Hedge Fund Investing: Leveraging Technology to Beat the Market feat. Tory Reiss

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 because these are such fun conversations. And we talked with Torrey Reese of Equi, and it just felt, you know, as an observer here between Bob and Torrey, just the nerds uniting. So it was a really fun time hearing some of the data, and Torrey definitely has some great data to share. I mean, he's in the space of what they call liquid alts. 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 kind of dive into really the nitty-gritty of their strategy and why they believe investment 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?

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 they actually run a strategy using a fund of funds model where they select managers. And I actually really like that strategy for hedge funds. So I think these guys are some great guys. You know, they're just brand new startup. I think last year, but They have already great track record and anyhow, super interesting conversation. You got to listen to this if you're interested in hedge funds at all.

Gotta listen to it. And as always, got to 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 rating and reviewing this podcast, whatever platform you listen on. And thanks so much. Enjoy. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. 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 Tori Rees of Equi. So Tori 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 so super excited to bring Torrey on and share his expertise. He comes from a fintech background and what they're doing at Equi is really cool. I'm going to have him kind of share about it, but it's really a hybrid of a fintech platform as well as an investment manager. So Torrey, welcome to the podcast.

Thank you. It's great to be here, guys.

And apparently, I mean, this hasn't happened very often where we have a guest that has claimed to have listened to every episode of the podcast. 'Cause I've been in all of 'em. I don't even know if I've listened to all of them. So that's, that's a feat right there. But this is really fun. Yeah.

Feel free to give me the pop quiz, but, uh, I'm, I'm a big fan.

Awesome. Well, Torrey, give us a little bit of background on you and, uh, kind of how you came to start Equi. And then I know you have some slides, so I like to give the disclaimer, you know, 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 want to watch the slides, that is able to do on YouTube. So Torrey, give us your background.

Sure. Well, I'm the CEO of Equi, like you said. We're a hybrid investment manager and technology platform. You know, 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 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.

So cool. So it, what's really been happening over the past several years, and you're 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, right? And so you, like I said, believe as much in pushing alternatives and getting this into the, the hands of the people, so to speak, as much as we do. And so what's really kind of the, the goal with Equi? Is it currently only for qualified professionals or Accredited investors, non-accredited, who does it kind of meet right now?

We're focused on accredited investors and the majority of our customers are qualified purchasers. Our, our vision really is about accelerating the adoption of alternatives by individual investors and their advisors. And you know, 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. Because I think that really the two have to go hand in hand if we're going to get this into the hands of the next, let's say, 10 million people.

Well, if you've watched the podcast, you know, I'm a computer scientist, so what's the tech side here? What's the tech good for?

Yeah. Well, 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 an endless maze of, you representations and documents and signatures and PDFs trading back and forth and, you know, tracking down whether it's for capital calls or, you know, your reporting, getting NAVs in the mail, 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 that's the future. So, you know, not only do we build technology on the front side, but all of our investing is also built on a foundation of technology. So, you know, 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.

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?

When I was first thinking about the idea for Acqui, one of the things that I struggled with was I was like many people where I had a spreadsheet and I've custom built a spreadsheet over years and it's like 17 tabs and I have one tab that's like all my investments. And so I have like, you know, angel investments and real estate and You know, over time it grew from just, you know, 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, you know, 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 in equities or bonds, right? 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 at the dartboard.

Your average return by doing that is going to be way, way lower than picking a few. They're all big winners. Yeah.

And I would imagine, I mean, basically now betting on the winning horse and the losing horse. You're just, of course, and you hope the average passes the finish line. Yeah. Got it.

You got it.

Okay. So you're curating the best manager. So you're kind of like a fund of funds. You're evaluating manager performance and picking the jockeys that you think have the strategies and the skills to go win in this, whatever this next season is. In front of us.

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. Well, 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 it's still cheaper to the customer.

Oh, cool.

And on Yeah. And beyond that, we also look at something that we think is interesting is we want to 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.

So there's technical—

yeah, 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 kind of hedge fund strategies, let's just, you know, talk about the types of strategies you're doing. 'Cause a lot of our listeners are real estate, right? That's kind of what they've known. That's You know, the world that they live and play in. But as we've talked about a lot of episodes, especially the early ones, there's kind of alternative investment continuum, right? As you kind of move up in net worth, you kind of 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, you know, it's kind of this, you know, illustrious area, but people don't really understand it. Right. And it's kind of, you know, 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 kind of mostly familiar with are platforms for real estate, right? Like a CrowdStreet or an EquityMultiple where you're going on and, you know, 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 the right deal? And how do I know that the representations they're giving— and, you know, we've invested in a few deals on the platforms and it has been hit or miss.

