Resolve Riffs Investment Podcast

For the quant community, it was arguably the most awaited book of 2019. Finally, a peek behind the curtains into the most successful hedge fund manager in history.

The +66% average (gross) returns that Jim Simons and his army of data scientists produced over the last 17 years in their Medallion fund captured the imagination of investors across the globe and their obsessive secrecy just added to the aura of mystique. After much resistance from the protagonists (not least of which Simons himself), our guest today was able to pierce that bubble and tell the story of Renaissance Technologies.

A 20 year veteran of The Wall Street Journal, Gregory Zuckerman has authored best sellers such as "The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters", "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History", and co-authored the award-winning "Rising Above: How 11 Athletes Overcame Challenges in their Youth to Become Stars" with his two sons.

Our 30-minute conversation with Zuckerman tracks a different course from his recent interviews, focusing on how the journey to write this book has changed his understanding of the asset management industry and how his relationship with some of the characters has evolved.

But most importantly, we discuss a topic that has been at the core of ReSolve's philosophy from the early years: the idea of harvesting sustainable edges from group relationships as opposed to individual trades or securities. Waste no time and dive right into the latest episode of Gestalt University.

As fees across the world of financial services have decreased over the last few years, the former quotas and commission-based model under which investment advisors operated sounds like a relic of a bygone era. Back then, advisors were not in the business of providing services such as estate or tax planning, let alone financial education.

Mike Hirthler, of Jacobi Capital, was a pioneer and an innovator. When he left the commissions-based job he got just out of college to launch a fee-based advisory firm, there was no shortage of skeptics telling him he would never make it under this new model. But it didn’t take long for the industry itself to follow suit.

After almost 35 years in the business, Mike recounts the difficulties of the early years and how the important decision of remaining independent ultimately contributed to the firm’s success. A student of behavioral finance and the psychology of markets, he remains passionate about financial literacy – both for the younger generations that he supports in local colleges (and mentors at the office), as well as the ‘boomer’ generation (many of whom have been his clients for decades) that are currently dealing with the challenges of retirement.

Following the teachings and lectures of Charlie Munger over many years introduced him to the concept of mental models and combining disciplines to improve problem-solving, which led to an interesting “encounter” with his “mentor-at-a-distance”. It was also through one of his lectures that Mike came across the work of German mathematician Carl Jacobi – who inspired his firm’s name – and one of his most important lessons: "Think through your major problems backwards; invert, always invert".

In this episode Adam Butler and Rodrigo Gordillo host ReSolve's Head of Quantitative Research, Andrew Butler to discuss how ReSolve employs tools from the field of machine learning to produce meaningful and practical improvements in investment outcomes. We start with Andrew's background in applied mathematics and in particular his experience applying ML tools to solve complex real-world problems in the physical sciences. It was fascinating to hear Andrew recount how he came to understand that the tools that work well to model physical systems are much less useful in a financial context. This was a consistent theme throughout the discussion. Our objective was to offer a high-level overview of the ML toolset so we started by defining what ML is and digging into three traditional classes of ML: unsupervised learning, supervised learning, and reinforcement learning. We make each method accessible with simple examples and discuss how ReSolve uses the respective techniques to improve outcomes at virtually every step in the investment process. At many points the group paused to reflect on the myriad ways in which financial markets are distinct from other problem categories. We explore why it is critical to view financial markets through the prism of ML for any statistical inference, and discuss several tools that should be handy in the toolbox of every modern financial analyst. Of critical importance, we reinforced the fact that the ML toolset is useless – if not downright dangerous – if deployed naively without the direction and support of experienced operators. Without a deep understanding of the unique properties and pitfalls of financial markets ML tools are likely to do much more harm than good to portfolios. We also discussed why the most important step – by far – in data-driven research is the validation and online learning step – the sentinel – where trader intuition and experience can amplify results by orders of magnitude. There was some debate about the role of machines and humans in finance and more broadly, and how those roles may evolve. Rodrigo held out hope for sustained human dominance in complex tasks while Adam argued that machines could be playing a much larger and positive role in society already if humans would just get out of the way! There is a lot of marketing around the field of machine learning at the moment but very little nuanced, practical wisdom. We hope you take something of practical relevance from our conversation.

Social media has democratized access to media, providing Wealth and Asset Managers with an unprecedented opportunity to capture investor mindshare via digital marketing.

Tune in and listen as Mike Philbrick, ReSolve’s President hosts an epic digital marketing roundtable discussion with experts in the field of digital marketing for Asset and Wealth Managers – Chadd Weston and Simon Jalbert from Traction House, as well as veteran Wealth Management professional Justin Castelli from RLS Wealth Management.

