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Managing Risk Through Long-Short ETFs · Views from 6,230

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  Ryan Nauman Host Adjusted for Risk: Welcome everyone to Zephyr's Adjusted for Risk podcast from the shores of Lake Tahoe.
• 0:23
  Ryan Nauman Host Adjusted for Risk: I'm Ryan Nauman, the market strategist here at Zephyr.
• 0:27
  Ryan Nauman Host Adjusted for Risk: Risk management is arguably one of the most important jobs for a financial advisor, but it can often be an afterthought when markets continue to rip higher.
• 0:38
  Ryan Nauman Host Adjusted for Risk: I have on an industry expert to discuss the most important aspects of risk management and some investment strategies to consider when implementing risk management strategies.
• 0:52
  Ryan Nauman Host Adjusted for Risk: But first, this episode is sponsored by the award-winning Zephyr, which helps investment professionals make more informed investment decisions on behalf of their clients.
• 1:03
  Ryan Nauman Host Adjusted for Risk: All right, enough from me.
• 1:05
  Ryan Nauman Host Adjusted for Risk: I have already talked enough.
• 1:07
  Ryan Nauman Host Adjusted for Risk: Let's go ahead and bring on the star of the show.
• 1:10
  Ryan Nauman Host Adjusted for Risk: I'd like to give a very warm welcome to Wayne Pinello.
• 1:14
  Ryan Nauman Host Adjusted for Risk: Wayne is the founder, president, and CEO of Next Gen EMP.
• 1:22
  Ryan Nauman Host Adjusted for Risk: Wayne, thank you so much for coming on the show.
• 1:24
  Ryan Nauman Host Adjusted for Risk: It's an honor to have you on.
• 1:26
  Ryan Nauman Host Adjusted for Risk: Really excited about this conversation.
• 1:29
  Ryan Nauman Host Adjusted for Risk: I'm a big proponent of risk management, hence the name of the podcast, so really like talking about risk and risk management strategies.
• 1:38
  Ryan Nauman Host Adjusted for Risk: Thank you for coming on.
• 1:40
  Ryan Nauman Host Adjusted for Risk: Can you please tell us a little bit more about yourself and Next Gen EMP?
• 1:46
  Wayne Penello Founder, President, & CEO NextGenEMP: Well I agree with you.
• 1:47
  Wayne Penello Founder, President, & CEO NextGenEMP: Risk management is a skill set that, Isn't taught, generally speaking, and it's poorly understood at best.
• 1:55
  Wayne Penello Founder, President, & CEO NextGenEMP: I've focused on it my entire career.
• 1:57
  Wayne Penello Founder, President, & CEO NextGenEMP: I, I think, you know, I came into the equities industry about six, seven years ago.
• 2:04
  Wayne Penello Founder, President, & CEO NextGenEMP: Prior to that, I was on the commodity side of the business.
• 2:07
  Wayne Penello Founder, President, & CEO NextGenEMP: I was a floor trader on the New York Mercantile Exchange for 10 years.
• 2:10
  Wayne Penello Founder, President, & CEO NextGenEMP: I was ring chairman of options.
• 2:12
  Wayne Penello Founder, President, & CEO NextGenEMP: Being a market maker in options, you have incredibly complex portfolio, both vertically in terms of all the strike prices you've got, but also horizontally in terms of the timeframe at which you put them out.
• 2:24
  Wayne Penello Founder, President, & CEO NextGenEMP: And learning how to balance that and understanding the nuances and the strengths of the Black-Scholes and Cox-Rubinstein models and using them to your advantage were very important to my success.
• 2:37
  Wayne Penello Founder, President, & CEO NextGenEMP: I, I left the floor, started to advise because I was on the Mercantile Exchange, specialized in oil and gas trading, started to advise oil and gas companies on how to manage their commodity price risk as an employee, and
• 2:52
  Wayne Penello Founder, President, & CEO NextGenEMP: then eventually moved out and started a, a consultancy, a, a hedge consultancy business.
• 2:58
  Wayne Penello Founder, President, & CEO NextGenEMP: Over that 20 years that I ran that business, we advised over 300 companies on how to manage commodity price risk.
• 3:06
  Wayne Penello Founder, President, & CEO NextGenEMP: We converted risk into budgetary terms, and this is something that will come up later in this call.
