Episode 07: $18T in Alt Investments, 1 Premier Assoc – Convo w/ Aaron Filbeck of CAIA | Think Like an Allocator | Why Allocators & Asset Mgrs Fail to Communicate | Qual vs Quant Due Diligence
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In this episode, Aaron Filbeck and I discuss:
His backstory: from wanting to be an architect to becoming a Director at CAIA
Why the world needs an association like CAIA / Who CAIA is for
CAIA’s research on qualitative vs quantitative due diligence (AKA culture eats Sharpe ratio for breakfast)
Why allocators and asset managers fail to communicate
The key questions managers can ask to identify their own differentiators
How the alt space has expanded from just hedge funds to many other types of strategies
Why the fascination with 60/40 allocation is misguided
About Aaron Filbeck
As Managing Director and Head of UniFi by CAIA™, Aaron Filbeck oversees content and product strategy for the UniFi by CAIA™ Program.
Aaron’s work has been published by Oxford University Press and The Journal of Investing, and covers topics such as ESG/sustainable investing, liquid alternatives, commodities, and asset pricing/factor investing. He is a frequent writer and speaker on these topics. Aaron is also an adjunct professor and serves on multiple advisory boards for Penn State University.
Resources mentioned in this episode:
Transcript
Below is an AI-generated transcript and therefore it may contain errors.
Aaron: Managers tend to prioritize the quantitative and look at my sharp ratio, look at my drawdown statistics, look at my Sortino ratio. Look at all these different risk adjusted returns. Whereas on the allocator side, who's sitting closer to that client, they're much more qualitative in nature, and they're focusing on what makes you different?
What makes you, uh, smarter than the competition? How at the end of the day, are you gonna help my client? Achieve their different outcomes that they're trying to accomplish their own lives, whether that, again, that's personal or it's in a institutional setting. And so what was really interesting about this report is the difference in terms of approach, um, between those two, uh, Constituents, which those two constituents really have to come together at the end of the day cause that's how the business is done.
Stacy: Hey, my name is Stacy Havener. I'm obsessed with startups, stories and sales. Storytelling has fueled my success as a female founder in the Toughest Boys Club, wall Street. I've raised over 8 billion that has led to 30 billion in follow on assets for investment boutiques, you could say against the odds. Yeah, understatement.
I share stories of the people behind the portfolios while teaching you how to use story to shape outcomes. It's real talk here, money, authenticity, growth, setbacks, sales and marketing are all topics we discuss. Think of this as the capital raising class you wish you had in college mixed with happy hour.
Pull up a seat, grab your notebook, and get ready to be inspired and challenged while you learn. This is the Billion dollar Backstory podcast.
What we've got here is failure to communicate. I think of that line from Cool Hand, Luke, often in the investment industry, two sides of the proverbial table allocators and asset managers, and it's as if they're speaking two different languages. For all intents and purposes they are, and it's a chasm we need to cross if we want to move the industry forward as a whole.
The Chartered Alternative Investment Analyst Association did a study on the key drivers for manager selection. It. Is gold. I literally quote the study in almost every conversation, podcast interview, presentation. So I figure it's about time I get my friend Aaron, fill back on the show to dive deep with us into the past research, yes, but also into the future of the alts industry.
Aaron's journey began as an allocator conducting due diligence on asset managers. Now he's an educator trying to help them. Aaron is a managing director at CAIA and the head of their Unify program. CAIA serves 13,000 members around the globe with 33 chapters, hosts 250 events per year, and produces extensive research on alternative investments.
One of my favorite things about CAIA is their people, the way they show up with authenticity. And today's episode has quite a few authentic moments, including a section where I totally screw up and refuse to edit it out of the conversation because, hey, we're real people here. Don't talk about it, be about it.
Without further ado, let's dive in behind the scenes of my favorite research on manager due diligence. Meet my friend Aaron, fill back. Aaron, thank you so much for being here. It is such a pleasure. I feel like I'm turning the tables a little bit because you and I have done interviews together many times in the past, but now I get to ask you some questions, my friend, and I'm so excited to invite our listeners into that conversation.
So thank
Aaron: you. Yeah. Well thank you Stacy, and it's been fun interviewing you over the years, so I'm excited to see how the tables turn and hopefully you can. Uh, you'll be nice.
Stacy: I'll be very nice. I'll be very nice. So, I mean, we've been friends, we've been colleagues in the industry for a long time. You know that stories are my jam and that's where we're gonna start.
Obviously here you are. Literally sitting at CAIA's, uh, US office. But I wanna go back, I wanna go back to where this all started. Did you always know you wanted to be in the investment industry? What was that path for you to get to CAIA?
Aaron: The answer is no. I, I didn't always know that I wanted to, to be in the investment industry early in my career.
So I originally, I wanted to be an architect. In high school, like, you know, I was like, I'm gonna go to go to university and become an architect. I'm gonna build stuff and design stuff. And that was really kind of my, my passion. Um, I went to school and I started off in, um, actuarial science. So that was a pivot.
