Transcript
In the early and mid two thousands, I ran a fund of funds, and it was, in the hedge fund world, SMA, so separately, managed accounts and fund of funds and I had clients that were high net worth investors here in, in Arizona, and it was very difficult to get them excited or happy about investing in alternatives, you know, they made their money in real estate and stocks and that's kind of really what they were comfortable with. And, and that's what they wanted to pursue. So I did a, an experiment and Daniel, I think this will, this will interest you to some degree.
I brought these guys in one at a time and sat them down and showed them. Data, but from different asset classes. I think there were five, maybe six asset classes. Things like gold stocks, macro trend, corporate bonds, regular bonds and real estate, something like that. But I anonymized it, so they didn't know which asset class was which.
It was just asset class, red and green, orange, blue, brown. Or whatever. And I asked them, or I told them, I said, let's build a portfolio. Pick your favorite asset class and we'll put 40% of your money in that, and then your second favorite asset class, we'll put 20 in that, and then your third, we'll put 10 in that.
So on and so forth. Yeah. And I also asked them to pick one asset class to eliminate forever. You're just going to delete it and we're never even gonna consider investing into it. So they're looking at this data, and down at the bottom, they could see the annualized return. Annualized vol the worst drawdown and the average correlation with the other asset classes.
And almost every single one of these people built , the same portfolio. They'd pick their favorite, their second favorite, their third, their fourth, the fifth, and then they would eliminate the one that they had liked the least. And then I would reveal to them the portfolio they built. And it was in almost all cases, the exact opposite of what they do in real life.
So what does that tell you? When you build a portfolio objectively without the fear and the panic, , and the envy and , all that stuff, you got this beautiful absolute return, total return stream going back, you know, 30, 40, years, and they're like, yeah, that. That that's exactly what I want, until I showed them what was in it, and then they said, okay, but that's not even the most interesting part.
The most interesting part is did it change their behavior in real life a little bit for a brief period of time. But if you check back two, three years later, they're right back to what they were doing before. , No permanent changes.
So I realized that even if you can force people to be objective and rational, as soon as they have to go back out in the real world and defend that to their peers, that it, it falls apart, right? So it's not enough to expose, whatever you want to call this, the truth or just objective reality. There's a reason that people do the opposite and I can't overcome that.
So, you know, I bounced around for a while and tried some different things. I mean, I really tried selling what it is I think people need. What people need the most at the margins is what they don't want. You know, they need effective diversification, and that means having something that can ballast the portfolio during bad times has a positive overall return, but it underperforms risk assets when they're soaring.
But there's a reason that nobody wants that. And there's a reason very few people can hold onto that. So I went back to the drawing board and thought, well, how do I get these people to invest the way I do, you know, my own personal portfolio? And one of my coworkers pointed at my personal portfolio and he said,
if they only saw the results of your personal portfolio, it's basically this all weather absolute return program. I don't think anyone would have a problem with that. And I'm like, yeah, but the individual ingredients are these things. And they said, well just roll it all up into one fund, run it at the right risk level, and roll it out to the world at a reasonable fee with reasonable taxes.
And see if they won't buy it. I thought, well, sure, why not?