• 3:11
  Wayne Penello Founder, President, & CEO NextGenEMP: But y- you...
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  Wayne Penello Founder, President, & CEO NextGenEMP: If I tell you that something has a standard deviation of one or two or three, that doesn't help you.
• 3:18
  Wayne Penello Founder, President, & CEO NextGenEMP: You need to understand risk in the terms that are the metrics of your success.
• 3:24
  Wayne Penello Founder, President, & CEO NextGenEMP: And so I converted commodity price risk into budgetary terms.
• 3:28
  Wayne Penello Founder, President, & CEO NextGenEMP: So whether the firm was focused on pure cash flow or debt-to-EBITDA ratios, we could express risk at a ninety-five percent confidence level for them so they knew how much risk they had and how much risk they needed to
• 3:43
  Wayne Penello Founder, President, & CEO NextGenEMP: take off the table to get into their comfort zone.
• 3:46
  Wayne Penello Founder, President, & CEO NextGenEMP: Forbes found out that I'd built this product and had patented it and asked me to write a book, which you may be able to see behind me here, Risk Is An Asset.
• 3:56
  Wayne Penello Founder, President, & CEO NextGenEMP: And there I disclosed the, the process that we used on the commodity side.
• 4:01
  Wayne Penello Founder, President, & CEO NextGenEMP: With that, one of my competitors decided that he needed to own that, and so he bought me out, and that was my, if you will, pushed off the diving board into equity trading.
• 4:13
  Wayne Penello Founder, President, & CEO NextGenEMP: And and so I started looking what managers do and account advisors do in the equity space, and they're very good at diversifying risk, but few are prepared to manage it.
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  Wayne Penello Founder, President, & CEO NextGenEMP: And so I, for the last six years, set out to come up with a better process and built an algorithm that helps us manage risk, to cut risk to less than half of what you would expect to have
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  Wayne Penello Founder, President, & CEO NextGenEMP: if you own the S&P 500.
• 4:37
  Wayne Penello Founder, President, & CEO NextGenEMP: And and to match or outperform it.
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  Wayne Penello Founder, President, & CEO NextGenEMP: Just to put that in real terms, if you own the S&P 500, you have a 95% confidence that you will not be down more than 25%, but that means you have a 5% confidence you will be down more
• 4:50
  Wayne Penello Founder, President, & CEO NextGenEMP: than 25%.
• 4:51
  Wayne Penello Founder, President, & CEO NextGenEMP: With risk management, we believe we've gotten that down to a 95% confidence you will not be down more than 10%.
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  Wayne Penello Founder, President, & CEO NextGenEMP: Why is that important?
• 5:01
  Wayne Penello Founder, President, & CEO NextGenEMP: Because now you can allocate more money to equities, which are generating 10, 12% returns, and less money to bonds and other assets that are generating lower returns
• 5:12
  Ryan: Yeah, Wayne, that's really interesting.
• 5:14
  Ryan: I love that you mentioned, I found it interesting you mentioned financial advisors are good at diversifying risk, but not managing risk.
• 5:22
  Ryan: So that's really interesting.
• 5:23
  Ryan: I think we'll get into that more.
• 5:26
  Ryan: So how do you view investment risk?
• 5:29
  Ryan: Some people view investment risk, you mentioned like standard deviations or volatility of returns.
• 5:36
  Ryan: Some more recently are talking about drawdown risk or the risk of losing money.
• 5:42
  Ryan: That's how I view risk.
• 5:44
  Ryan: Then there's systematic risk, right?
• 5:46
  Ryan: So how do you view investment risk?
• 5:53
  Wayne: It's more than just volatility by itself.
• 5:55
  Wayne: It's, it's, if you will, it's relative volatility.
• 6:00
  Wayne: How, how much volatility can I stand?
• 6:02
  Wayne: I mean, you, you, you can't make outsized returns without taking additional risk, but that doesn't mean that you have to take it on face value.
• 6:10
  Wayne: You can manage it.
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  Wayne: So you know, we can...
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  Wayne: if we want, you know, for example take a sixty-forty equity bond portfolio.
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  Wayne: If we assume the bond has zero risk and you put sixty percent into equities, which I s- just said a moment ago, has a, has a ninety-five percent confidence that you won't have more than twenty-five percent risk.
