those are targeting, let’s say 15 to 20% returns. And so if that portion of your portfolio over performs it, it can drive, your entire portfolio to higher average returns over time. And so that’s why asset allocation is so important, right?
Is understanding how to balance real estate current income. Core holdings, return enhancers to really create something. Beautiful.
Bob Fraser: So back to your secret sauce. How are you picking these managers? Am I just really just You’re just saying, trust me. Come on.
Tory Reiss: No. We don’t. So you were asking Ben about this, so so go back in time we’re saying, can we really can we really just use data? Is it that simple? It ends up, it’s not that simple. It’s very complicated to get all the data from a lot of different sources, both public and private databases or scraping data. Then it’s not just getting the data.
You have to normalize it. Then not only do you have to normalize it, but you need to actually make it usable. And what I mean by usable we wanna look at things like. Sharp. We wanna look at Sortino, we wanna look at correlations between these managers, strategies, and any other financial instrument.
Then we don’t only wanna be able to do that, we wanna look at correlation between one manager’s strategy and another manager’s strategy. And so I’ll give you, I think one sort of poignant example. The correlation of all of the managers in the multi-strategy portfolio is close to zero. Like it’s very uncorrelated.
But during major events like major market displacement, correlation goes to one that’s just like, how markets function, right? So we have one manager that arbitrages the risk premium between Nordic government bonds and Nordic mortgage bonds. And they’ve done this strategy for almost 20 years.
It’s incredible. They’ve outperformed, the S&P 500 by a huge margin, their largest ever drawdown was only something like eight and a half percent during the great financial crisis. Something like that. Don’t quote me on that. That was their largest ever drawdown, but they annualize at such a, good rate that they’ve more than make up for it. But here’s the thing, when we were looking at that strategy versus say we have another strategy that trades volatility, right? You saw long short volatility. Those are completely different.
Products and markets. But the correlation goes to one when there’s a market crisis in repricing like last year or like the upcoming bear market that we anticipate correlations go to one. So what do you do? So what’s interesting is our team found that there was a correlation, very high correlation between Nordic bond markets and the dax, the German Dax.
So they basically found a way to hedge using a short on the DAX that will offset. This Nordic manager and ensure that when that manager might be taking losses, it’s offset by that position on
Bob Fraser: the D You’re layering a hedging strategy on top of it.
Tory Reiss: Yeah, exactly. So sourcing is part of it, but we won’t invest in a manager until our investment team like understands the strategy well enough that they could.
Run the strategy themselves. They have to really understand it on that level. And so back to the story of looking at correlations, looking at, we look at correlation to the general market. We’re looking for size under 1 billion. This is actually one of the most important things. Everyone thinks bigger is better.
No. No. So we actually, all the data will show you that your,
Bob Fraser: when your minimum investment is 2 million to 3 million, you have to find only certain things can fit in that bucket and Exactly. So it’s a whole lot better to do smaller and more agile, nimble type investments. And for example, your little north deal, I’m sure you couldn’t put.
A trillion dollars or even a couple billion dollars into that, it wouldn’t even fit. It does. That big strategy, a lot of these knit strategies, the best strategies are little, they’re little tiny. Exactly. Inefficient markets that guys figured out how to nab, yeah. And the small.
Tory Reiss: Yep. Yep. And we, there’s another guy, we, we’ve got a couple who are, they’re arbitraging, it’s called Viatical settlement. I think you may have mentioned this one before. Before, yep. But they arbitrage life insurance policies and it’s actually a brilliant strategy. They’ve performed exceptionally very non-correlated.
And so there’s, to your point, there’s these niche markets that when you pair them together, the sum is greater than the parts. But I think that something that is to me, I would say fun about this whole thing is when we reach out to these managers and we would email them for the first time.
Sometimes you have to email a lot of times where we’d be calling them and they’d be like, who? Who are you? How did you find me? No one has ever reached out to me cold. Like most of them would say, I don’t market. I don’t go to conferences. Like, how did you find me? And what’s wild about this is like a lot of it is actually relying on the data.
And what’s crazier is that they would not get accepted at any of the large private wealth organizations. Goldman won’t talk to them. JP won’t talk to because they won’t talk to you unless you have a billion dollars. The best managers are the ones that can’t be distributed through most of the major platforms.
So they don’t even bother trying. And especially if you’re capacity constrained. Don’t bother talking to Blackstone cause they don’t wanna write you a check less than 200 or 300 million dollars. So again it leaves a lot of alpha in what we call the long tail.
Bob Fraser: Totally. I love it. People don’t know I actually ran a hedge fund for five years and did well until I didn’t do well. I know quite a bit about hedge funds and I’ve also thought the best way to do hedge fund investing is as a fund of funds with someone who is very busy full-time looking at the data redeploying and rebalancing continually. I’ve always thought that was the best way to do it. And I know that some of the best fund of funds they charge a 1% fee or something like that, and it’s additive, but it’s not because their returns are higher, right?
