Inside the Secretive World of Pod Shops | Bob Elliott

[00:00:00] 2024 is the smallest number of hedge fund startups in the past 25 years. And a big reason why that is, is people are like, well, do I build this all myself, which is a huge vein, or do I just plug into a pod shop?

[00:00:12] The goal is to have a optimized portfolio of idiosyncratic alphas that is consistently moving capital to the more effective strategies that are likely to generate returns ahead.

[00:00:25] You'll strip out the same factors and then you'll have the same effect of exposures, right?

[00:00:29] So, and then if something happens that is, that runs against a moment of randomness, let's say, that runs against it, then you're all exposed in the same way.

[00:00:37] Welcome to Excess Returns, where we focus on what works over the long term in the markets.

[00:00:41] Join us as we talk about the strategies and tactics that can help you become a better long term investor.

[00:00:46] Matt Ziegler is a managing director at Sunpoint Investments.

[00:00:49] Justin Carbonneau is a managing director at Life and Liberty Indexes.

[00:00:52] No information on this podcast should be construed as investment advice.

[00:00:56] Securities discussed in the podcast may be holdings of clients of Sunpoint Investments.

[00:01:00] Hey guys, this is Justin.

[00:01:01] In this episode of Excess Returns, Matt and I are joined by Bob Elliott, founder of Unlimited Funds.

[00:01:04] We dive into the world of multi-strategy hedge funds, often referred to as pod shops, and break down what they are, how they work, who the major players are, and how they manage risk and returns across many different investment strategies.

[00:01:13] We also discuss how traditionally expensive hedge fund approaches can now be replicated in a low-cost ETF wrapper, an area Bob and his team at Unlimited Funds are actively competing in.

[00:01:21] As always, thank you for listening. Please enjoy this discussion with Bob Elliott of Unlimited Funds.

[00:01:26] Bob, thank you very much for joining us today.

[00:01:28] Thank you so much for having me. Great to catch up with you and happy holidays as we get into it.

[00:01:36] Happy holidays to you too. We've got the stockings in the background and those will be full of different items in a few weeks here.

[00:01:44] So yeah, I always appreciate you spending time with us and our audience on Excess Returns.

[00:01:48] And we'd like to talk to you about a bunch of different things.

[00:01:51] And today, what we wanted to do was talk to you about, I think, a type of hedge fund strategy that's been with us and out there in the market for a long time.

[00:02:04] I think maybe in the last few years, it's sort of gained in popularity, possibly due to the size of some of these firms and some of these funds and also maybe some extent to their performance.

[00:02:17] But maybe that's just a marketing thing. I don't know. But the topic or the types of strategy or funds is these multi-strategy funds, hedge funds, also known as pod shops.

[00:02:26] And so what we thought we would do is just kind of talk, generally speaking, about what these types of funds are, the types of strategies that are run in these firms, maybe what some of the benefits or good things are of these multi-strategy approaches, but also some of what the risks and the costs are to investors.

[00:02:50] You know, you spent a good portion of your career at one of the largest hedge funds in the world.

[00:02:54] I don't I don't and you can correct me if I'm wrong. I don't think it was like pod shop style type of investment strategy.

[00:03:00] But, you know, we just thought you would be a great person to come on and talk to us about sort of this.

[00:03:04] And so our audience can learn about what these things are and what what goes into them.

[00:03:09] Yeah, yeah. Thank you so much for having me.

[00:03:11] And, you know, they certainly in many ways have captured a lot of the headlines are probably, you know, these pod shops there.

[00:03:21] They're only a few hundred billion out of a five trillion dollar industry of overall hedge fund investment strategies.

[00:03:28] But they've captured, you know, I don't know what you call it, 75, 80 percent of the headlines over the course of the last year or two, couple of years.

[00:03:36] And so they're definitely sort of the main focus from many allocators in the in the institutional space in terms of where things might be going.

[00:03:47] So excited to come on and and and talk through it.

[00:03:52] So at the most basic level, if you were to describe what one of these pod shops actually is, what a multi strategy fund does, how would you articulate that?

[00:04:02] Well, I think there's you want to sort of think about it as a couple layers is probably the best way to think about it.

[00:04:08] The first layer of what these pod shops are, are a series of individual or team PMs, portfolio managers with a certain set of expertise.

[00:04:19] Maybe they're an expert in a particular sector, a particular type of stocks, a particular asset class or strategy, investment strategy, like a fixed income ARB strategy or event strategy or whatever.

[00:04:34] Each one of those different pods you can think about as having their own their own individual return stream.

[00:04:40] Now, the trouble that many allocators have, let's say that they were investing directly in the pods, you know, directly in these PMs.

[00:04:48] The trouble that many allocators have is you don't know how they're related to each other.

[00:04:52] Right. So let's say you could have 20 different pods and all of them could be long risk assets in one form or another.

[00:04:59] They all think that they're experts in being long risk assets.

[00:05:02] But the reality, you know, they're experts in their particular assets, not recognizing that they all essentially have the same factor exposure.

[00:05:09] And so that's the level up that these pods do, which I think is important to recognize.

[00:05:14] So take the PMs, go a level up and say, what's the cross factor exposure that exists in their views?

[00:05:21] Right. In the sense of how do I basically not take, you know, single concentrated bets in certain cross factor exposures, but instead try and get the genius, extract the genius of each, the unique genius of each manager across each one of these different managers by extracting the factor exposure.

[00:05:41] And then a level up from that, you could almost think about like it's a tactical, a highly tactical allocation mechanism where identifying which managers idiosyncratic alpha is outperforming or likely to outperform the best given the scenario that exists in a period of time and shifting capital efficiently towards those that are likely to outperform versus not.

[00:06:06] You take those three layers and you add on leverage. And basically what you get is you get a, the desire, the goal is to have a optimized portfolio of idiosyncratic alphas that is consistently moving capital to the more effective strategies that are likely to generate returns ahead with the idea of the, how do you create, you know, pretty good returns with low factor exposure?

[00:06:37] Is, would you say that the majority of players, and I would imagine this is true. Maybe this is a silly question, but is it, is it like a handful of players that are sort of in this pod shop arena? Because, you know, if you're talking about multiple teams and most, you know, maybe even a few dozen or maybe even more teams and portfolio managers sort of working independently, I would imagine that these funds have to be, you know, pretty decent sized funds.

[00:07:05] And so who are the, who are the major players and do they control like most of the assets, even in the hedge fund industry? Do you know that?

[00:07:13] Yeah. Yeah.