The first pivot, I guess, uh, you could say where I was in finance, math, statistics, all the fun, quantitative stuff. And then, uh, took an accounting class, took a finance class, and ultimately decided, well, I think I'm just gonna do finance instead of actuarial science. Uh, just found it so interesting and fascinating and you know, here I am
Stacy: today.
So wait. Okay, we're coming back to the architect piece, but I'm gonna make you go a little bit deeper here because before you ended up at CAIA, you actually were an allocator. And I think that part of your journey super fascinating. I also wonder, I mean, I don't know. Your parents personally, but I know of your father, so I wanna weave in just like what's going on in the Lbeck house that maybe informed some of this journey for you.
Aaron: So both my parents are in education, so grew up in a very academic household. Um, and so, you know, teaching and helping people understand, uh, complex concepts and breaking it down, uh, was always kind of a piece of my upbringing and, and I think ultimately led to where I am today, uh, with, with CAIA. So that's always kind of a fascinating thing.
My dad is obviously in the industry, and so a lot of people know him and, uh, we sometimes get confused, uh, as one another. I've had a couple people reach out and say, oh, I, you know, took your class, uh, you know, 20 years ago, and I was like, uh, I don't think you did. So that's, that's always been really, really cool.
But, uh, yeah. So to to your, uh, your earlier comment. So, Left school, um, started a career in wealth management, uh, working for an RIA and was on the allocator side of the table. So doing a lot of manager research and asset allocation and fund selection, and really getting into the nitty gritty of the investments.
Did that for a number of years. And then, uh, this opportunity popped up randomly at, uh, at CAIA. And I, I was kind of sitting there thinking about my career and what I wanted to do, and, you know, there's always this kind of academic, educational itch, uh, that I had and CAIA's in a unique position where it's not a full-blown university.
You're not, you know, sitting as a, as a professor necessarily. And you're still in the industry, which I very much enjoyed. But there's a little bit of a, a unique perch that CAIA has in terms of observing, um, everyone. I mean, we've kind of got this unique, uh, perspective of allocators and managers and getting kind of a nice perspective of the industry.
So, saw this posting and, uh, ultimately had a couple conversations with, uh, some of the people here at CAIA and Joints. I've been here for, uh, Almost four years. It's hard to believe, feels like, uh, quite a long time, but I'm having a blast. It's a lot of fun.
Stacy: That's so great. And obviously I knew you when you were on the other side of the table and I was joking in the green room that, you know, I guess there's three tables kind of in the industry because you left.
That allocator side, you didn't come to the dark side, which is this side where the managers are. Right. You kind of went to this other perch and I love that word. What a great word for the table that you guys are at. That's, that's awesome. Well wait, one more question. What did your mom
Aaron: teach? I. So my mom's taught a couple things.
So she is, um, she's an elementary school teacher. Uh, second and third grade. She's taught at university. So she, um, was a English teacher and, uh, wonderful. Right now she's, she's teaching middle school, so she's kind of, she's seen it all. She's, uh, she's had all different ages and different backgrounds.
Stacy: Awesome. You know, there's something to be said for being able to simplify. Complex things, which you talked about. Nothing will get you there. Like tell it to me like I'm in fifth grade, right? So there's something really interesting there. I wanna talk about CAIA for a second because. One of the things that's so important to storytelling is what makes you different.
It's kind of this idea that like, why does the world need another insert? Whatever you are, right? Because there's so much proliferation across industry definitely here in, in a lot of different ways. And so when you look at the. The investment landscape, the profession. Why did the world need another association?
Because there were certainly professional associations out there doing great work helping people, but why? Why CAIA?
Aaron: Yeah, no, it's, it's a really good question and I think something that we are constantly trying to challenge ourselves with and, and ask that question of ourselves. So, CAIA, you know, started, we're, we're celebrating our 21st birthday this year, so we've been around for, for over 20 years.
And the genesis of CAIA really came out of, uh, the hedge fund space. So early two thousands, uh, you know, these, these hedge fund strategies were popping up all over the place. This term alternative investments were really synonymous with, um, hedge funds. And, uh, you know, there wasn't a whole lot of other things, um, in that umbrella.
Private equity was still relatively small terms of assets under management. Real estate's always been there, but. You know, may not have been a, a big piece of the institutional pie and so on. And so as, as CAIA started, we really looked around and said, there's all these new strategies that asset allocators are looking at to complement maybe the more traditional long-only stocks and bonds, but they don't fully understand it.
And wouldn't it be great if there was some kind of an educational program. To help train them on some of these more esoteric strategies. Yeah. And thinking across the entire portfolio. And so I think, you know, fast forward to today, alts are over 18 trillion in assets under management. It's a very diverse, um, group of strategies.
So hedge funds is a very big piece of that. But private equity has, uh, grown from a very niche, uh, industry into a very mature institutional asset class, almost 10 trillion, um, in assets under management. Real estate has become its own private credit, one of the fastest growing, uh, strategies in the industry.