So they’re making up for it. But you’ve ever actually solved that it sounds brilliant. Here’s my one question for a guy who’s done tons of the exact kinda analysis that you’re talking about, spreadsheets and correlations on massive amounts of data. The thing is, the correlations change over time, right?
Yep. So what works today I put together some killer automated trading strategies and they worked and they worked like a charm until they quit working. And everything quits working at some point. And because the market is a bunch of people who are very smart, just like me and you and everybody else who are adapting, and if something doesn’t work, they start adapting, they shift.
And so it’s not this thing, this static thing, but it’s human activity. And so how do you manage that? That the fact that the rules change, right? Absolutely. Correlations change.
Tory Reiss: It’s an excellent question. I’m smiling ear to ear because my co-founder, Itay, who you will just get such a kick out of you, you gotta talk to him sometime.
But he, so first of all, you’re right. He also was a hedge fund manager traded volatility. He is as good as they get in my opinion. They’re looking at the positions, they’re looking at the portfolio every day. They’re looking at the risk, they’re looking at the concentration, they’re looking at correlation and they’re managing it.
And then, we’ve automated as much as we can. And keep in mind, we’re not using spreadsheets. We’re actually using software. So for all the data analysis, everything we’re doing, we’re using real data that’s updated some of it real time, some of it in a lag. But what that allows us to do is look at things like rolling correlation analysis and how it’s changing over time.
Because your point, it’s not enough to look at correlation as a function of a moment in time. It’s evolving, there’s this scatter plot.
Bob Fraser: HisTorycal correlations. You can’t because they work. They’re correlated for a moment, then they’re not correlated then they’re not then correlated.
And you can’t look at hisTorycal correlations. You can’t over weight those things.
Tory Reiss: So I agree with you. And so what the innovation that I think e and this is more credit to Itay like again, I don’t want to take credit here, is we have a system that we call Copernicus. And it’s our data system.
And our data system is actually more of a forward looking model. Cause again, all this data analysis work, to your point, is like driving, looking the rear view mirror. You can’t do that. You’re gonna crash. So what Copernicus does is it’s basically looking at different layers, global markets, it’s looking at macroeconomic regime, inflation, macro data. And it’s actually moving from, the high level, macro level to market level. So it’s looking at micro market level micro structures. So we’re looking at dealer positioning, volatility analysis, the implied market regime.
Then it goes to the portfolio level and it’s saying, let’s look at the weighted sizing of different positions, the screening tool for all the different trades. Where is the convexity? And what they’re actually doing is they’re modeling well, if these changes happen. Here’s the four most likely scenarios that can play out.
So then how do we position so that we’re not predicting the future, we’re just probabilistically. Again, it’s just like a Bayesian calculation of what’s most probable, and then how are we positioned for that situation, and then how do we have the right risk controls in place so that no matter if we’re right or wrong, We don’t lose money.
And so that, that’s, this is all part of Itay’s innovation is basically saying, sure, we can use it to get in the door, the backward looking data, but if we wanna manage forward, we need our own data. And so that’s why we had to build Copernicus. And so that’s and again, it’s because, He looked at the wor the world and he’s saying, everyone’s saying that, the, essentially the sun revolves around the earth and he’s looking at the data and he’s saying, I’m pretty sure they’re wrong.
I’m pretty sure the earth revolves around the sun. And imagine if you had that disparity of information and then you could trade on that. That’s essentially how, Etai and his team are functioning. And so that’s what they actually credit a lot of why they’re able to perform the way that they do.
Ben Fraser: Very interesting. Yeah, I’d actually love to dig more into that. My first thought is like the black swans, right? Because the idea is there’s these black swan events that happen, every once in a while. And the reason they happen is because the probabilities are skewed. And so people assume that it’s, gonna be X probability when it’s actually y and most models can’t adapt to that.
So what you’re saying is you’re looking at the changing correlations over time to potentially identify where the probabilities are not reflecting the underlying metrics or how are you avoiding, like the black swans? Yeah. Where the probabilities become irrelevant.
Tory Reiss: You don’t necessarily avoid it. There’s a slide. I didn’t include it, and maybe I’ll have to send this to you in a follow up. But basically you can look at like they’re looking at these factors like, is growth accelerating or decelerating? Is inflation decelerating accelerating? Then, if you’re looking across these different like quadrants what’s the right thing to do?
Depending on the quadrant we’re entering, like if selective, if basically we’re in a stagflation environment, you would wanna be, long gold de Nasdaq volatility, short dollar and treasuries and small caps. And you can hedge upside market risk, right? Because in that instance, where you wanna be careful is if the market takes a surprise rally or there’s a fed pivot or whatever.