[00:07:14] Yeah. And it's very important to recognize that pod shop approaches are only, they're less than 10% of overall assets in the hedge fund industry. So tradition, what's called traditional hedge fund managers, you know, like equity long short managers or global macro or multi strategy, which, you know, may, may make many approaches, may approach investing in a lot of different ways.

[00:07:41] But not be in the sort of traditional pod shop methodology. You know, that's still the vast majority of the hedge fund industry. And within the pod shops, there's really a couple of very, you know, a handful of, of different funds that are that that hold, there's a couple of big funds.

[00:08:01] Millennium, Bally Asni, those are good examples of, you know, big funds that have the Citadels. Those are big funds. They have, you know, big assets. So Millennium now I think is pushing $80 billion with those most recent capital raise. And then I'd say there's a long tail of smaller funds that make up that up to 300 billion, give or take assets in the overall pod shop strategies.

[00:08:29] Do you have any insight into, of the major ones that have been around a while, like what the, I don't know, what the return streams look like and maybe like what the risk adjusted returns at the sort of at the fund level might look like?

[00:08:46] Yeah. So there's, you know, the leaders, and this is, this is very typical in the hedge fund type industry or amongst asset management in general.

[00:08:53] The, the couple of leaders that have gathered the most assets on a historical basis have some pretty impressive returns.

[00:09:02] So you look at a millennium and you look back through time and they've got something like, I don't know, a two net of fees, sharp ratio with zero correlation to the stock market or betas or, or, or traditional factors over the course of the last 30 years.

[00:09:18] Now, um, and the same, the same is true for one or two more, so else type strategies.

[00:09:26] Then there is, I'd say a set of funds that are stepped down, which look more like, you know, between 0.5 and 1.0 sharp ratio with moderate correlation to asset markets, um, that make up the rest of the, the rest of the, the, the segment of the hedge fund industry.

[00:09:45] I think it's really important to recognize that when you're looking at that, um, millennium has not delivered a two sharp ratio net of fees with zero correlation asset markets on $80 billion of assets, right?

[00:10:00] That 25 or 30 year track record, the vast, vast majority of that track record is with much smaller asset basis.

[00:10:07] And so I think the real question when you're looking at these behemoths is, is that long track record actually indicative of the expected future performance?

[00:10:19] Or are you likely to see when you move from 10 pods to 20 to 350, are you likely to start to see degradation in the alphas?

[00:10:29] Cause you'd imagine that, you know, the 10 pods managing $500 million or a billion dollars have a very different alpha opportunity set than 330 pods, you know, investing $80 billion over time.

[00:10:45] Yeah. Yeah. I always like the, you know, you see these like statistics, like this hedge fund has generated, I don't know, X amount of billions of dollars in profits for, um, investors, but you, they don't really give you like the annualized return.

[00:10:59] They just give you like the net number of profits, which I always kind of find interesting. Like to me, I'd rather know, okay, well, is that a 30 year track record at like a 12% annualized return with, you know what I mean?

[00:11:13] So it's like, they give you like the total number of dollars generated and they sort of hold that up as sort of their marketing piece, I guess.

[00:11:22] Yeah. I mean, and, um, coming from a large, uh, hedge fund, which, uh, is often, often is quoted in terms of, uh, their, their long-term performance is quoted in a similar way.

[00:11:33] What I, what I, I just emphasize, I, I've, I've, I have direct experience seeing a fund go from, you know, a few billion dollars to, you know, a hundred plus billion dollars going from a challenger to the incumbent hedge fund.

[00:11:46] And the operational constraints that exist, um, between running a few billion dollars and running a hundred billion dollars are very, very different.

[00:11:57] Um, I mean, well, I won't go into any particular details about my experience.

[00:12:01] You can imagine, for instance, things like transaction costs don't scale.

[00:12:06] I mean, they, they aren't flat by any stretch as you're, um, as you're scaling up your assets under management.

[00:12:12] If anything, um, you know, uh, they, they compound, right.

[00:12:16] That the difference even between 25 and 50 and 50 and 75, uh, that next 25 billion, as you get to larger and larger positions in a market, um, becomes, you know, faces higher and higher transaction costs.

[00:12:28] And that's really good.

[00:12:29] That's really the challenge, honestly, as you start to get to that, those sizes is that trade-off between, uh, prospective alpha, which is, which is uncertain, right.

[00:12:40] You hope to get alpha, but it doesn't mean it's going to be there versus the transaction costs element for which there is, um, you know, transaction costs are certain.

[00:12:50] Like you will always have, you will have transaction costs.

[00:12:53] Like that's the way the world works.

[00:12:54] Alpha is uncertain.

[00:12:55] Transaction costs are certain.

[00:12:56] As you get to bigger and bigger sizes, your transaction costs I'd describe as become more certain and a more influential part of your overall return, uh, dynamic.

[00:13:06] You know, I had kind of thought like the whole two and 20 model, you know, was sort of like on its way out or the last five to 10 years.

[00:13:15] But then in prepping for this conversation with you, I was listening to another podcast on, um, the pod shop and they were talking about how the fees were.

[00:13:29] And maybe it's for these like really top performers.

[00:13:31] Um, I mean, if you have somebody that's, you know, a fund that has a two, you know, a net of feet to sharp ratio, I mean, you're going to pay up for that.

[00:13:39] But just what I'm really trying to get at is like walk through, cause the economics are different here.

[00:13:46] You have, you know, you have a portfolio manager, you have a team, you have the platforms, you have incentive, incentive-based fees.

[00:13:53] So from your perspective, like how do the economics of this work and like, what is, what is the fee structure like?

[00:14:00] Yeah.

[00:14:00] So a lot of, um, a lot of the pod shops have, uh, uh, uh, they've innovated, one might say in creating, uh, the pass through fee as a primary source.

[00:14:14] And, you know, of course anyone who's invested in, in funds, um, there's always been, uh, uh, I call it sort of sensible standard pass through fees, which is like, you know, the fund, uh, pays the audits and the accounting and things like that.

[00:14:28] And there's good, there's good fiduciary reasons why that should be the case.

[00:14:31] Um, but what these folks have done, uh, many of these folks have done is they've, um, innovated by not just passing through things like fund expenses, um, but instead passing through the direct expenses of the employees who are allocating the capital in order to raise them in order to run the money.

[00:14:51] So, whereas traditionally, for instance, when I was in the hedge fund business, traditionally you'd pay your employees out of the two and 20 essentially.

[00:14:59] Um, and that's how the economics of the business works.

[00:15:02] Um, the pass through expenses essentially are that the investor pays the fund manager directly.

[00:15:09] And these are not, you know, this is not a de minimis amount in many cases.