So we've got this whole plethora of, of strategies that are now available. And you look at where a lot of the, the capital is going in the institutional space and even more recently in the private wealth space. And people need education. They need to understand how these strategies work, the ins and out of them, ins and outs of them, and, uh, are they appropriate for their end clients.
And so I think where we sit, we're trying to make sure that we're raising the standards, raising the bar for the industry that's continuing to grow and evolve. But where that educational gap is, is sorely needed, is where we sit.
Stacy: That's great. And I love that you're specialists, right? I talk so much about that.
Like serve, be, you know, be something special to someone specific and CAIA, is that right? And even going all the way back to your genesis. This, which at the time probably felt a little kind of startup rebel, you know, to say, Hey, here's alts. It's, it's becoming something and we want to become something right alongside it.
Mm-hmm. And that's awesome, and I love that you've stuck to that. I mean, you've expanded in many ways and we'll talk about that, but I love that you've stuck to that specialization and just. Own it, and I hope that people listening kind of get courage from that because you've built something really, really special.
So you talked about kind of sitting in between different constituents, and that's something that. I'm big on two, like who, you know, who is your target market. You talked about the allocators, you talked about the managers. Do you feel you serve both of those groups or do you feel that one or the other is more of your target market?
I can relate by the way to having two target markets in the seat that I'm in, so I'm curious, yeah, if you identify with one side or the other more strongly.
Aaron: Yeah. And, and I'll, maybe I'll answer it in a, in a slightly different fashion. We, we have this, uh, this tagline, think like an allocator. Yes. I love that tagline line.
We, we've used that in our marketing materials and you see it on our website and, and a lot of our, um, outward facing, uh, conversations. So it, it says, think like an allocator. Doesn't mean be an allocator. And so the way that we're, ah, we're trying to help the industry is to think. Like that asset owner, the institutional investor, the private wealth manager who's looking across a variety of different asset classes and strategies.
And so everything that we do is from that lens of those people who are closest to the client and trying to. Serve that end client doesn't mean that all of our members are allocators, but you know, if you're a hedge fund manager or you're a a private equity gp, having an understanding of that total portfolio is so important and where your particular strategy fits into that overall portfolio only makes you better.
It only makes you better at having those conversations, and it only makes you better in terms of how you position that, that strategy in the marketplace. So I, I guess I would say we take all comers, um, anyone Yeah. Who wants to go through the program, uh, welcome to do so. But what you'll find is that the way that we talk about things and our thought leadership and, and our curriculum is very much focused on that perspective of the allocator.
Gosh,
Stacy: I love when I'm doing a podcast and I feel like I should do the Running Man, which I can't do cause I'm like hooked up to all this stuff. Plus I won't be able to see it. But that makes me wanna just jump outta my chair. I love that. I love that because putting ourselves in the shoes of the people we serve is the very best place to start, I think in every industry.
But. Definitely in this industry. It's like, okay, I have to pitch, okay, this is my time. It's about me, it's, it's me, me, me. And that's so broken. We are not the heroes of our story. We are the guide. And what you have captured in that tagline is all of that, and then some. Think like an allocator, not be an allocator.
That was awesome. I love that. Aaron just like high five from the storyteller marketing person. Um, that is, that is good. That is gold. Okay. I feel like this has been such a long time coming this next. Part of our conversation and you're gonna laugh because, you know, I carry this research paper around for what, two years now?
Is that how old
Aaron: this? I think, I think it might be two years. But hey, it's got life. It's not
Stacy: life. It can never die. It can never die to me. I'm, I'm, I'm holding it close. Can we spend some time geeking out on this cuz it's so important. To our listeners, so for those of you are like, what the heck is she talking about?
I hold here in my hands also gold. The alternative investment due diligence survey on key drivers for manager selection. This is a, a amazing research report that CAIA put together a few years ago and. The gist of it in my, from my perspective, is just a, again, think like an allocator understanding how allocators conduct manager research.
Yes. But some of the things that were most. Telling for me was the, the fact that you also included the managers in that conversation. Mm-hmm. Because then you could see where the gaps were like, allocators sync this, but managers think allocators sync something totally different. And those elements really jumped off the page for me.
So, The biggest thing I always talk about here, and I'd love for you to, to riff on it, is the idea that in a numbers industry, numbers are the only things, things that matter, and I feel that needs to be challenged. And I felt like your research really uncovered that. Can you speak to the different, you know, the roles that may be qualitative, quantitative, and I don't wanna ignore our friend operational due diligence, but just for me, that qualitative, quantitative piece really is the thing.
Aaron: Maybe I'll start big and I think moving into, do it into the, the due diligence process. So I think you're right. We are, we are a numbers industry. You go through your, your credentials and you're, you're doing the analysis on, on your individual investments, and it's a very quantitative industry in terms of how we approach things.
If you think about. The perspective of the client. So whether that client is an institution or an individual, clients are not usually very qualit or quantitative. They're very qualitative in nature. So they're asking questions. If you're an individual, they're asking questions about, can I retire? Am I gonna be able to sustain my lifestyle in retirement?