• 6:30
  Wayne: Well, that sixty-forty split gets you down to a ninety-five percent confidence that you won't have fifteen percent risk.
• 6:35
  Wayne: That's effective on managing risk, but not effective on achieving portfolio objectives, which is I'd like to make equity-style returns on the entire amount of capital that I've saved.
• 6:47
  Wayne: So what we really wanna focus on is controlling that downside risk.
• 6:53
  Wayne: And the first place I would recommend investors do, and, and I'll, I'll put this out there now, you c- you can reach out to me after this.
• 7:01
  Wayne: I've built a spreadsheet that I'm happy to share with anybody, that you just drop in the stock symbol, and it will track the high watermark of that stock, and then it, it will also identify all of the drawdowns.
• 7:13
  Wayne: And you can do this on daily, weekly, or monthly data, you know.
• 7:16
  Wayne: But it allows you to see what kind of drawdowns, because you may get the idea that I love this stock and I wanna own it, but it's currently trading at its highs.
• 7:27
  Wayne: And, and if you know that it might have a fifty percent pullback, well, you certainly should buy some of it because I-- we don't know if it's gonna go higher or lower tomorrow.
• 7:36
  Wayne: But, but knowing that you could lose fifty percent of your money, you're probably not gonna go all in.
• 7:40
  Wayne: You're probably gonna reduce that and look for opportunities to have drawdowns so that the moment it gives you the opportunity to buy with better location at a lower price, y- you're in a position to do that and have
• 7:52
  Wayne: the confidence to do that.
• 7:53
  Wayne: Because, for example, back to the twenty-five percent in the S&P.
• 7:57
  Wayne: If the S&P is down ten percent when you're making your entry into the market, well, now you only have fifteen percent risk, right?
• 8:05
  Wayne: Because it's gonna fall twenty-five percent from the high, not twenty-five percent from your entry point.
• 8:11
  Wayne: And so we want to manage...
• 8:14
  Wayne: You've g- you've got to g- make good decisions about what to own, but you've also got to understand the volatility of the beast, how that relates to your tolerance for risk, and use that information to get yourself better
• 8:25
  Wayne: entry location.
• 8:28
  Ryan: That's a very good point.
• 8:29
  Ryan: And, at Zephyr we use the drawdown graph a lot.
• 8:33
  Ryan: think there's a lot of information there, and it's interesting that you use it in terms of maybe, is this a good time to buy or a good time to sell?
• 8:42
  Ryan: Yeah I love that way of using that graph to make investment decisions.
• 8:48
  Ryan: Very important.
• 8:48
  Ryan: Do
• 8:49
  Wayne: And l-l-let me rephrase that s-slightly.
• 8:51
  Wayne: So strategically, you decide what you want to own, but then tactically you use that graph to help you make better entry and exit decisions.
• 9:00
  Wayne: And you have to put the combination together
• 9:04
  Ryan: Yeah, like a lot of things in this industry, you can't just it together in a silo, right?
• 9:09
  Ryan: You gotta put all the data, all the information together to make, better, more informed investment decisions.
• 9:17
  Wayne: Well, you know what, what you have, if, if you don't mind, I'm sorry to interrupt you, but but buy, hold, and what I like to call hope.
• 9:24
  Wayne: Buy, hold, and hope works because the market in itself has three tailwinds.
• 9:30
  Wayne: All right?
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  Wayne: And I, I like to call them the three wins.
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  Wayne: You, you have increased population, you have inflation, and you have innovation.
• 9:39
  Wayne: All of these things drive company prices higher, right?
• 9:42
  Wayne: So even when you enter at a, a bad moment, you know, the, the industry standard is, well, just hang in there because it will come back.
• 9:51
  Wayne: And it will come back because of those three wins.
• 9:55
  Wayne: And what we're trying to do in this conversation, Ryan, between you and I, is to help people say you want to lean on that.
• 10:01
  Wayne: That is a very important part of equity investing.
• 10:05
  Wayne: I mean, one of the reasons real estate keeps going is because they're not making any more of it, and you have more people that want it.
• 10:10
  Wayne: So equities are kind of the same way.
• 10:13
  Wayne: The advantage that you have in equities is that there's much less slippage, it's...
• 10:18
  Wayne: and they're much more liquid.