[00:15:12] You know, if you talk to certain allocators, they'll say that what they're seeing is when you add in the pass through expenses, essentially the fixed component of the fee structure could be seven or 800 basis points like that or magnitude.

[00:15:26] In addition to the performance fees that get paid on top of it, uh, based upon their performance.

[00:15:34] And I think the challenge for allocators is what pass through fees are essentially fixed, whether the alpha comes or not, as long as the alpha keeps coming, it looks like, you know, it looks fine, right?

[00:15:43] You'll pay seven and 30.

[00:15:45] As long as the alpha keeps coming in, you get that to net of fee sharp ratio with no market exposure.

[00:15:50] The real question is, will it come?

[00:15:54] Right.

[00:15:54] And as long as you're paying the 7%, that's a high hurdle rate, uh, to delivering, to getting net a good net of fees returns.

[00:16:03] You know, two and 20 and then eight fixed on top.

[00:16:07] Sounds like a game.

[00:16:08] Some people might be interested in getting into.

[00:16:11] I'm curious about the types of strategies that these individual traders.

[00:16:16] So I guess like the top layer here before you, or whichever way you would put that.

[00:16:20] The bottom layer of the top.

[00:16:21] Yeah.

[00:16:23] So the traders themselves who are going like, okay, here's an interesting structure I can play in.

[00:16:27] What kind of strategies do I have to bring to the table if I want to be in CENPOD?

[00:16:32] Yeah.

[00:16:33] A lot of times, um, what they're looking for is the, what the pod shops are looking for individual managers who have, who generally pursue market neutral type strategies.

[00:16:46] Um, so that might be, you know, equity market neutral strategies.

[00:16:50] Like, uh, a lot of times you'll, people in a particular sector, you know, who are sector specialists who might go long and short, the names in the sector.

[00:16:58] Um, or, uh, you might see, um, people pursuing sort of more idiosocratic alphas related to, uh, you know, um, event activities or, you know, various liquidity trades and things like that.

[00:17:12] Capital structure trades, all sorts of trades like that, that are, you know, essentially plausibly market neutral.

[00:17:19] Now they layer on top of it, as I said, in that risk control component, they often will layer on top of it, implicit factor exposures that exist.

[00:17:27] Because even though you might be truly like market neutral, for instance, if you bought, you know, uh, the cues and sold the Russell 2k, like you're, you could be market neutral in some like, you know, dollar weighted sense or even vol weighted sense.

[00:17:41] But you're not market neutral in the sense of, you're still exposed to a factor as a simple example, large cap versus small cap factor tech versus, um, versus other sectors.

[00:17:52] Right.

[00:17:52] And so what they're doing is they're basically taking people, uh, investors who have strategies that look sort of initially market neutral that initially are, um, have performed well in the past.

[00:18:05] And then essentially layering on top of it, uh, cross cutting factor neutrality to try and strip out any implicit factor bias that exists in any individual strategy or cross strategies.

[00:18:16] The one thing, you know, if you, if you go try and interview, just as a simple example, go try and interview at these places, what they'll say is we want, you know, a two to three, uh, gross sharp ratio with $500 million managed.

[00:18:31] And, uh, you know, a couple of years of cracker that that'll give you like, that's kind of a standard.

[00:18:36] So if you're a portfolio manager and you have that, that's what they're looking for.

[00:18:40] Now, those people who have been in the business for a while might say, um, three sharp ratio strategies, uh, rarely exist or rarely persistent, um, and rarely persistent and almost never persistent at size.

[00:18:57] And so I think that's one of the interesting, uh, challenges I'd say is how believable it is that PMs would reliably be able to deliver something like a three sharp ratio strategy over time.

[00:19:12] Uh, that's market neutral.

[00:19:15] So that's like on the way into the pot shop.

[00:19:18] And then if I'm already there, I keep thinking, and I just moved.

[00:19:22] So it's, I've got a bunch of old, uh, iPods around here somewhere that I really wanted to be able to hold one up and I ran out of time.

[00:19:28] So it's like, like ACDC doesn't know, like they're doing, you shook me all night long, but they don't know, like the nobodies are there doing it at the same time.

[00:19:36] They don't know like all the other, they don't know.

[00:19:38] Hey, see Dixie is on there doing their like hillbilly version of the song.

[00:19:42] Like once you're in the, in these strategies and you're managing money, like, do I know if the other guy has the same crypto exposure?

[00:19:49] Does the risk manager talk down or am I just like doing my thing and they're sizing me?

[00:19:53] In general, in general, they're, um, part of the idea is to, is to emphasize idiosyncratic alpha.

[00:20:00] And so part of the way that you do that is by not having, uh, let's say community thinking about certain exposures.

[00:20:09] Um, because what you're trying to do is, is sort of extract the unique genius of that individual manager or that pod.

[00:20:16] So very different, for instance, where I came from, which was one portfolio, one strategy, one aggregate strategy built up of many underlying strategies.

[00:20:25] Um, but that's kind of, there's an interesting trade-off there because, um, the trade-off there is between, um, a circumstance where if you have idea sharing, prospectively, other people in other positions might benefit from the idea sharing.

[00:20:42] Right.

[00:20:43] Um, they might not be thinking about certain aspects of what's going on.

[00:20:47] They might not know as many things.

[00:20:49] You know, there's all sorts of reasons why idea sharing in general is good in terms of intellectual development.

[00:20:54] Um, but the challenge with it is that it leads to group think in one form or another.

[00:20:58] And so that's kind of the, you know, a lot of ways what they're trying to do is just kind of isolate the individual managers, kind of think about them as, as individual folks.

[00:21:07] Now, I mean, who knows?

[00:21:08] Do the people call each other and, you know, have a chat?

[00:21:11] Yeah, I'm sure.

[00:21:12] I'm sure it happens, but it's not, uh, it's really not organizationally designed the way that, um, that I, you know, uh, many big, particularly macro funds, multi-asset macro funds might.

[00:21:24] I don't worry.

[00:21:25] I'm picturing you sitting there yelling at the pod shop manager and nobody puts Bobby in the corner.

[00:21:30] And what about on the pyramid there?

[00:21:35] The, the, like the capital allocation process then.

[00:21:38] So I have these two managers, I'm keeping them separate.

[00:21:40] They're both putting up giant numbers.

[00:21:43] How do I think about reallocating from one to the other?

[00:21:47] How's that work?

[00:21:47] Well, I think one of the challenges, one of the challenges that, that, um, that the pod shop dynamics, uh, face on an ongoing basis is the fact that, um, it's very rare for high ratio strategies to be persistent.

[00:22:03] Um, particularly like outsized high ratio strategies.