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? I mean, you know, so don't want to just pick the guy that had the best returns and say, oh, he's my guy. It's like, well, his shot is won. It's over.

You know, he got lucky.

He rolled 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 you, you know, 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, you know, 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, you know, there's short, you know, long, long short. There's lots of different strategies and they all work sometimes and they all don't work sometimes. So figuring out, figuring out which, what time it is, right? For which strategies are going to work and which managers are likely poised to have the best wins. So how do you curate your managers? I mean, very interesting, right?

That's the million-dollar question. That's part of the secret sauce. So I'll tell you a very short anecdote. Before starting Equity, before I raised funding, before anything, we interviewed dozens. I'm talking dozens of capital allocators from multifamily 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, well, I've been in this industry 20 years. I know everyone. I have the best Rolodex. I go to the conferences. Like, you know, I've been in early. I know a guy, golf with a cousin, you know, that type of a thing. And we're sitting here and I'm like, I'm thinking back to, you know, when you ask You know, 100 people, if they're above average drivers, 80% will tell you they are, right? And so it was a similar sort of a thing where we were like, 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.

You're the Moneyball of hedge funds, right? It's like, let's go, let's do the data, right?

Love it.

That was it.

Great movie. Anybody wants to watch a movie about baseball and spreadsheets.

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 of.

Yeah, that's awesome. So have you beat the market?

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, 'cause 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.

Yeah, that was in 2022. It did 22%.

Yeah, that was—

And what was the benchmark?

23, it's going to be 23%. Is that what you're telling me?

I think it'll do better, frankly, because that was a partial year. 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. That.

So let's jump into the slides. Let's see what you got.

So here's what I prepared for you guys. You know, our investment team has been looking at, you know, 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, you know, 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 decelerations of real economic activity, and that's of all time. So, you know, right now things operate in a lag, but if you look at M2, which is, you know, or really the rate of change, which is a very significant indicator that 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.

So he's looking at money supply growth. Yeah.

Correct. Yeah. Which is negative, right? Which means liquidity is actually also being pulled out of the system, right? 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. You see 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, you know, 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, you see that there's 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 and many bears, but from peak to peak, you're not really making money for a decade.

This is a pretty compelling chart. I mean, this is something that goes against like 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, you know, whatever the number is, 6, 7, 8, 10% per year since 1900. Well, 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, you can see there's periods of basically just sideways movement for many, many, many years.

I love this chart. When Ben went to school, he studied finance and he was, he was, you know, sitting at the feet of these professors and learning efficient market hypothesis and modern portfolio theory and all these things. I said, Ben, they don't know what they're talking about here. And I gave him a book by John Maldon called Bullseye Investing. You remember that, Ben? And I said, you're going to read this at the same time. Didn't have this exact chart, but very similar. So if you invested in the, you know, October 1929, put all your million dollars into the stock market, you didn't recover that for, you know, what, 70 years, you know? And so it matters what time you invest. You know, over averages, you know, they're right. The stock market does go up, you know, because it's investing in America, it's investing in business and in ingenuity and productivity and innovation. But timing matters. You very well could be right that we could see a pause. My one question on that, you know, just a little bit of pushback as an economist is given the amount of money coming in and the amount of liquidity and inflation, they continue to ease. We could see more growth, but you absolutely could be right here. And you know, I'm well aware that there's big pauses on economic growth and so good point. So if this is right, you're predicting a pause, what happens then?

Yeah. And I think you actually hit the nail on the head, which is, you know, we can't predict, like, will there be a full Fed pivot and they'll actually start printing again? You know, 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, you know, 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, well, the Yale Endowment and David Swensen, whose books I 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, 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 you know, if most portfolios, which are just stocks and bonds, if those are the two return drivers you have for 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 like, okay, well how do we do that? Let's talk about alts. And sort of that's like the next half of the presentation. I talk a little bit about alternatives. This next slide, what it, what's to me, this was so eye-opening. Like I remember reading this report when I was originally doing the research, acquired as starting equity. And you look at this difference from 2016 to 2019, you see 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, you're a data guy, so I think you'll love this. I absolutely love this chart. This is showing that the dispersion or the spread between the, the black dot here is the median, and then the colored is the bottom quartile or bottom 25%, and then the, 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 some of the asset classes, it 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, right? 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%, right? It is staggering just how much of a difference manager and security selection makes.

It makes a lot of sense if you're a venture capital investor, right? The guy knows what he's doing. He's going to 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 showcases for managers or the other way, right? Not, you know, faceplants for managers.