You know, am I on track and uh, am I gonna be fine at the end of the day? And so we've got, on one hand, we've got this very, very, Quantitative industry. On the other hand, we've got this very qualitative client. And so that translation really comes to fruition in the asset allocation process, but also the manager selection process.
And so what was interesting about this report on the due diligence side is that, uh, I think one of the interesting things is that, Managers tend to prioritize the quantitative and look at my sharp ratio, look at my drawdown statistics, look at my Sortino ratio. Look at all these different risk adjusted returns.
Whereas on the allocator side, who's sitting closer to that client, they're much more qualitative in nature, and they're focusing on what makes you different. You know, what makes you, uh, smarter than the competition? How at the end of the day, are you gonna help my client? Achieve their different outcomes that they're trying to accomplish, uh, in their own lives, whether that, again, that's personal or it's in a institutional setting.
And so what was really interesting about this report is the difference in terms of approach, um, between those two, uh, Constituents, which the two constituents really have to come together at the end of the day cause that's how the business is done. But I, it is a very interesting report, and I know you've been singing its praises for the past two years and we really appreciate it.
But I think it's still, it's true today.
Stacy: Yeah, it sure does. And I think that that communication gap, you know, if, if story unlocks sales, then understanding who you're speaking to is super important. Who you're telling the story to and what story. You're telling, if you're telling a story that the, that the allocator, in this case, the think like an allocator tagline.
If you're telling a story the allocator doesn't really want to hear, then you're sort of speaking two different languages. It's not a story that's gonna resonate. And then, you know, if you're the manager who's, who's doing this, who's kind of approaching the due diligence process very quantitatively.
You're gonna leave and get super frustrated, like, well, that doesn't, you know, it's not working. What's wrong with them? And it, it just creates all this unnecessary tension. It's like the very first thing we need to do is understand what language we're speaking in and let's meet there. To your point, that's better for everyone.
Manager. Allocator client, whomever the client may be. So that was, that's the biggest thing that I sort of gravitate to in this report, is that allocators believe qualitative is as important, if not more than quantitative. And managers are kind of the opposite. And that's something that I think personally and professionally, we all need to try to bridge that gap.
There was something else as I was preparing for this, I, I always get something new when I read this report and let me see if I can find it here. Oh yes. So the thing that kind of hit me today was, What determines the predictability of future returns? Hmm. And I'm, I'm sort of putting you on the spot here cause I didn't tell you I wanted to talk about this, but this was fascinating.
75% of the investors surveyed rate qualitative analysis as having higher predictability than quantitative. And can you talk to that? I mean, you've actually been in the sea of an allocator, so I think you have a really unique perspective, not just at CAIA, but also kind of being a practitioner. I think that would surprise a lot of managers that allocators look to qualitative for predictability of returns.
Aaron: Well, and I think it comes down to the simple notion of, you know, past performance doesn't predict future returns. And so, The quantitative numbers that you see on a page or a fact sheet or anything along those lines, those already have been realized. The other investors got those returns. And so it might get you in the door.
You might get a good understanding of how the strategies work historically, but if you're in that allocator seat, you're more concerned about, you know, where does the future lie? You know, how are you gonna continue to, to generate those returns, um, in the future and help my client achieve those different goals that they're trying to accomplish?
So I think that takes a much more qualitative approach. You're buying into the manager themselves, the team, how they implement their process, decision making, uh, processes. You know, is there one key person who's making all the decisions? Is it a team effort? Where do you guys specialize? I mean, there's a lot of qualitative, um, metrics that, uh, you should focus on.
To make that decision moving forward. The past, past performance is, is great and it can be helpful in forming questions for the future returns. But if you're simply relying on a historical screen, the research is shown and you can look at mutual funds, you can look at other strategies. Usually those, you know, top quartile managers.
Immediately afterwards, we'll go through a, a really rough period and hopefully, you know, hopefully you can stick through it. But, um, if you're simply relying on those numbers, it usually doesn't lead to a good outcome.
Stacy: And you know, when you say it, it makes total sense, right? I mean, as a manager being on that side of the table, you're like, well, of course my past returns don't predict anything.
And then it's so, so begs the question then why do you keep talking about that? Right? It's like, if you know it, because we do intuitively, then why are we so focused on it? Yeah, and I, I've heard a couple different like quotes that I love. You kind of said one there, which is like, past performance is other people's alpha, and I think that's so true.
I have another friend in the industry who, who says yesterday's performance is not for sale. I. That's a good one. It already happened. And so the key, I love how you said the key is to take those numbers and develop qualitative questions to uncover how did that experience come to be? Where's the repeatability that led to that?
And or if there are anomalies in those numbers, good or bad. Mm-hmm. Let's talk about that and let's explore that. And I don't think managers are ready for those types of questions the way they need to be.
Aaron: And I think that, you know, the, the past returns can lead to good discussions on their process. So, you know, you can look at a ruling tenure number, for example, and it's like, well, great, you know, that doesn't tell me much about what happened over those 10 years.