Together we go deep to tackle the application of digital marketing as it relates to Wealth and Asset Management businesses covering the following items and MORE!

• How the network effect informs how to most effectively market to your client and prospects.
• How to zero-in on the highest impact content
• How to cross-purpose your content and find the best platforms for distribution
• How to find your tribe and hone your niche market with the right mix of marketing and selling
• The changing paradigm of “know-like-and-trust” in a digital economy.

You will not want to miss this episode. Whether you’re a veteran marketer or just starting the process, this podcast provides unprecedented access to some exceptional minds in the realm of digital marketing for Wealth and Asset Managers with real boots-on-the-ground experience.

Let’s face it – Meb Faber is everywhere, and he’s built an asset management business from scratch with a very unconventional approach. I wanted to take a look back at that journey to get some perspective on the good, the bad, and the ugly along the way. Meb shared some interesting stories and surprised me with some of the lessons learned.

Meb has launched a really thoughtful and unique family of ETFs but I was interested in some of the ideas on Cambria’s shelf. He shared some other concepts that he’s excited about but that the market isn’t ready for yet, including a compelling and more tax efficient alternative to typical income strategies.

Most people are aware that Meb takes great pleasure in busting financial myths. We discuss his pet peeve at the moment – market cap weighting – and some research that he’s conducting on why investors should consider strategies that avoid over-allocating to mega-cap companies. It’s amazing how such simple strategies with intuitive explanations can be overlooked by investors for so many years. 

My favorite part of the conversation was when Meb described how his thinking had changed over time. Consistent with many of the most thoughtful professionals I’ve chatted with over the years, most of Meb’s lessons relate more to how investors behave in markets rather than the nature of markets themselves. He provides some great illustrations. 

I think you’ll enjoy some of our “off-roading” and discussions on topics he isn’t asked about very often.  Any time with Meb is time well spent and this is no exception.

Academics and practitioners are no longer surprised by the existence of the low volatility anomaly. Many papers have been published in credible journals describing the effect and several explanations have been proposed. But most of the explanations seek to preserve the traditional relationship between risk and return that serves as the fundamental basis of modern economics.

Eric Falkenstein turns this concept on its head.

Eric wrote his thesis on the low volatility effect long before it was acceptable to talk about in polite company. Despite the size of the effect and the depth and breadth of Eric’s analysis, it violated the critical “equilibrium” theory of the day and was rejected by every journal. Eric learned some valuable lessons from this experience that listeners would do well to pay attention to.

I was most intrigued with Eric’s research into an alternative equilibrium model, rooted in aversion to relative rather than absolute wealth. If investors are more concerned with relative status rather than absolute wealth then the low volatility phenomenon is a legitimate risk factor.

Eric’s work covers far more than just low volatility investing and risk models. Our discussion branches into politics, social policy, and eventually into his new pet project – cryptocurrencies. This was an all-around incredible conversation that listeners won’t want to miss.

You can’t read, watch or listen to Rob Carver for any length of time without recognizing that he has done a lot of thinking about the problem of uncertainty. Traders will connect with Rob’s story of experiencing a large and unexpected loss (is there another kind?) that led him to question whether his models were in sync with the current market environment.

The experience contained a silver lining, as it prompted Rob to formalize an approach for analyzing what to expect from strategies in different market environments. Rob shared his thinking and his findings, which many listeners might find quite surprising.

Rob has thought more deeply than most about how to design portfolios that are most likely to perform out of sample. We discuss how Rob thinks about the construction of strategic policy portfolios but we also dive deep into quantitative strategy design. I was especially fascinated to discuss Rob’s recent presentation on the “Three Judases” that cause many systematic strategies to fail in live trading.

Rob is an open book and generously distills mission critical wisdom from decades of trading into digestible nuggets that will add value for almost any investor.

When asked about his past, what Larry Swedroe really wanted was to work with the New York Yankees. That dream died when CBS sold the Yankees to George Steinbrenner on January 4th, 1973.

But another door opened at the same time that would forever change the trajectory of Larry’s life. As CBS was selling the Yankees, the collapse of the Bretton Woods Agreement had unleashed a maelstrom of volatility in the foreign exchange markets, which caused a great deal of trouble for US corporations with foreign operations. Corporate Treasury departments were rudderless and needed people with brand new skill sets to manage the new world order.

Larry was in the right place at the right time. He learned fast, and over the decade following the collapse of Bretton Woods he led some of the largest Treasury and FX operations in the world while managing their FX risk with completely novel instruments like currency and interest rate swaps. Then he moved on to mortgages and was one of the progenitors of the multi-trillion dollar securitized mortgage business. 