• 10:20
  Wayne: So you have access to your money, so when you have those personal crises in your life, you know that the money that you need is there when you need it, instead of, "Well, I, I need to sell that
• 10:30
  Wayne: rental property that I bought, but it's gonna take me six months to find a buyer, and I hope I like the price."
• 10:37
  Ryan: Very good point.
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  Ryan: And like you said, when you look at...
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  Ryan: They're very popular, those long-term graphs.
• 10:44
  Ryan: Again, we're talking about graphs.
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  Ryan: That's a P-500.
• 10:47
  Ryan: It just continues to go up and to the right, right?
• 10:51
  Ryan: And like you said, those three primary drivers are powerful.
• 10:56
  Ryan: So you think financial advisors need to rethink how they view investment risks?
• 11:02
  Ryan: Like you said, we talk a lot.
• 11:03
  Ryan: Historically, I think people are understanding the drawbacks of standard deviation and volatility.
• 11:10
  Ryan: still use it just because it's it's simple.
• 11:13
  Ryan: But do you think it's time for them to rethink how they view investment risk and take more of a broader holistic pic- picture of it?
• 11:23
  Wayne: Well if-- financial advisors have a very difficult job.
• 11:27
  Wayne: One, because each client has a specific net set of needs and risk tolerances.
• 11:33
  Wayne: That, that complicates the job just to begin with.
• 11:35
  Wayne: But during periods of strong bull markets like the one that we've recently had, you know, it's easy to become complacent and just say, "Well, I'll just wait this one out, and I hope I'm buying at a good time."
• 11:46
  Wayne: I'm a, I'm a...
• 11:46
  Wayne: You know, I mean, just, just take the, the Tesla IPO, right?
• 11:50
  Wayne: It, it immediately jumps from one thirty-five to one seventy, and in a couple days it gets to two ten.
• 11:55
  Wayne: Then yesterday, it dropped down into the one forties.
• 11:57
  Wayne: It's probably trading around one sixty now.
• 12:00
  Wayne: It's probably a great stock to own.
• 12:02
  Wayne: The guy is a genius, and and he, he owns something like two-thirds of all the satellites in space.
• 12:08
  Wayne: I mean, if-- A friend of mine calls Elon Musk an alien from the future.
• 12:12
  Wayne: I think that's a pretty good description, you know.
• 12:16
  Wayne: But what you-- what, what...
• 12:18
  Wayne: Where I'd like to help RIAs is that, yes, you need to take risk management more seriously, but you're not really trained to do that.
• 12:25
  Wayne: And in all fairness, I'm not trained to do what you do.
• 12:28
  Wayne: I don't-- I, I, I just can't do what you do.
• 12:31
  Wayne: What I'm trying to do is provide you a, a single resource that can be the foundation of, of providing a stable growth environment for your clients' investment dollars.
• 12:43
  Wayne: And then there are tax efficiencies and special opportunities that you may identify that you want your customers in, some more than others because they have a higher or lower tolerance for risk.
• 12:57
  Wayne: That's your job, is to find this.
• 13:00
  Wayne: My job is to come up with a portfolio that you can have complete confidence in, that it's being managed by a team of experts, and with a focus on risk management without compromising the kinds of returns investors deserve.
• 13:16
  Ryan: Wayne, that, that's spot on, and such a good way of putting it.
• 13:20
  Ryan: Like you said, financial advisors, they have a very hard job.
• 13:23
  Ryan: They have to manage so many different aspects of their clients' affairs, and, at this point too, it's getting more competitive to outsource some of this risk management, outsource some of this investment management, portfolio management pieces so they can
• 13:41
  Ryan: maybe focus on more important things like building relationships and building their assets under management.
• 13:50
  Ryan: So speaking of that, you mentioned, a lot of people, not just financial advisors in this industry, they're really good at diversifying risk.
• 14:00
  Ryan: like you said, they're not as good at managing risk.
• 14:04
  Ryan: What is the most important aspect to really successfully managing risk in an investment portfolio versus, say, diversifying it?
• 14:14
  Wayne: You have to develop a disciplined, repeatable process that allows you to adjust to regime change to begin with.
• 14:23
  Wayne: You know, strong markets versus weak markets or even bearish markets.
• 14:27
  Wayne: It's you know, it's how do you manage the risk when, when, when the market isn't Doing well.