That you were managing this portfolio. So using the numbers as an allocator is helpful for me to ask a follow up question of, well, can you talk about, you know, 2008, or you can you talk about 2013 when interest rates skyrocketed. How did you position your portfolio, how did you think about risk exposure within that context?
And can I take some of those nuggets and use that as a preview for what future performance might look like in a different environment? Yeah. Um, so I, I think it both matter, but. Yeah, I love the, you know, the past performance is not for sale. It's, it's all the future. That's
Stacy: it. Right? It's so true. Other people's alpha, that's, that's not available to you.
I told you there was a place in the report where I, I literally have written in my notes, Aaron, question mark, and I said, I wasn't gonna tell you. I'm gonna read you what it says. Okay. And I, I think this is you, maybe not. One co-author of this report, a former investor with active due diligence experience, remembers the mantra that investors want to know whether a manager is smart, different, and careful.
Is that you? It was not me.
Aaron: Oh my gosh. It was.
Stacy: I know you.
Aaron: I know. You might have to remove this stuff. There's
Stacy: another, I'm not removing it. Cause this is where you're, when you're wrong, you own it. So there's another allocator in Theia Mix.
Aaron: I think the person who wrote that is a colleague. He's, he's no longer with CAIA, but his name is, uh, Keith Black, and he was one of the co-authors of, of the report for this, this questionnaire.
And I, I distinctly remember him telling that story on, on a webinar. I wish I could take credit, but that's, uh, that's all Keith.
Stacy: Well also I love that you have so many former allocators in the mix. I think it really kind of speaks to a differentiator, if you will. About the people there because it gives you a really unique perspective.
And I like that mantra of smart different and
Aaron: careful. You know, that was his background on the, on the consulting side and uh, did a lot of due diligence on a lot of managers and that was kind of his mantra as he was going into that process. But I'll, I'll have to tell that I love it. Uh, you mentioned give
Stacy: him a high five.
Give him a high five for me. That's great. Cause I like that section a lot. And he kind of unpacked it. He actually even used narrative there. You know, he said something like, if a manager is not different as defined by their philosophy or narrative description of their style, then the performance is not viewed as unique.
And I think it speaks to storytelling again, in a different way. Here we're really focused on backstory and sort of the journey that people go on just as, as people, because there are people behind the portfolios. But there are so many stories we tell in our day-to-day lives, in our day-to-day professional lives, and certainly as managers, but that narrative around your edge and what makes you different, I, I wanna explore that a little bit.
Because to me, it's one of the biggest challenges that asset managers have. You know, when you ask somebody what makes you different, they either struggle to know, like they haven't done the work to know what makes them different, or they're just simply afraid to say it like they know, but they're afraid that the allocator won't like it.
So they don't say it. So they kind of say, well, everyone else sort of says differentiators like this, so I'm gonna have some flavor of that. And you're like, but that's not uniquely different. How does that sit for you, uh, in all your roles as, as just somebody in the industry?
Aaron: It's a challenging question to answer, I think for a lot of managers because they're so in it, um, as part of their investment process, they may not even think about it necessarily in terms of what that differentiator is, but you know, and, and you can check off the list of all the different ways they can answer it.
It's. It's, um, you know, informational advantage. Uh, it could be processing of information, uh, faster than their peers. I mean, there's a lot of things that you can kind of point to. Maybe the other way to ask the question is, what about your strategy? Can I not replicate myself? Ooh. And, uh, that's a, that's a unique perspective to, to kind of.
From the manager research perspective, if I can decompose your returns and just bill it on my own, what's that? That error term or that excess return that comes from that strategy that's unique to you as a manager? That might be a, a more quantitative way of answering it, but I like that it does
Stacy: tell the story.
That does tell the story. So it's sort of like the unexplained alpha a little bit. Not, not that you wanna say it's the luck part, but it's sort of the part that the manager says, well, I know how that's happening. Yeah. But someone else might not know how that's happening. That's super interesting. You know, I, I think like I, I'm on the board of a, um, Of an investment boutique, a breakaway from a very well known value shop.
And you know, it's interesting because I think there's a delicate balance, and I wonder how you view this Sometimes I. People lean too much into the new and different thing and not enough of like, here's kind of the familiar, known thing. Hmm. And sometimes it's the opposite, right? So like this particular breakaway, obviously, you know, you go, you set up your own shop.
You do that because there's something philosophically or from a process perspective or, or just from a people culture perspective that you wanna do differently. So you leave because you want to do something different, and as you get in touch with that, it's a delicate balance of saying, well, I'm this, With a twist, basically like, and here are the twists.
And that to me is really where the conversation should start. You don't wanna just sort of throw out everything that's been done, cuz that's just not, not real, it's not known, it's not. You know, I loosely used the word proven, even though nothing's proven, like the repeatability might not be there. So you wanted to talk about, to your point, what are you doing to make it better?
Right? What are you doing to make it better, different? Really that different piece, is that more unique? And let's talk about that. I get it that you're a fundamental research. I get it that you're a value investment shop. I, I know what those things are, but, but show me the different parts and talk to me about those.