[00:22:07] And so a big part of the advantage, big part of the strategy is how do you go through a process of allocating capital between them as efficiently and quickly as possible?

[00:22:16] And so, you know, a lot of ways, what is happening with that capital allocation is you can almost think about it like a very short term alpha trend fund.

[00:22:27] So they see a manager, they're generating good returns on a short term basis.

[00:22:31] Um, I, various people have, have discussed this publicly risk managers and capital allocators.

[00:22:38] They'll say, you know, if I see a good manager on a six month alpha timeframe, generate uniquely good returns, then I want to start to shift capital there.

[00:22:46] But if it goes for beyond, you know, but, but the reality is the information value is really only present in the, let's say a 12 month timeframe.

[00:22:55] Meaning like whatever, you know, if I can understand the 12 month alpha, I have a pretty good sense as to how to allocate for, you know, the next day and the next day and the next day.

[00:23:06] But that gives me no information value on the probability that that manager will perform well a year later, two years later, over the next five years, none of that matters.

[00:23:15] So it's a very, very tactical allocation.

[00:23:17] And it's a reason why part of the risk management strategy is, um, is to knock out managers very, very quickly, uh, in terms of, you know, those that are performing in a negative way or not holding up to the same standard, basically eliminating them to the portfolio.

[00:23:35] Once their alpha momentum starts to fade.

[00:23:37] So that's why you hear these sort of tight stops, like a 2% drawdown on a 6% target fund.

[00:23:43] They basically, or target strategy, they basically knock you out.

[00:23:46] Whereas like a traditional macro manager might, you know, might need to see a strategy, um, you know, move two or three standard deviations out of expectations over a several year timeframe before they believe that it wouldn't, you know, it's not, it doesn't make sense to allocate capital to it.

[00:24:03] And what about when you're running that money is you're just getting the call.

[00:24:06] So you might be on the upswing, but risk management is always about rebalancing in some form or another.

[00:24:12] So somebody is on an upswing and now we're calling and we're saying like, I need that capital, that alpha you just generated to go over here where something seems to be emergent.

[00:24:19] You seem long in the tooth.

[00:24:21] How do you, how do they deal with just the psychological realities of running money that way?

[00:24:25] Yeah.

[00:24:26] Well, I think it's, um, I think if you, if you talk to PMs who, who, uh, are on the, uh, multi-manager, uh, treadmill, let's say, um, it is a very, it is, you know, it's very challenging because, you know, it's like, it's the ultimate.

[00:24:44] What have you done for me recently?

[00:24:45] Um, and I think any of us who, uh, have been in the asset management business, uh, for, you know, for more than a few years, uh, know that, um, that even great managers, it goes up, it goes down.

[00:24:59] You can outperform, you can underperform.

[00:25:01] There's a lot of noise, a lot of randomness and noise in any successful strategy.

[00:25:07] And so I think, you know, sometimes, uh, and that it's hard to know whether the, whether the outcomes are a function of true skill, meaning like, let's say you're not doing well.

[00:25:19] Like, is that because of true, because you're not skilled or is it because of, you know, noise, uh, and separating that signal from the noise is very hard.

[00:25:27] I think what they're trying, you know, in general, what they're trying to do is very much do short-term alpha trend following in a systematic and disciplined way.

[00:25:37] And that, you know, there are signs that there is indication, short-term alpha trend following indications if that you can take advantage of, if you, um, are sufficiently disciplined and agile with it.

[00:25:52] What about, does each shop have to develop their own tools for sort of ranking and understanding their exposures to people all, is everybody plugging into some new version of Aladdin that I haven't heard of yet?

[00:26:05] What's, what's happening here?

[00:26:07] Well, I think part of, part of the advantage and if, you know, the part of the emergence of these, of these businesses is pods that would typically, you know, you'd start, if you spun out of, of existing asset manager, you'd be like two guys at a WeWork.

[00:26:21] You know, running your money, um, with a small fund.

[00:26:25] So that's what that neighbor's doing in the WeWork.

[00:26:28] Literally in our WeWork, uh, in our New York office, uh, there's, there's two guys who do this.

[00:26:34] People that are right next door.

[00:26:35] I think it's funny.

[00:26:36] You know, and they, you know, are equity long, short guys and they listen to conference calls and they scream at each other all day and presumably put on positions and hopefully they're doing okay.

[00:26:46] Um, but yeah, that's what you'd normally do, uh, in the old days.

[00:26:50] Um, uh, it wouldn't be a WeWork, you know, it would be in somebody's closet.

[00:26:54] Uh, and then, you know, you'd upgrade to a, to a slightly, slightly worse office.

[00:27:00] Uh, but you know, today the, the, the advantage is basically if you're an independent PM, you know, the idea of going and dealing with all of the hassle.

[00:27:09] Um, and it is a hassle, take it from an asset manager, uh, to set up all the back office and the infrastructure and manage the clients and, you know, do all the stuff in the compliance.

[00:27:21] Oh, the compliance, um, do all the stuff that every asset manager hates to do in their day to day, but nonetheless has to do it.

[00:27:28] Right.

[00:27:28] Or you could just go to a pod, basically plug in, you know, send them your views and, you know, benefit from the data and the, uh, and the infrastructure that's been built.

[00:27:38] You know, there's a lot of advantages to that.

[00:27:39] And I think that's why we see, if you, if you look at the data, you know, it's 2024 is the smallest number of hedge fund startups, uh, in the past 25 years.

[00:27:49] Um, and a big reason why that is, is people are like, well, do I build this all myself, which is a huge vein, or do I just plug into a pod shop, you know, get guaranteed base compensation.

[00:27:59] And hopefully I can, you know, keep up with the treadmill.

[00:28:02] Well, it kind of makes me think disruption of everything.

[00:28:05] You go from two and 20 down to a 20 and higher and down, and it's not as much fun because you can't make as much money in the most, you know, raw sense.

[00:28:15] The idea that they've come up with novel fee structures and said, Hey, we have different ways to compensate you to come into this.

[00:28:22] I, I hasten to use the word innovative, but it seems like this is one way to try to attract talent back into this pool.

[00:28:30] Yeah.

[00:28:31] Well, it's certainly, I mean, part of the benefit from the individual PM is there is a real benefit in socializing the operational cost in a way that, um, starting your own funds, you know, uh, there's not a lot of, you know, there's been a lot of regulatory steps that, you know, probably are to the safety, uh, at least some of which are to the safety of the investor.

[00:28:52] But man, oh man, does it create a high regulatory hurdle to start your own fund?

[00:28:58] I mean, like functionally to, to run your own money, you have to, you know, 50 or 60% of your staff is going to be back office, you know, in one form or another.