• 14:33
  Wayne: And, and you know, it's people would like to think that, that, "Oh, I can do risk on, risk off.
• 14:37
  Wayne: If I'm, I'm not comfortable with the market, I'm gonna lower-- increase my cash position by lowering my equity exposure."
• 14:44
  Wayne: Well, I think any one of you listening to this, you look in the mirror, you'll agree with me, your timing sucks.
• 14:50
  Wayne: And I'm-- I say it with complete confidence 'cause my timing sucks.
• 14:53
  Wayne: All right?
• 14:54
  Wayne: You can't time the market.
• 14:55
  Wayne: Charles Ellis, who was on the chairman of the Yale Endowment Committee and wrote a book called Winning the Loser's Game, one of my favorite books.
• 15:02
  Wayne: There's a short paragraph in on page, I believe, twenty-five, maybe twenty-three, but twenty-five.
• 15:06
  Wayne: It says, "If I bought and held the S&P for ten years, my dollar grew by five and a half dollars.
• 15:12
  Wayne: But if I miss the best ninety days," that's ninety out of two thousand five hundred plus days.
• 15:18
  Wayne: "Miss the best ninety days, my dollar shrank by twenty-two cents."
• 15:22
  Wayne: You can't miss those days.
• 15:25
  Wayne: But he also went on to say that, "If I miss the worst ninety days, my dollar grew by forty-three dollars."
• 15:34
  Wayne: Not, not five and a half, forty-three dollars.
• 15:37
  Wayne: And so I looked at this and s- and said to myself, "Well, he's clearly identified the low-hanging fruit.
• 15:43
  Wayne: C-characterizing this as a timing problem, which he's clearly proved you can't time the market."
• 15:49
  Wayne: And, and I decided this is an allocation problem.
• 15:52
  Wayne: How do I allocate my funds more aggressively so that I can take advantage of the portions of the market that are weak in a way that protects me on the downside without compromising my ability to earn on the
• 16:07
  Wayne: upside?
• 16:08
  Wayne: And so you can imagine that if, if this was a horse race and you knew which horses were gonna be in the front and back half of the pack, and so you apply 100% of your capital to the
• 16:19
  Wayne: horses you think are gonna be in the front half of the pack.
• 16:21
  Wayne: And then on a reduced basis, and we use a fifty percent ratio, you, you actually sell the, the bets on the horses that are in the back half of the pack.
• 16:32
  Wayne: Well, every once in a while, one of those horses is gonna surprise you, and that bet is gonna cost you money.
• 16:37
  Wayne: But you're probably gonna be very right about all the ones that you already own.
• 16:41
  Wayne: And if for no other reason, you've got the three tailwinds, and you bought them because they have been performing well.
• 16:47
  Wayne: So when you put that package together, now all of a sudden, you- you've got something that is diversified, so it's protecting you against idiosyncratic or company risk.
• 16:56
  Wayne: You have allocated across industry sectors based on your p- view of what will be strong and what won't be.
• 17:04
  Wayne: So now you're managing the systematic risk, but those shorts is the only way you can manage the systemic risk.
• 17:11
  Wayne: And, and I, I appreciate that this is very difficult for the individual investor to do, but inside an ETF wrapper, it becomes an asset in a, in a very big way.
• 17:25
  Ryan: Yeah, that's interesting, Wayne, and I am a firm believer, and I'm glad you brought it up, the importance of asset allocation versus market timing.
• 17:33
  Ryan: I agree with you.
• 17:34
  Ryan: I'm the worst timer in every part of...
• 17:37
  Ryan: Not just investment management, right?
• 17:39
  Ryan: I don't even attempt, I don't look at markets, very often, at least once a week maybe.
• 17:45
  Ryan: It's just one of those things where I'm not gonna win by market timing.
• 17:50
  Ryan: And there's studies show that asset allocation, makes up, 95 to 90, pr-
• 17:57
  Wayne: Yes
• 17:59
  Ryan: of the returns of a portfolio, right?
• 18:01
  Ryan: So it just shows you how important asset allocation is for an investment portfolio.
• 18:07
  Ryan: I'm glad you brought that up too about shorting.
• 18:10
  Ryan: Like you said, it's hard for financial advisors to gain access to that strategy.
• 18:13
  Ryan: So can you provide us with, a little bit more information on that and one investment strategy that you feel can help manage risk?