And at the same time, you wanna be careful not to say, well, that's all we are is this new twist. It's a delicate balance. It really is.
Aaron: Yeah. I would, I would agree. I mean, I think, um, you know, investors like familiar, uh, even though different is, is what leads to excess performance and performance. But if you can find a way to bridge that gap of, okay, there's, there's a process here that's very well known.
It's, it's backed by, you know, rigor and has been tried and trued. And tested, uh, over time, but we go above and beyond maybe to the, the replication comment, uh, that I made earlier. Well, this is pretty similar across all value managers for ex example, or a growth manager or, and so on. So here's the part that we add that leads to better performance, better risk adjusted returns.
And articulating that, I think is, is very well said. Um, and I think it depends on the strategy that you're pursuing as well. You know, if you're a quantitative manager and you're. You know, you're looking over, uh, you know, lots of data and, and you're, you're doing a lot of data science. It's part of your process.
You have to constantly be changing in order to yes, to keep up, because a lot of this stuff becomes more commoditized and, and well known. But, um, you know, if you're more of a fundamental, long only, uh, manager or. Maybe a long, short equity, uh, manager. I mean, there's a lot of things that are gonna be similar across the board, and so focusing on yes, we're this plus, uh, this extra thing as I think is
Stacy: important.
Yeah, me too. And I love the quant piece. I've had quant managers in the alt space say, well, like, story doesn't really matter for us. We're quant. And it's like, actually it still does. There are still stories. There's, it's the same. You still have a due diligence process that's run by people to your point, you still have to iterate, innovate, come up with what's going to keep you current and different, and have that edge.
So I still feel that the people component and the the narrative matters tremendously for a quant strategy.
Aaron: And it's, it's probably a very different story, um, yes, than the fun. I mean, the fundamental manager is gonna focus on the individual companies and they're doing these really deep dives, whereas quantitative managers, it's much more about.
Your model and what you're trying to accomplish within the strategy. You may not be getting into, you know, uh, individual securities cuz you own thousands of them. And so it's a different way of telling the story, but, uh, it is, it is important nonetheless. So, and especially with quant, which can be very challenging for people to understand relative to, well I understand, you know, apple and, and Facebook and Proctor and Gamble.
But with this quad strategy, it's like, oh my gosh. Like I've got a, I've got a whole new way of thinking about things and you need to break it down to me like I'm in fifth grade.
Stacy: Yeah. Oh, there we go. See, I'll rose lead back to fifth grade. You know, I wanna, so there were a couple things you hit on there that I wanna touch on.
One is, this actually goes back to the beginning of our conversation when you talked about just how the alt space has expanded from just hedge funds. To many other types of strategies. And you also sort of alluded to this democratization that's going on where it used to be that also was, you know, for a select few types of investors for many reasons.
But now you're seeing that change and. It reminds me of the, of the research you've done around the portfolio of the future and just kind of the need for expanding our knowledge around what's happening in the alt space. So I wanted to talk about that. I'm sure it's something you have a much deeper understanding of than, than I do.
Given the seat you're in, can you talk about what's happening
Aaron: there? Yeah, sure. And, and maybe I'll start with the portfolio for the future and then talk about what we're doing on Yeah. On the democratization front. So it was actually a year ago, and it, it's funny, I, so I gave a presentation a couple days ago on Portfolio for the Future for one of our chapters.
The timing of this piece couldn't have been any better. It was look no further than CAIA for your inside information. And in terms of what's going on in the market, the genesis of the piece was basically, uh, and the rationale behind it was, well, the future is not gonna look like the past. Uh, we're coming off of a, you know, 10 to 12 year period where.
Interest rates were at record lows. Inflation was low and and manageable. Public markets dominated everything. Uh, large growth in particular dominated everything. You really didn't need diversification for the, you know, 2000 tens essentially. And our view was, well, a lot of this isn't sustainable. And so how do you think about putting together a diversified portfolio when interest rates go up and inflation goes up and.
You know, public markets are no longer the dominating factor and things like capital formation, moving more into to the venture and, and buyout world and private equity. And there's a lot of these different things, central bank stimulus, uh, you know, really reversing, uh, the different trends that are being more accommodative.
Uh, and you know, this was in March of last year, and of course as soon as we released this, you know, a lot of this stuff reverses. Sometimes it's better to be lucky than good. Um, in terms of. Our crystal ball. But what we're trying to do, um, with this piece was basically, here's a guide path to think about allocation and portfolio construction in an environment when rates are normalized and inflation is not low and a little bit more volatile and you're taking on more illiquidity in that portfolio.
And so that was, that was kind of, you know, the looking forward view of, of what we were trying to accomplish. And the fact that the opportunity set is so wide, And widely available to you. Um, you know, your tool set is, is much broader in terms of what you can select. So that's, that's portfolio of the future.