[00:29:07] Um, that's a, that's a high cost burden just to stand things up.

[00:29:12] I mean, just think about it.

[00:29:13] If you just a very basic economics, like let's say you ran, you know, $500 million.

[00:29:19] I mean, that's to be clear would be a huge raise, right?

[00:29:21] That's a lot.

[00:29:22] A lot of people can't raise $500 million.

[00:29:25] You're, you're two.

[00:29:26] You're probably not getting two.

[00:29:27] You're probably getting one, right?

[00:29:28] You're, you're one and maybe 15 as a startup fund.

[00:29:32] And, you know, you're looking at 5 million in fixed expenses in fixed income.

[00:29:38] You know, that's, you probably need 10 people at the very minimum.

[00:29:42] And that's, you know, and you haven't bought a, you haven't paid for a Bloomberg.

[00:29:45] You're sitting on the street.

[00:29:46] Like there's a lot of additional expenses.

[00:29:48] You haven't paid a lawyer.

[00:29:49] Like, you know, there's also, and have fun and like just all sorts of stuff that you've got to set up on top of it.

[00:29:55] And like $500 million, that's a pretty good fundraise, you know, about as good as you're going to do as a startup manager.

[00:30:01] And so maybe, you know, as a pod manager, you might be giving up some of the, frankly, equity opportunity to run your, and the flexibility to run your own shop.

[00:30:11] But you don't have to deal with all that hassle.

[00:30:13] You just show up and start running money.

[00:30:16] There's something very attractive about that.

[00:30:19] Yeah, it's, it's really, it's like, I hadn't thought about, about it in these terms before, but it almost reminds me of like, A, there's a bunch of things that rhyme with the restaurant industry.

[00:30:29] But then B, there's a bunch of stuff like this feels like a mall food court where it's like, hey, we got the people, we got the basics.

[00:30:35] The FDA will come and check all you guys out and back to business as usual.

[00:30:41] You're still exposed to all the vagrancies of market risk.

[00:30:44] Yep.

[00:30:45] Yeah.

[00:30:45] Well, I mean, I'm sure the pod shop folks will love the mall food court.

[00:30:51] You're but the P.F. Changs.

[00:30:54] We got the P.F. Changs.

[00:30:56] We got the Chick-fil-A.

[00:30:57] It's pretty good.

[00:30:59] Hey, but it's come a long way.

[00:31:01] It's come a long way.

[00:31:02] All right.

[00:31:03] What about major market events?

[00:31:04] Because then same thing.

[00:31:05] So I don't know if we can map this back to COVID.

[00:31:09] You tell me.

[00:31:09] You have a major market event that's basically impacting everything.

[00:31:13] If you're running a shop like this, how do you take one of those all correlations went to one type of event?

[00:31:18] What would happen?

[00:31:19] Yeah.

[00:31:20] Well, I think smart risk managers are thinking about those events and thinking about them very carefully and taking steps to avoid at least knowable factor risk.

[00:32:06] You have forced to leveraging across the whole portfolio.

[00:32:08] Those are some of the risks to this business model.

[00:32:12] So I think simple examples like back in July, we saw a hard rotation away from growth and towards Russell 2K.

[00:32:22] Well, like a traditional, you know, a traditional equity long short might be looking at maybe long growth stocks, right?

[00:32:30] Or and maybe not literally growth stocks, but it could be growth oriented stocks in your sector and various things like that relative to short, smaller caps, lost producing companies, etc.

[00:32:41] Like it didn't take much to create a hard factor rotation there that was kind of unexpected.

[00:32:47] And the challenge, one of the challenges, this is one of the challenges in general is like if all of these managers are thinking about risk management similarly and cutting out factors similarly and trying to get to the same kinds of idiosyncratic, idiosyncratic alphas in a similar way.

[00:33:11] You essentially create peer risk, whatever positioning risk, because you often if you strip out all the same factors, right?

[00:33:23] And let's say the Citadel PM team for TMT is, you know, is as good as the Baleazni TMT team as as good as the, you know, the Millennium team, then their idiosyncratic alpha will likely be correlated to each other.

[00:33:42] And so a lot of ways, and now you're levered five times.

[00:33:47] And so, you know, it has outsized effect.

[00:33:49] And so for those of us who live through, say, the quant disaster of 07, I don't know how many, if you all remember the quant disaster of 07, like those, the market by creating more and more of these entities, more and more of these concentrated entities risk positioning in the same way, you create a greater implicit risk of dynamics like that playing out.

[00:34:14] When we, when we think about that, and specifically to that point, because you get, you can have, I presume, some really amazing upside.

[00:34:23] You can also potentially have some really catastrophic downsides with these things.

[00:34:29] Are we at the point where there's, I don't want to call it systemic weakness of the model, but are we at the point where we have to be talking about pod shops now?

[00:34:36] Is it, is this the new, the new boogeyman in the system, like talking about what the pod shops are doing?

[00:34:41] Is this the new risk parity?

[00:34:43] Yeah.

[00:34:44] I mean, I think it's certainly, it's probably not a macroeconomic risk because just of the nature of, like, we talked about risk parity or something or, or banking institutions or things like that.

[00:34:59] They're taking on broad aggregate economic exposure and, and taking on broad economic leverage, et cetera, sort of at the index level.

[00:35:09] This is, as I say, it feels more like the risks that existed back in the 06, 07 period where you had the quants, like highly aligned quants taking similar exposures.

[00:35:19] Now they've come a long way, right?

[00:35:22] 15 years ago or something like that, where, for instance, back then they all realized, they sort of woke up one day and realized they were all short the end and long, long other stuff.

[00:35:33] And, and that was imprudent.

[00:35:35] Um, and so, you know, that, that sort of thing isn't going to occur, but I think, um, anytime you have similar strategies being pursued with high leverage, where the view is, um, how do I say this?

[00:35:51] Where the view is, uh, that there's only idiosyncratic risk being taken, right?

[00:35:57] That, that happens.

[00:35:58] That's happened through time.

[00:35:59] You've been through this business line enough.

[00:36:01] You've heard that story happen over and over again.

[00:36:04] And so often what you see is that a shock event basically creates a, an acute unwind of those positions.

[00:36:13] Uh, and that, that, you know, is unexpected.

[00:36:17] And do I think that that would see this?

[00:36:18] Yeah, of course.

[00:36:18] I think that that risk is that, um, it's probably not macro economically destabilizing, but certainly for managers like this, it could easily, you know, you could easily have a high cross correlation between manager, uh, views.

[00:36:32] So you talked before about a lot of money flowing into this space.

[00:36:36] So as it grows, there's more and more capital comes in as more and more capital gets allocated.