Yeah.

This is excellent.

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 on BiggerPockets. I was reading all these books because 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 be getting into the prospectus and going deep and like wanting to learn like 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 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 like, oh, go look at this marketplace. Because if you just kind of stumble in and be like, well, this has a high return, so I'm going to invest in that. You're not being appropriately rewarded for the risk that you're taking because you don't even know what risk you're taking.

This kind of plays into a concept we've talked a lot about, but you know, if you have the idea of a jockey and a horse, right? You kind of 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, well, what is the deal? What market is it in? And what's the rent growth? Or what's, you know, 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? And to your point in that chart, so 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.

And this actually goes towards both your point and Bob Fraser'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 know, you look at the coupon, 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, right? Or you're looking at distressed debt or any, like all the hedge funds are kind of clustered right there around the middle too. 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 that 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 because like we need to all be aware of the data.

Something else that this chart points out, it's kind of how US small-cap equities, US large-cap equities, just, you know, the markets, how, what a winning strategy that is. So you have pretty high returns with not a lot of dispersion and they're beating venture capital returns. And even so, all these smart guys are not beating the market, right? The basic—

on average.

Yeah.

On average. And so you 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, right? And you know, and you pointed out in that growth chart there, but there really is a good strategy of just say, pick index funds.

Something I think 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 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, you know, things that will 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, you know, 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.

I love it. As you know, we run debt funds and we love debt funds. You know, honestly, you can get almost equity returns with debt funds with a tiny fraction of the risk, tiny fraction. Get that extra couple percent returns, you're taking on 10, 20 times the risk. It's just not worth it. And so debt funds are great. Debt funds are great in times like this when you don't know what the equity's going to do.

You know, 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. And 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. Like 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, they can have years, they've averaged for almost, you know, 8 or 9 years, they average around 50% annualized.

Time to invest in that guy.

Right. 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 equity hedging. And so what you'll notice is it's almost identical, the return of equity 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 want to dip their toe into liquid alts, I do think you need to think actively, like when is the time you want to either go into a manager or redeem? And it's a little bit different than, you know, invest in a manager and let it compound for 10 years unless you have, you know, someone that's actively managing the liquid strategies. So The shirt, 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 that strategy is structured is it's a blend of both discretionary macro, like you mentioned, and systematic. So it itself is already diversified.

Yeah, this is super cool. Talk a little bit about what kind of role does this play in a portfolio, right? And just again, you know, dumbing it down for folks that are not familiar with hedge funds, not familiar with liquid alts, right? Because generally we're talking about private investment into real estate or 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. So they have 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?

Yeah, 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 Incomes, where I think about that as like, okay, that can provide current income and that would fit in my personal, let's say portfolio is like a slow and steady type strategy. Well, what do I want to 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. Because you shouldn't trust a large part of your portfolio to something that isn't highly diversified, well-diligenced.

The first best way to make money is not lose money.

Exactly. So that's a key tenet of what E-Tai calls the equity investment model is don't lose money. He says, you know, 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 when you're like, 2022, you know, my personal portfolio, for example, I have half in our multi-strategy. I didn't lose money last year. I'm now compounding. So like this year, if we performed a target, I'm compounding from a 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 types 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 you know, 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 overperforms, it can drive, you know, 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, earned income, core holdings, return enhancers to really create something beautiful.

So back to your secret sauce, how are you picking these managers? Am I just really just, you just saying trust me? Come on.

No, no, no, we don't. So you were asking Ben about this, so right. So go back in time. We're saying, could we really just like, can we really just use data? Like, 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 do I mean by usable? Well, we want to look at things like Sharpe. We want to look at Sortino. We want to look at correlations between these managers' strategies and any other financial instrument. Then we don't only want to be able to do that. We want to 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 displacements, correlation goes to 1. 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 8.5% 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 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 1 when there's a market crisis and repricing like last year, or like the upcoming bear market that we anticipate, correlations go to 1. So what do you do? So what's interesting is our team found that there is 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 the DAX.

You're layering a hedging strategy on top of it.

Yeah, exactly. So sourcing is part of it, but we won't invest in a manager until our investment team 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.

When your minimum investment is $2 million to $3 million, you have to find only certain things can fit in that bucket. And so it's a whole lot better to do smaller, 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, right?

It does, right?

That big of a strategy. A lot of these niche strategies, the best strategies are little, they're little tiny.

Exactly.

Inefficient markets that guys figured out how to nab, you know, and they're small.