And uh, I dunno if you have a, a
Stacy: question on that, but Yeah. Yeah. So I, it's funny cuz when you first mentioned it to me, I instantly went to, oh, this is like gonna be a rewrite of 60 40 and that's not exactly what it is. That's right. Or is
Aaron: it? No. So, um, it, it's funny, we, you know, there's a lot of articles out there and, and it's funny to see kind of the change in tune in 2022 versus 2023.
So a lot of articles in 22 were, you know, death of 60 40. You know, you've gotta diversify. You need other things besides, you know, stocks and bonds and, you know, worst year and decades for a 60 40 portfolio. Fast forward to this year. We have similar articles from the same news outlets and, and media that are saying the exact opposite.
Oh, 60 40 has the best start to a year and, you know, X amount of years. And so I think this, this fascination with, with a 60 40 is a little bit misguided in terms of is it good or is it bad? From our perspective, 60 40 is just an allocation, um, and it's one of one of many. And so I think the more important thing is what is your client trying to accomplish?
What are you trying to accomplish on behalf of your client and what's the most appropriate allocation to do? So if 60 40 is that allocation, great, you know, that's, that's a good mix for you. But there's also these other things out there that you can use, um, as a tool to. Achieve those different objectives.
And so when you look at the portfolio for the future report that we wrote, it's less about well abandon the 60 40 and, you know, have a 50 30 20 allocation or a, you know, 60, 20, 20 allocation and more about how do you think about that broader tool set and incorporating some of these other assets, um, into that, that broader tool set into your allocation.
So it's a little bit of a nuance, but I think it's an important one. Don't focus on the allocation, focus on the outcomes and the allocation will will be secondary.
Stacy: And not only that, focus on the end client. Exactly. It goes back to that. It goes back to that because, and I love the phrase guide path. I think that's really interesting when you think about the experience you're creating.
The goal that you've set out, you know, this outcome, those subtle tweaks, those nuances though in the, in the narratives you write can have a very big impact, right? It could be the unlock that someone needs to go, oh yeah, that hits for me. I get it. So I appreciate you sharing that. I, I don't know if I'm gonna geek out on Portfolio of the Future the way that I do on this little gem that I carry around with me, Aaron, but I will read it and I can't wait to explore that more.
Every time you, you riff, it takes me back to this idea that if we put ourselves in the shoes of whomever we're serving and instead of trying to be better or best, we really try to be different and compliment. I mean, even in the portfolio of the future. Conversation we just had. That's really what you're talking about.
Mm-hmm. It's that you need things that will compliment each other to get you somewhere. Yes. It's not necessarily about, this is better, it's not. This allocation mix is better than 60 40. It's that what's in it. That compliments each other to get you where you're trying to go. And I mean, that's just, that's like the story arc of everything.
That transformation of you started here, you wanna end here and what is the transformation that happens in the middle? So that differentiation thread is just a, a really strong one for me in our conversation. You know, you
Aaron: start with the client and what the client is trying to accomplish, everything else will work itself out because you've got that north star that's guiding you instead of what's the appropriate percentage in this versus this.
It's what's the client trying to accomplish and let's, let's figure the rest out.
Stacy: I love that advice. I think that's great advice for all of us, no matter what industry we're in, but especially in this one. Okay, so I wanna end. With a version of PRUs questionnaire because doesn't every investment podcast end like that?
I don't know. Maybe they should. So the idea of this, I'm, I date myself every time, but it's, it's from James Lipton inside the Actor's studio where he would interview actors and end with this, these questions that just. Allow us to get to know you a little bit more. And I've had the, the pleasure of being able to do that.
And, and it, it, it changes how it changes the perspective we have on each other as people. And so I appreciate you taking a little deep dive here on the personal side. So, first question, hopefully an easy one, we're gonna ease into this. What book inspires you?
Aaron: So I, and I was giving a little bit of thought to this.
Um, so I, there's two, one, uh, maybe just more of an interest. Uh, I love, uh, ready Player one. Uh, I don't know if you've seen that movie or read that book. No. What is that? Okay. Well, the listeners will have to, to recommend that to you or, or, okay. Ready Player one. Ready Player one. It's a great sci-fi. Uh, you know, there's a lot of like eighties culture in there.
It's, it's fun. Oh,
Stacy: it's fun. Okay. All right. I love it.
Aaron: So that's a fun one. Okay. In terms of, of a book that probably inspires me is, um, I don't know if you've read Fact by Hans Roling. He basically just takes a look at society over the past couple of centuries. And you know, I think in the short term we tend to focus a lot on, you know, the news cycle and, and what's going on in, in a daily day-to-day basis and what's going wrong with the world.
And he kind of takes a step back and says, look where we were 500 years ago versus 400, 300, 100 years ago. And we made a lot of progress as, uh, as a civilization and. You know, things like child hunger and, uh, starvation and, and all these things that may have been more common a couple centuries ago, that's all gone.
And so we, we've seen this vast, uh, improvement in, uh, society. And I think it's just a nice perspective to see how far we've come as a people. And, uh, it's mu it's a much more optimistic view of. Human rights if you'll
Stacy: Okay. I love, so hence the inspiration. That's great. I, I don't know either of those books, so that's always fun for me.