[00:36:41] Does that diminish the return potential or does it actually increase this kind of like idiosyncratic weakness that it kind of produces at the, at a broader scale?

[00:36:51] Yeah.

[00:36:52] Well, I think, um, anytime you're, you're choosing to take on more, let's say, uh, more, more folks, either whether it's an incremental investment strategy, right?

[00:37:03] The nth investment strategy, meaning like the nth indicator, let's say, or the nth asset, there's a tradeoff between the goodness, the goodness of that.

[00:37:14] Um, and the, uh, and the transaction costs of running slightly larger, a slightly larger pool of capital.

[00:37:22] Right.

[00:37:23] And so if you think about it, um, whether it's the tech, your 10 best, uh, investment strategies, let's say you're in systematic investment, that's a smart investor.

[00:37:33] Your 10 best, um, you know, are probably pretty good.

[00:37:37] But then the question is how good is your 11th relative to the ability to take on another billion dollars of assets and, you know, and the transaction costs that come with it.

[00:37:46] And so I think a lot of these places are, are getting to the point where you're slowly, but surely starting to get, you know, these are 331st pod that comes into millennium.

[00:38:00] And the assets that can be managed as a function of that, is that really a good tradeoff?

[00:38:04] Like what is the alpha opportunity relative to the transaction costs?

[00:38:10] And remember, transaction costs are penalty across the whole set, not just a penalty on the 331st, but a penalty on all of them because everyone has to pay incremental transaction costs.

[00:38:19] And so is it, is it worth it to add those additional, um, uh, funds?

[00:38:24] And I, and so often asset managers will look at this problem and they'll say, well, I'm creating more and more probabilistic dollar value of alpha.

[00:38:34] But the problem is that because alpha is always on a nice edge, right?

[00:38:40] You can easily tilt your transaction costs can start to rise at its high.

[00:38:44] You know, it's the worst of all worlds.

[00:38:46] Your transaction costs are rising and your goodness is falling.

[00:38:48] Right.

[00:38:49] And where exactly that point is, it's very, very hard to know.

[00:38:53] So as a case of millennium, like almost certainly the first 50 managers are worth it and almost certainly managing $10 billion is worth it.

[00:39:03] Right.

[00:39:04] I, you know, that, that seems pretty compelling given their track record and what they've been able to do, but at 50 billion and 300 managers, hard to know at 80 billion and 330 managers.

[00:39:16] I mean, even harder to know.

[00:39:18] Um, and there are real consequences of that because, you know, I think the risk is that the challenge, there's so much money to desiring to go in that it's actually can easily, uh, uh, be an enemy onto itself.

[00:39:33] Right.

[00:39:34] Well, as we know, when people want to throw money at some, something, somebody out there is usually want to say, I'll take that money.

[00:39:43] If whoever else is shutting it down, I'll take it.

[00:39:45] And that's, it's, am I correct?

[00:39:48] Are we kind of at that phase with some of these pod shops where there's more money seeking this type of stuff right now?

[00:39:52] And yeah, I mean, Ken, Ken Griffin, when I was talking about it, he's basically like people are just essentially pouring money into us.

[00:39:59] Right.

[00:40:00] And the same thing, um, with millennium, like people are just desperate to give us money.

[00:40:04] And so, um, you know, as an asset manager, it's the rare asset manager who will say in the face of capital flowing in, no, my edge is this strategy at this size.

[00:40:20] And I will not take your money.

[00:40:22] Right.

[00:40:23] Very, very, almost, almost no asset managers say that.

[00:40:26] Um, because the economic incentives are so much in favor of taking on the nth dollar of capital and essentially hoping that it'll work out for you.

[00:40:37] You know what I mean?

[00:40:39] Um, and so, uh, and so I, I think it's, it's in, and having lived through, you know, a, a fund that can move forward.

[00:40:50] You know, move from challenging as a challenger to an incumbent.

[00:40:53] I, I've seen this pressure firsthand, which is, you know, there's always a desire.

[00:40:58] And often what you'll see is whether in the pod shots, it's adding new managers that may be lower standards, more green, uncertain, right.

[00:41:07] Or moving into other asset management areas or, you know, other strategies that you've never really run before.

[00:41:15] Um, there's always that pressure to do that.

[00:41:18] And, uh, and, and it really comes down to like good, excellent asset managers, know their edge, know their size, and are disciplined about just doing that.

[00:41:29] All right.

[00:41:31] So if your asset manager is happy to take your money, maybe, maybe, uh, that's a sign that it's not the best thing that they should be doing.

[00:41:40] Don't order the steak dinner at orange Julius in the mall.

[00:41:43] It's a lesson.

[00:41:45] Sticks in the.

[00:41:47] You seem to love a mall.

[00:41:49] I don't know why I was there today.

[00:41:51] I had a whole Knight Rider conversation a couple hours ago and I think I've derailed into 1987.

[00:41:58] So I think that conversation around asset managers is good sort of segue into some of the things that you guys are doing over at unlimited Bob.

[00:42:05] And I think it's interesting.

[00:42:06] One of the things that you pointed out earlier is in 2024, you had the least number of hedge funds launched, but I think it was possibly the best year for new ETF launches.

[00:42:18] Um, and also flows into ETFs.

[00:42:21] Not that the people in the podcast space are launching ETFs, but certainly people like yourself.

[00:42:26] Who sort of come from the hedge fund cloth.

[00:42:30] You decided to, you know, launch a ETF, uh, an asset manager and an ETF firm.

[00:42:36] Um, and so what was, you know, when you think about that decision about what you guys are trying to build over at unlimited, what were you, you know, why did you decide to pursue that?

[00:42:49] Yeah.

[00:42:49] Well, I think, um, the, the ETF space has come a long way.

[00:42:53] I think a lot of people in the asset management business sort of associate ETFs with index products and, and obviously been wildly successful at creating low cost index products.

[00:43:01] Um, but really starting in 2020 and the last couple of years, there was a regulatory change that allowed for more sophisticated investment strategies to be run in the ETF wrapper.

[00:43:13] As long as there are, what I described as like common sense, uh, risk controls applied to those strategies and, and reasonable limits on leverage and such.

[00:43:22] Um, and so, um, as, you know, startup asset managers, the, you, you, you, you look at the, at the world and, um, there's, you know, you go into the two, the pod shops.

[00:43:35] Basically, we sort of talked about all the economics there.

[00:43:37] If you are going to be independent, there's actually a lot of advantages to running that, running your strategies in an ETF wrapper, assuming it's appropriate for the ETF wrapper.

[00:43:45] Not every strategy is.