You wanna be prepared to capture that, what we would call right side tail risk, right? Left side tail risk is like you’re gonna lose a lot of money, right? Side is the market’s gonna outperform you. So how do you prepare for that? And I’ll give you an example. And this again, Itay insight, not taking credit here.
So we have a manager where they have a strategy, and it’s called a pipe strategy, private investment in public equities. But what they do is they act as like a merchant bank. They do loans to micro cap companies, short duration loans, but that debt is convertible into equity at a discount. So they collect the coupon.
But under some instances, let’s say if they’re worried about default, they can convert and sell and still capture the spread so they don’t lose the principle or they just collect the whole thing and they make, let’s say eight to 12 on the debt that they made. But let’s talk about a different scenario.
Let’s say markets start skyrocketing. They convert. They convert. They get all the upside. They get all the upside. So you know what they did. In 2020, they’ll have years where they can have 60%, a hundred percent years. Now this manager has a 14 year track record and has an annualized at 29% a year.
And so again, that’s our right side tail hedge where if the mar, if the Fed pivots and there’s this big upside move, they’ve got all these positions in a lot of really struggling companies right now. Or if market starts surging. They can have a hayday with it and like I said, so
Ben Fraser: from your perspective then you can over-allocate to that manager to not get left behind the market and take advantage of a bigger allocation to the right.
Okay. Very cool.
Tory Reiss: So we’re defensive everywhere else.
Bob Fraser: If you remember my episode I did on hedge fund returns over time and generally when the markets go sideways hedge funds tend to outperform when the markets are just going on a tear.
- Hedge funds cannot keep up. They, they can’t, they generally underperform. And so basically if you’re arguing that this is gonna be a lost decade, that the markets are likely to tread water, go, have volatility, go up and down sideways, which I can’t argue with, I’m not gonna take a position on that.
But then hedge funds would be a great strategy, a great time to get in at this time.
Tory Reiss: That was why we rushed as fast as humanly possible in 2020 to start this company. Cuz I, that was our view. And our view was, if you keep going down the chain of logic, and by the way, this is why we invest in education.
We, we wanna put out as much content as we can. You watch our YouTubes, you watch our videos, you’ll see Itay. We are very focused on education because our conclusion is, if you educate investors enough, they’ll arrive at the same conclusions that we have and we think that we are doing the game optimal right thing to the best of our ability.
It’s like it, this is where I would put my own money. And so that’s like the ultimate kind of skin in the game, so to speak. You guys operate the same way in that regard. And so we don’t have blinders on. I’m a big fan of venture capital.
I’m a fan of angel investing. I’m a fan of real estate, huge fan of real estate. My co-founder is a huge holder of real estate personally. And I think that all these asset classes have a place in a portfolio, but you do need to know where are you in the economic cycle and what do you think is gonna be, what is gonna drive the returns of your portfolio in the time to come.
And so that, that’s really where. I think unfortunately people have been trained to buy the dip now for about 12 to 13 years. Right now the market positioning of all these funds and everything is bullish. Everyone’s buying the dip right now, and we feel like we’re getting closer and closer actually, the more of another pretty large down move. Our view is that 2022 is actually just a repricing to trend, meaning that wasn’t the bear market. That was literally just, there was a huge stimulus, huge amount of money printing, and now it returned to trend and now we’re actually approaching a bear market where there will, we think there will be the real down move.
Bob Fraser: Bonds are getting to the point now where they’re actually a decent investment.
And they have never been, they’re competing with stocks for the first time in decades. So that’s gonna be a headwind on stocks. I’m a big fan of treasuries. I’m not disagreeing with you. So you guys are not venture capitalized,
Tory Reiss: are you? Oh, no, we are. So we raised venture capital.
And I know. I believe me, I, I. Every time I do it, I’m like, why am I doing this again? But to do a lot of what we needed to in the early days, this was very capital intensive and we’ve built a lot of infrastructure and had to hire a lot of very expensive talent to do what we’re doing.
But I think we’ve now got a very scalable platform that can scale to the billions of dollars. And we’re hoping that the investment is the juice is worth the squeeze. Awesome.
Ben Fraser: Well, Tory, thank you so much for coming on. This was really fun. I wish we could do, some more.
I’m sure we’ll probably have you back on. But what’s the best way for folks to, to learn more about Equi?
Tory Reiss: Yeah, just check out https://www.equi.com/. We’re on YouTube and Twitter and like I said, even if the investment’s not right for you, like always decide what’s right for you. Hopefully our education and our content and just like you guys are doing, like we think that should be for everyone.
Thanks again for the time today.
Ben Fraser: Awesome. Thanks, Tory.
Bob Fraser: All right. Great to meet you.