• 18:22
  Wayne: Well, lo-long short strategy is the only way to go.
• 18:26
  Wayne: It's, Because if you buy any of these buffered funds, the first problem you have with those buffered funds is some of the big Wall Street houses, I don't wanna throw anybody under the bus, but huge names that have
• 18:41
  Wayne: very bright financial engineers and market makers, they put this package together, that they deliver it to a secondary source that finally delivers it to you.
• 18:52
  Wayne: Each of those is taking a slice of the pie that, believe it or not, winds up being about six percent of the returns.
• 18:58
  Wayne: So by the time you get it to your customer, he's already taken a six percent hickey just to have this protection.
• 19:06
  Wayne: And, and I think if you were to do the analysis and said, rather, rather than take this risk that, that is pay these guys to give me this package, if, if I were to rightsize my portfolio so that
• 19:22
  Wayne: I get the risk to the same level, you'd, you'd, you'd find that at the, at the very least you'll do as well and, and more, and all likely you'll probably do better.
• 19:30
  Wayne: I'm not a big fan of these things.
• 19:32
  Wayne: And, and as a one-time ring chairman of options on the New York Mercantile Exchange, I was the guy that at the end of the day would sit down and settle all of the options.
• 19:42
  Wayne: And and this was back in the '80s, so we didn't have laptop computers.
• 19:45
  Wayne: You used the God-given talents to do that math.
• 19:50
  Wayne: And and so I love to take these, these packages apart and say, "Okay, if I were to recreate that, what would I do?"
• 19:56
  Wayne: And and the, the...
• 19:57
  Wayne: It's not very complicated.
• 19:59
  Wayne: It's basically relies on algebra.
• 20:01
  Wayne: So the benefit of a long short program is that you're eliminating people that you really don't need to pay to do this, but as an individual, it's very hard for you to do that.
• 20:13
  Wayne: And And the industry makes it hard because if you in your individual account go short something, you get the cash from those short sales, it sits in your account.
• 20:24
  Wayne: You can see it, but you can't use it, and you get no credit for it.
• 20:27
  Wayne: When we do this as an ETF, we bas-basically get broker-dealer status.
• 20:31
  Wayne: So yes, the cash sits in our account, and we're making about three and a half percent interest on that money, which goes directly to the investors.
• 20:38
  Wayne: So in an ETF wrapper, now we can go short and, and have that, that benefit of that short from an interest rate perspective go completely to, to the investors and offset our management fees and stuff like that.
• 20:51
  Wayne: The other thing that it does is you've, you've got a team of people watching this, making all those decisions for you, which requires rebalancing and updating the portfolio and adjusting to regime change in the market.
• 21:06
  Wayne: If you did that, that's gonna trigger a taxable event.
• 21:08
  Wayne: When it's done inside an ETF wrapper, it doesn't, because we use 531 exchanges to harvest losses and defer gains.
• 21:17
  Wayne: So the holding period for an individual of an ETF, unlike a mutual fund, but in an ETF, the holding period for an ETF is when the investor bought it and when they sold it.
• 21:26
  Wayne: So it's much easier to get long-term capital gains treatment.
• 21:30
  Wayne: So you put that together with the protection that you're getting by having shorts in your portfolio, it's, it's a huge win for the individual investor.
• 21:40
  Wayne: And, and I might add, one of the things that RIAs have trouble with is every time I go to Exchange or one of these big conferences, RIAs generally don't wanna talk to anybody who's got less than a, a
• 21:52
  Wayne: million dollars to invest.
• 21:54
  Wayne: And I understand that scalability is impossible.
• 21:57
  Wayne: You can only have four or five hundred clients, and even that you can't service them all properly.
• 22:02
  Wayne: A package like my product, which is the ETF is EMPB, Efficient Market Portfolio Balanced.
• 22:10
  Wayne: But you, you can put somebody into that with as little as $35, 'cause that's what it's trading per share.
• 22:18
  Wayne: And so you're in a position where your smaller accounts that you would normally turn away, that you don't have the time to discuss what you're going to do, and these are the kind of people that when the market
• 22:29
  Wayne: has a shakeout, a big drawdown, they get shaken out, and that's the worst time to get out.
• 22:32
  Wayne: We all know that's the worst time to get out.