[00:43:46] And the reason why that is, is because, you know, with the advent of a lot of these, um, white label providers, you can actually basically run the whole operational aspect of an ETF.

[00:43:56] Let's say, you know, your, your sort of, uh, minimum payment is maybe $250,000 a year.

[00:44:02] Well, actually $250,000 a year, uh, to launch a financial product is pretty cheap, right?

[00:44:07] It's like essentially one employee, right?

[00:44:09] Versus, um, you know, a traditional asset manager, uh, in the two and 20 space running an LP type structure, et cetera.

[00:44:16] We probably have to have, you know, 10 basically to make it break even.

[00:44:19] Um, and the reality is, you know, there's, there's comfort in the market of roughly 1% fees for, you know, sophisticated actively managed strategies.

[00:44:30] And so the fee differential to own between the two, isn't all that different except of course for the performance fee, but you know, sort of, if you're running a business and as a manager of a business, you want to, you need to think about the, um, you know, your fixed fee expenses, your fixed expenses versus your fixed fee earnings.

[00:44:48] And so there's a lot of opportunity there from standing up a business.

[00:44:51] It's also a lot faster and easier.

[00:44:53] You know, you could do it in 90 days and stuff like that.

[00:44:55] Um, and by outsourcing the, the, with the white label provider, you basically do the things that you, you know, that you might enjoy doing, which is running the money and talking about, uh, running the money with prospective investors.

[00:45:10] How do you guys go about replicating hedge fund strategies at one of it?

[00:45:16] Yeah.

[00:45:17] I mean, we, you know, our idea was basically this $5 trillion of assets in, in hedge fund positions.

[00:45:22] And the reality is that, um, the vast majority of those don't justify the two and 20 fees that the, that are being paid by investors.

[00:45:31] And, and so just getting a little bit beyond, you know, the multi-manager pod shops, which, you know, may or may not be worth the costs that are being paid.

[00:45:40] Um, there's a whole lot of alpha that's other hedge fund managers do a great job generating alpha.

[00:45:46] The problem is that they do a great job of charging fees.

[00:45:50] And so asset managers aren't that, you know, uh, investors aren't that much better off investing directly in funds.

[00:45:55] And so our idea was, well, we could use technology to look over the shoulder of the managers, see how they're positioned in close to real time, take that understanding, translate into long and short positions in liquid securities and put that in ETF and be able to offer it for something that is, you know, much lower fee than two and 20.

[00:46:12] And also, um, a lot more liquid tax efficient, you know, particularly for taxable investors, like hedge fund strategies are like the worst thing that you could possibly invest in LP structures are.

[00:46:22] Um, and, and, and so if you put that together, you could start to essentially change the economics, you'll keep, you know, not, not a perfect, uh, implementation of the positioning that they have, but a pretty good, pretty close implementation with a lot lower fees.

[00:46:38] And a lot lower taxes means that, you know, investors are better off than they would be investing directly in the funds.

[00:46:45] And are there major, like, are there major sleeves of strategies that are represented in this, in this, in your strategy or how does that look?

[00:46:55] Yeah.

[00:46:55] I mean, our technology, what we do is we, we look at the major hedge fund strategies.

[00:46:59] And the reality is that, you know, there's, there's almost every manager can, can fold into one of, you know, equity long, short event related strategies, fixed income, global macro, emerging markets, managed futures, or multi strategy, which is really some combination of those other strategies.

[00:47:17] That's like 98% of the assets in the, in the hedge fund industry.

[00:47:20] And so functionally what we do is we look at each one of those different strategies in our technology, uh, um, does essentially the alpha mining for each one, uh, in terms of the positions.

[00:47:31] And, and then we can take those building blocks and combine them in various ways, whether it's sort of an index type approach, which, um, which, you know, we have in the market today, uh, or individual sub strategies, which, uh, you know, which we're looking at pursuing, um, or combinations, active combinations, uh, of those through time to try and generate a differentiated return.

[00:47:53] So there's all sorts of different ways that you can package it together that we're doing, um, at unlimited.

[00:47:59] And just how would that be different than a pod strategy?

[00:48:03] Obviously there'd be more individual teams.

[00:48:05] It might not be as much systematic, but they seem somewhat similar, I think.

[00:48:10] Right.

[00:48:11] Or.

[00:48:12] Yeah, I think, I think, um, in the sense of, uh, in the sense of essentially creating multi multi manager, uh, right.

[00:48:21] So diversification of manager or diversification of strategies, they're very similar.

[00:48:26] Um, what I'd say is the pod shops, uh, are, um, are, uh, layering on top that, uh, that risk control aspect that is, uh, trying to eliminate factor exposure, um, uh, as well as that tactical, uh, allocation.

[00:48:44] We do a little bit of that in, in some, some institutional work, but, um, but that's kind of the way that they're doing it.

[00:48:51] And, uh, in order to sort of compensate for that, they're taking on a lot more leverage leverage, which is, you know, at levels that is not really, um, appropriate for the ETF.

[00:49:01] So I think more about what we're doing as multi strategy, more equivalent to multi strategy than equivalent to what a pod shop is doing.

[00:49:10] And so like, look, from my perspective, there are, there are almost certainly asset managers that are out there that are worth the fees that are getting charged or probably worth the fees that are getting charged.

[00:49:21] But that is a, and if you can get access to them, go for it, really go for it.

[00:49:25] Uh, but that is a likely a very tiny portion, a very small portion of the overall asset management business.

[00:49:33] Whereas, you know, essentially like 90% of the time you're, you're probabilistically better off finding a liquid, a low cost tax efficient liquid replication.

[00:49:45] Um, then you are investing in an individual manager.

[00:49:48] Did you happen to see, um, the for God piece from this week?

[00:49:53] Uh, Dan and a couple of his analysts wrote this piece called persistent alpha.

[00:49:58] And they were basically looking at like a public equity pod shop strategy and they back tested it.

[00:50:04] I think they went back.

[00:50:05] I don't know.

[00:50:06] Uh, let's see.

[00:50:07] They went back, um, tonight from, from 97 to 2004.

[00:50:12] And then they looked at all actively managed mutual funds and ETFs and sorted based on their 12 month alpha and then constructed sort of this portfolio of the top alpha generating strategies.

[00:50:27] And then, you know, showed it with no leverage levered up.

[00:50:31] And it was just an interesting, I mean, it was a big back test effectively, but I'm just wondering what you kind of think of that in terms of a strategy.

[00:50:39] I mean, it seemed like interesting to me.

[00:50:41] I was like, maybe somebody should do this with an ETF.

[00:50:44] Maybe you guys should do it.

[00:50:45] I don't know.

[00:50:46] Yeah.