Yep. Yep. And we, there's another guy, you know, we've got a couple who are, they're arbitraging, it's called Biatical Settlement. I think you may have mentioned this one before, 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, than, you know, the parts. But, 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 we have to email a lot of times or we'd be calling them and they'd be like, like, 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 that's 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 them 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 because they don't want to write you a check less than $200 or $300 million. So again, it leaves a lot of alpha in what we call the long tail.

Totally. I love it. People don't know, I actually ran a hedge fund for 5 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, very busy full-time looking at the data and redeploying and rebalancing continually. I've always thought that that was the best way to do it. And I know that some of the best fund of funds, they charge a 1% fee even or something like that. And it's additive, but it's not because the returns are higher, right? So they're making up for it, but you've ever actually solved that. So, you know, it sounds brilliant. Here's my one question for a guy who has done tons of the exact kind of analysis that you're talking about, spreadsheets and correlations on massive amounts of data. The thing is the correlations change over time, right?

So, 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? The correlations change.

It's an excellent question. I'm smiling ear to ear because my co-founder Yi Tai, who you will just get such a kick out of, 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, you know, 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 to your point, it's not enough to look at correlation as a function of a moment in time. It, it's evolving. Like there's this scatterplot, think historical correlations.

You, you can't, you, 'cause they work, they're correlated for a moment, then they're not correlated.

And they're not, then correlated.

And you can't look at historical correlations. You can't over those things.

So I agree with you. And so what, what the innovation that I think, and this is more credit to Itai, 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 in the rearview mirror. You can't do that. You're going to crash, right? 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, you know, the high-level macro level to market level. So it's looking at micro— market-level microstructures. 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 4 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 like eTie's innovation is basically saying, sure, we can use it to get in the door, the backward-looking data, but if we want to manage forward, we need our own data. And so that's, that's why we had to build Copernicus. And so that's, and again, it's because You know, he looked at the world and he's saying, everyone's saying that, you know, the essentially the sun revolves around the earth and he's looking at the data and he's saying, 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, you know, Yi Tai 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.

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 happen, you know, every once in a while. And the reason they happen is because the probabilities are skewed. And so people assume that it's, you know, going to 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 where the probabilities become irrelevant?

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, you know, if you're looking across these different quadrants, well, 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 want to be long gold, the NASDAQ volatility, short dollar and treasuries and small caps, and you can hedge upside market risk, right? Because in that instance, where you want to be careful is if the market takes a surprise rally or there's a Fed pivot or whatever, you want to be prepared to capture that, what we would call right side tail risk, right? Left side tail risk is like you're going to lose a lot of money. Right side is the market's going to outperform you. So how do you prepare for that? And I'll give you an example. So, and this again, ETAI 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 microcap 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 principal, or they just collect the whole thing and they make, let's say, 8 to 12 on the debt that they made. But let's talk about a different scenario. Let's say markets start skyrocketing.

They convert, 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%, 100% years. Now this manager has a 14-year track record and has annualized at 29% a year. And so again, that's our right side tail hedge where 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 markets start surging, they can have a heyday with it.

And like I said, from your perspective, that you could overallocate to that manager to not get left behind the market and take advantage of a Bigger allocation to the right. Okay. Very cool.

So we're defensive everywhere else.

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 can't, they generally underperform. And so basically if you are arguing that this is going to be a lost decade, markets are likely to tread water, go have volatility, go up and down sideways, which I can't argue with. I'm not going to take the position on that. But then hedge funds would be a great strategy, a great time to get in at this time.

That was why we rushed as fast as humanly possible in 2020 to start this company. 'Cause 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 want to put out as much content as we can. You watch our YouTubes, you watch our videos, you'll see itai. 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's, this is where I would put my own money. And so that's like the, 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. You know, 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 going to be, what is going to drive the returns of your portfolio in the time to come. And so 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 to 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, you know, we think there'll be the real down move.

I mean, bonds are getting to the, to the point now where they're actually a decent investment, you know, and they have never been, they're competing with stocks for the first time in decades.

Right.

So that's going to be a headwind on stocks.

I mean, I'm a big fan of treasuries.

I'm not disagreeing with you. So you guys are not venture capitalized, are you?

Oh no, we are. So we raised venture capital and I know, I know, I believe me, I, every time I do it, I'm like, why am I doing this again? But you know, 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 you know, I think we've now got a very scalable platform that can scale to the billions of dollars. And so, we're hoping that the investment is, the juice is worth the squeeze.

Awesome. Well, Torrey, 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 learn more about Equi?

Yeah, just check out 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, just like you guys are doing, like We think that should be for everyone. So, um, thanks again for the time today.

Awesome. Thanks, Tori. All right.

Great to meet you.