And I'm super curious about this Ready Player one too. So now we're going into what place inspires you? What's your happy place? Yeah.
Aaron: This, this is probably a boring answer, but because I, I do travel quite a bit. I'm, I'm obviously up here at a, in our America's, uh, office. Being home is nice.
Stacy: I listen, that's my happy place.
I 100% get that. And you're not alone. A lot of people on this podcast actually have said some version of that. I think, you know, it travels glamorous when you're not the one doing it. Yeah, it's, it's, it's, it's a grind. So I get that and I am here for it. Okay. Let's take a turn into, uh, into the musical realm.
Okay. So let's pretend that you are going to be walking out onto a stage in front of, You know, a thousand of your thousands will go make it even bigger than my normal thousands true fans. Thousands of true fans there. For you, what's the song they play? What's your walkout anthem, your hype song that plays as you take that stage?
This
Aaron: is a tough question for me cuz I, I love music, but a lot of the music that I like is, uh, I'd say more chill. So, so I don't know. I don't know if I have a good answer. You don't have a hype song. Maybe I'll throw this out. There's a band, uh, called Turnstile. They're kind of a post-punk band. They came out with an album a couple years ago that I really like.
Uh, and maybe the song, uh, from that album would be, uh, mystery. It's
Stacy: just, okay. It's, it's aggressive. It's good. It's aggressive. That's, Hey, and, and so let's, well, we're gonna take a twist then, which is, since you more prefer the chill music, so you're sitting at home, you're, you're in your happy place. What song do you put on for Chill?
Aaron: That's a good question. Yeah. So I love, uh, I love Manchester Orchestra as a band. I don't know if you've, you've don't across them.
Stacy: Uh, okay. I have like a list now. Yeah, yeah. So I've got, this is good. This is why we do this.
Aaron: So, Manchester Orchestra, uh, put out an album a couple of years ago that I, I love. Um, so there's a song on there called Bedhead.
That I, I really like. So that might be my, my chill walk-in Anthem, if you will
Stacy: walk in. That's perfect. I love that. Okay, here we go. What profession, other than your own, would you like to attempt?
Aaron: I don't know, may, maybe in a different life I'd stick with the architect or I was wondering if he'd say that.
Or even the actuarial science. I, I don't know. You know, the actuarial science profession has always been interesting to me, but, uh, those people are far smarter than I am. I don't know if I could make it, but, uh, maybe one of those, kind of going back to that, you know, or maybe something more. And that, that would probably be, let's go back to those two.
Stacy: That's, we'll go back to those two. Maybe you'd be in the music biz.
Aaron: We didn't go as far back as my young childhood, but I did want to be a music producer, so maybe let's,
Stacy: let's use that. Maybe that's it. Maybe that's it. Yeah. I remember in our, in our podcast in, am I right that there was some sort of a keyboard in your background?
Aaron: There was, yeah. Yes, I've played piano for a very long time and yeah, anything piano related is, is awesome.
Stacy: Okay, now let's go different direction on profession, which is what profession would you not like to do? They're
Aaron: awesome and, and they do it far better than I could. I could not work in a hospital.
Yeah. I mean, good for, good for them, but I don't know if I can handle it.
Stacy: Yeah, it's a different type of strength, isn't it? Okay. And last one, what do you want people to say about you after you've retired or left the industry?
Aaron: You know, obviously there's, there's the element of, you know, hopefully I continue to conduct myself ethically.
And so there's an element of, you know, quitting the client first and, uh, being a fiduciary. And I hope that that rings true. Um, after I've left, I think maybe more on the, the lighthearted side, you know, I hope people, uh, appreciate that. I try to make this fun. You know, this, this industry and to your point at the very beginning is very numerical and quantitative.
And so I try to bring a little bit of, uh, Levity to the situation and you know, let's have fun with, uh, what we're doing here cuz if we're not having fun, what's the point? I mean,
Stacy: if that's not the perfect mic drop place to end this thing, Aaron, I don't know what is so well said my friend. Thank you for being here.
For people who are interested in these research reports and just following along on what CAIA is doing, what's the best place for them to do that?
Aaron: We're very active on social media, so Twitter and LinkedIn, um, are the two primary places you could follow us. Um, I personally, I'm very active on both as well, so, uh, I can drop those links to you, Stacy, but, uh, follow us and, uh, yeah, we've got a lot of thought leadership and we're, we're out there quite
Stacy: a bit.
That's great. Thanks for everything you do and everything CAIA does, Aaron, and for taking the time today to be with us.
Aaron: Thanks for having me,
Stacy: Stacy. Appreciate it. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The information is not an offer, solicitation, or recommendation of any of the funds, services, or products, or to adopt any investment strategy.
Investment values may fluctuate and past performance is not a guide to future performance. All opinions expressed by guests on the show are solely their own opinion and do not necessarily reflect those at their firm. Manager's appearance on the show does not constitute an endorsement by Stacey Havener or Havener Capital Partners.
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