[00:50:47] Well, I think two things related to it.

[00:50:50] One, um, the thing I found very interesting.

[00:50:53] Yes, I read it.

[00:50:54] Uh, I, uh, I love Dan's work.

[00:50:57] Uh, you know, talk all the time and he's, uh, if you're, if you're not subscribed to Dan's newsletter, stop right now.

[00:51:05] Don't subscribe to it.

[00:51:07] And I get no, I get no economic benefit from it.

[00:51:10] Just the, the happiness of, uh, of people reading good research.

[00:51:14] Um, but, uh, I think two things that I thought were very interesting about it.

[00:51:19] One was, um, uh, it highlighted the, um, short term alpha opportunity, right?

[00:51:27] So what it showed was there was not actually much persistence over extended periods of time.

[00:51:31] But if you take that 12 month timeframe, probabilistically you invest the next day.

[00:51:36] There is some short term alpha opportunity set that comes from, uh, that exists once taking into consideration factors in a sensible way and stuff like that.

[00:51:46] I think that, that was, that's interesting and confirmatory of what I believe is the sort of one of the key tenants of the underlying benefit of the, um, the pod shop structure.

[00:51:58] The other thing it highlighted was, look, the alphas traditionally that have existed in public market, publicly traded assets, sort of liquid alts alphas.

[00:52:09] They're not very good.

[00:52:10] And there's a, there's a fundamental reason why that is, is because like, why, why the heck if you were skilled, would you be running?

[00:52:18] You know, why would you be at a black rock at their multi-strategy fund, which is a mutual fund?

[00:52:24] You know, why would you be there instead of running two and 20 money?

[00:52:27] And so what it highlighted was, you know, wallet, it emphasizes that you can extract some idiosocratic alpha.

[00:52:34] The quality of that is actually quite a bit lower than what you see amongst hedge fund position, actual hedge fund position, um, or actual pod shops.

[00:52:42] And so I think what it emphasizes is the idea is a good idea.

[00:52:48] Hedge funds themselves are actually a lot smarter than what you can get in the liquid alts space.

[00:52:53] And so to the extent that you can figure out ways to access the actual hedge fund positioning rather than, um, buying a bunch of liquid alts products, you're probably going to be a lot better.

[00:53:03] Do you see this from an allocator's perspective?

[00:53:05] Do you see this really, is this going to hit the liquid alts space?

[00:53:09] Are we going to see another evolution in what's available and achievable with liquid alts?

[00:53:13] That's not just more overpriced vanilla ice cream.

[00:53:17] That's not a mall reference.

[00:53:18] Let the record show.

[00:53:21] Um, I think what we're going to see in the, in the liquid alts space is, uh, uh, evolution of more sophisticated asset managers into the, into the, um, into the space.

[00:53:35] Uh, and folks who, you know, would have traditionally been their own sort of small shop, uh, in the corner, uh, in, in a hedge fund type structure using, leveraging the ETF type wrappers in order to execute their strategies.

[00:53:50] I think, um, and that, uh, because it's cheaper and more efficient, there's a higher probability that that's going to be net beneficial for investors, uh, as they're, um, you know, as they're investing.

[00:54:03] And so that's, that kind of like, uh, quality, quality of alphas is, is, is, is going to increase, uh, particularly in the, in the liquid alts or ETF, uh, wrapper.

[00:54:14] I think the other thing that we're going to see is much more around a core versus you much more allocations towards core versus satellite in that context, which is, you know, for the first time, honestly, like ever, you can have kind of like the spy of hedge funds, right.

[00:54:32] Or the spy of managed features, right.

[00:54:34] Those strategies exist in an efficient ETF wrapper.

[00:54:38] And so if you're looking, if you're thinking about how do I make my building blocks of my portfolio, starting with those sort of core, um, uh, index index, you know, alpha indexing type strategies, and then layering on top of it, say particular managers that you like or not, uh, you know, particularly managers that you like.

[00:54:59] I think that's what we're going to see in the liquid alts sort of allocation space, uh, in, in, uh, um, in the years ahead.

[00:55:07] So, um, what have we learned today?

[00:55:10] We've learned about Matt's mall knowledge and then, um, Bob's, Bob's love of her dogs research.

[00:55:18] No, um, but seriously, Bob, this has been great.

[00:55:22] We, we like to ask, um, all of our guests, um, a standard closing question and you've been on the podcast multiple times, but I'm pretty sure we haven't asked you this one, which is what is one thing that you believe in that you think most of your peers would disagree with you on?

[00:55:35] You do not get the alpha that you pay for.

[00:55:38] Um, and it's very, it's very common.

[00:55:42] I saw a comment on this on LinkedIn today is if you pay peanuts for alpha, you get peanuts.

[00:55:48] And the answer is no, no, no, that's not at all how alpha works, right?

[00:55:52] The way alpha works is it's hard to generate alpha and every penny you give away in fees is a penny you don't have for yourself.

[00:55:59] And probabilistically, it's much more likely, uh, that if you pay handsomely for alpha that you get very little than the opposite is true.

[00:56:11] Um, and so when you're thinking about how do you build the best alpha portfolios, the easiest, the highest probability improvement that you can make to your alpha portfolio is reducing your fees and particularly reducing your tax expense.

[00:56:28] If you're a taxable investor.

[00:56:31] And so frankly, like alpha managers or allocators would be way better off spending their time figuring out how to reduce their fees than trying to find, you know, the next great, perfect alpha creed, um, out there.

[00:56:45] And so, uh, and so that's what I'd say is I, I believe actually, um, I, I strongly disagree, uh, with the idea that if you pay peanuts for alpha, you get peanuts.

[00:56:55] Um, it's in many ways, the exact opposite.

[00:56:58] That's great, Bob.

[00:56:59] Thanks for team that second lesson up for us.

[00:57:02] We really appreciate it.

[00:57:04] I keep coming on and you'll get a whole.

[00:57:06] Yeah, exactly.

[00:57:08] We'll have a podcast just around the lessons from Bob Elliott.

[00:57:10] Well, listen, uh, thank you very much.

[00:57:12] Happy holidays.

[00:57:13] Wish you all the best.

[00:57:14] Talk to you soon.

[00:57:15] Great.

[00:57:16] Thank you so much for having me.

[00:57:17] Happy holidays.

[00:57:17] See you guys.

[00:57:18] This is Justin again.

[00:57:19] Thanks so much for tuning into this episode of excess returns.

[00:57:22] You can follow Jack on Twitter at practical quant and follow me on Twitter at JJ Carboneau.

[00:57:28] If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube or leave a review or a comment.

[00:57:36] We appreciate it.