• 22:34
  Wayne: You can put them into a product like this that you know that it's safe.
• 22:39
  Wayne: You know that everyone at that AUM category has exactly the same portfolio, so when they call you, you don't need to look anything up.
• 22:47
  Wayne: You know exactly where you are.
• 22:48
  Wayne: Huge time saver.
• 22:50
  Wayne: So you put all of this together, you're helping the customer and you're helping yourselves.
• 22:54
  Wayne: And it's a, it's just a great package.
• 22:57
  Ryan: Yeah.
• 22:58
  Ryan: Wayne, I agree, and about p- buffered products, they're interesting.
• 23:03
  Ryan: I have a firm belief that y- a lot of these new products, I don't know i- it's investment management, whether it's ETF or whatever it is, when they are produced and created and launched in a bear market, or
• 23:15
  Ryan: I'm sorry, in a bull market, everything looks good, right?
• 23:18
  Ryan: Markets have been ripping higher, so we haven't had a really big drawdown, as, a deep correction since a lot of these buffer products have been created.
• 23:29
  Ryan: So how do we know if they work, right?
• 23:31
  Ryan: We don't really know if they work.
• 23:33
  Ryan: We don't know how they're gonna react when down 20%.
• 23:37
  Ryan: So it is gonna be interesting there.
• 23:40
  Ryan: What are some misconceptions of long-short strategies?
• 23:44
  Ryan: Wayne, I'm gonna age myself here.
• 23:45
  Ryan: When I started 20 years ago, long-short strategies, they were pretty p- they were very popular back then.
• 23:52
  Ryan: Then all of a sudden the popularity died off.
• 23:55
  Ryan: Now they're picking up some more.
• 23:57
  Ryan: W- Are there some misconceptions there, long-short strategies, and why maybe the popularity died off following, the early 2000s?
• 24:08
  Wayne: The big-- I, I think the, you know, one misconception is, is that long short strategies only work in bear markets, that they're bearish, and that's not true.
• 24:19
  Wayne: If they're designed properly, they should outperform in all markets.
• 24:23
  Wayne: And what I mean by that is in, in, in a down market, you should suffer thirty to fifty percent of the losses.
• 24:31
  Wayne: In an up market, you should participate in sixty-five to eighty-five percent of the gains, right?
• 24:36
  Wayne: So the, obviously, the volatility cone has shrunk, right?
• 24:40
  Wayne: Because the lows are higher and the highs are lower.
• 24:43
  Wayne: But you're, you're capturing more than two-thirds of, of the gain on the upside, but you're only suffering less than half of the losses.
• 24:52
  Wayne: So, you know, the fact that they only work in bearish strategies is misleading.
• 24:58
  Wayne: The fact that, you know, they're excessively risky because the short positions can go to zero.
• 25:03
  Wayne: You know, in our funds, we're only fifty percent short, so...
• 25:07
  Wayne: And, and things are reasonably correlated.
• 25:10
  Wayne: So if the whole market's gonna go up, the short positions we have are going to lose money, and they're gonna go up with the market.
• 25:16
  Wayne: But I own twice as much stuff that I'm making money on than, than I have shorted stuff that I'm losing money on.
• 25:21
  Wayne: So you don't have open-ended losses, which is, again, a, a huge misconception for many.
• 25:28
  Wayne: And, and then, you know, the-- I guess the other misconception, I, I don't wanna overbuild long short strategies, that they'll always outperform in down markets.
• 25:36
  Wayne: That's not necessarily true.
• 25:37
  Wayne: I mean, every, every trading strategy is built on having an edge that it's going to capture over a long period of time.
• 25:48
  Wayne: But at any given Sorry about that.
• 25:52
  Wayne: On any given day, noise can overwhelm it.
• 25:55
  Wayne: So, like, our particular strategy, we, we have about eight or nine basis points a day edge in a market that has seventy basis points of noise, right?
• 26:06
  Wayne: So on any given day, you know, if, if the, if the noise and our edge are in the same direction, we're gonna look like geniuses because we just made so much money.
• 26:15
  Wayne: But on a day where the, the noise is against us, we're still making our edge, we dampen that noise, but it still looks terrible.
• 26:24
  Wayne: So you, you want to be in a position that you focus on your primary objective.