By the mid 1990s Larry was ready to retire from finance and settle into a university teaching gig. But, he was approached by a group of planners starting an RIA firm and invited to spearhead the investment side of the business. Fama and French had published their seminal paper on the Cross-Section of Stock Returns in 1993 and by 1995 David Booth had launched an asset management firm to commercialize their ideas – Dimensional Fund Advisors.

With the courage and confidence earned from cutting his teeth at the vanguard of two major financial industry innovations, Larry had the conviction to embrace the academically backed “factor” approach from the outset. Over the next couple of decades Larry would go on to write over a dozen books making the case for a disciplined, academic approach to investing. And his firm would grow into one of the largest independent advisory firms in the country.

Larry is obsessed with academic finance. We talked at length about the factor zoo and he described the process he uses to identify the factors that are most likely to continue to produce strong excess returns in the decades to come.

The low beta factor came under scrutiny with Larry expressing a healthy skepticism. He observed that low beta returns have been regime dependent with low beta outperforming when it loads on value characteristics but underperforming when it loads on growth characteristics. The low beta factor portfolio currently loads on growth characteristics. Larry prefers to own quality in value stocks and lower portfolio beta by lowering total equity exposure.

In this episode, ReSolve’s CIO Adam Butler and Larry discuss the pitfalls of single factor strategies because they often load negatively on other premia. Larry shared his story of discussing how to introduce momentum into the DFA value oriented portfolios. He describes how they conceded by holding onto value companies that had moved out of the typical value range so long as they were exhibiting positive momentum. This has been a substantial contributor to DFA’s performance in many products since it was introduced.

It is often the case that “value” strategies are short momentum stocks or quality stocks and vice versa. Larry describes ways in which thoughtful portfolio construction can lead to much more effective long-term performance.

Larry emphasized how important it is to stay up on the literature because the structure of the markets, and our understanding of them, change over time. He uses the example of “book to market” as the classic value screen, but how this metric has become less useful over time as developed economies moved from a mostly industrial base to a service orientation. Today, so much of the value of companies is in brand names and technologies, which aren’t recognized on the balance sheet. He presents a highly counterintuitive case of companies that would have traditionally been considered unattractive but that have outperformed the market by a wide margin.

This conversation turned to how factor strategies performed in 2018 – a “diversification catastrophe”. Larry highlights a common conversation that he’s been having with clients who have been protesting that they don’t have decades for their portfolio to produce the long-term benefits of diversification. He points out why this type of thinking is exactly backwards and presents some shocking material demonstrating just how risky it is to put all of your eggs in the “equity” basket.

Larry believes investing should be founded on three core principals. But I’ll let him explain what they are and why they are so important.

This conversation with Larry is a treasure trove of practical realities about markets and investing. Highly recommended.

Mark Kritzman graduated with a business degree in a time of intense crisis and change in financial markets, and this experience shaped the arc of his career. He has dedicated his professional life to the study of asset allocation and portfolio optimization and his papers on these and other topics have earned over a dozen top awards in finance, including nine Bernstein/Fabozzi/Levy Awards.

This conversation between ReSolve’s CIO Adam Butler and Mark is loosely guided by core themes from Mark’s newest book, “A Practitioner’s Guide to Asset Allocation”. Mark describes why he embraces Samuelson’s Dictum and how this has motivated his focus on asset allocation as the most fertile ground for active returns. Relatively small traders can drive mis-priced securities back to equilibrium but asset classes can – and do – stray far from equilibrium because traders lack the capital necessary to correct mis-pricings on their own. This is exacerbated by other barriers to arbitrage like institutional tracking error constraints and benchmark-oriented incentives.

Given Mark’s views it’s not surprising that his team at Windham Capital focuses mostly on Tactical Asset Allocation. He expresses the view that the policy portfolio concept is profoundly misguided since markets have highly unstable distributions. Dynamic markets imply that optimal portfolios should change over time in response to changes in expected return, risk and correlation dynamics.

Mark makes the case that portfolio optimization gets a bad rap but that most of the protests are disingenuous. Sure, out-of-the box optimization is error-maximizing on portfolio weights but that’s irrelevant for a few simple reasons, most prominently because no one with any sense would use an optimizer out-of-the-box, but also because while small changes in portfolio estimates might lead to large changes in weights, the expected mean and variance of the portfolio would hardly change at all. We address the 1/N arguments and Mark makes clear why they’re bunk.

We cover a lot more ground but toward the end Mark divulges that he’s publishing a new paper with mind-blowing implications. I won’t give away the plot here…

Mark has forgotten more about finance than most investors will learn in their career. Put down what you’re doing and listen to this right now.