• 26:30
  Wayne: You have to-- understanding that I need to give this enough time to work out.
• 26:34
  Wayne: But you-- basically, you wanna let the market go through a full cycle, an up cycle and a down cycle, which in today's markets, I, I would, I would argue that until you've been in something six months, you don't
• 26:45
  Wayne: really know how it's working.
• 26:46
  Wayne: Y- I could make the argument that it's a year, but, but six months in, in my mind, if, if, if you've got a, a, a viable edge in the market, you should start seeing that in six months.
• 26:59
  Wayne: Maybe not in terms of total returns, but in terms of relative c- returns.
• 27:03
  Wayne: If the market is down and you're down a lot less, then, then it worked
• 27:07
  Ryan: Yeah.
• 27:08
  Ryan: Yeah, exactly.
• 27:09
  Ryan: Wayne, that's fantastic, and I'm really glad you brought that out up about a full market cycle.
• 27:14
  Ryan: To be honest, w- when have we had a full market cycle, right?
• 27:18
  Ryan: It seems like it's been a while.
• 27:20
  Ryan: Sure, we had, during the, the trade war tariff tantrum, there was a steep sell-off, but it recovered quickly.
• 27:28
  Ryan: Like, when have we really experienced a full market cycle?
• 27:33
  Wayne: That's a really great question.
• 27:35
  Wayne: And obviously we, we, we had the mortgage meltdown in 2008, and the market's pretty much been on a tear since then.
• 27:43
  Wayne: Although it has had a couple of 25% pullbacks since then.
• 27:47
  Wayne: And, and depending upon your timeframe, one might argue that that's enough to be a full market cycle.
• 27:54
  Wayne: One thing that is important is to, is to understand that with tech- technology has compressed time, so that where it used to take 10 or 15 years for the market to have a full economic cycle, I don't think
• 28:11
  Wayne: that that timeframe has changed because that's based on human nature.
• 28:15
  Wayne: However, short-term reactions like to the COVID experience or this problem we're having in the Middle East right now, that stuff gets compressed.
• 28:27
  Wayne: Because that is financial traders responding to immediate information that, that they've got in the market.
• 28:35
  Wayne: So I would say that as you, you know, if-- like if I, if I, if I look at the S&P over, over the last, you know fifteen years, it's had several twenty-five percent pullbacks.
• 28:47
  Wayne: And, and so-- and, and but it's had many more ten percent pullbacks.
• 28:52
  Wayne: And, and so what you want to do is see how whatever, whatever you're doing performs in those cycles.
• 28:59
  Wayne: You know, what does it do when the market goes down?
• 29:01
  Wayne: What does it do when the market goes up?
• 29:03
  Wayne: And, and you can't just say, you know, today the, the market's up or down, and I did this, and I'm gonna make my decision based on what I see today.
• 29:11
  Wayne: This is where I go back to you have to have enough data to have a meaningful sample set.
• 29:15
  Wayne: So to-- that's a long-winded way of saying that I think market cycles can be as short as eighteen months now, and that's why you need to give at least six months of inf- data to figure out what's going
• 29:27
  Wayne: on.
• 29:27
  Wayne: But, but there are shorter-term cycles that we as humans live with, and then there are longer-term cycles that it's very hard for us to comprehend.
• 29:37
  Wayne: But as, as I...
• 29:39
  Wayne: I wanna close this discussion with the fact that investors need to appreciate how dramatically the market has changed in the last five years, not just ten or fifteen, twenty years.
• 29:52
  Wayne: But when I, when I read some analytics and somebody says, "I backtested this back to nineteen fifty or nineteen twenty-nine," I read it for amusement only.
• 30:02
  Wayne: I would never take that person's advice because the way the market behaved in, in two thousand and ten has nothing to do with the way it behaves today, because technology has had that big an impact on it.
• 30:15
  Wayne: And, and I, I just you know, I'm very bullish on the American economy.
• 30:20
  Wayne: As you and I were discussing earlier before we, we started taping this, I, I, I think that the bull market we're entering is gonna be bigger than the bull market from nineteen twenty to nineteen twenty-nine that was the
• 30:33
  Wayne: bubble that that burst.
• 30:36
  Wayne: And AI is, is going to bring efficiencies in, in ways that it's hard for the average person to fully comprehend.
• 30:44
  Wayne: But if I personally, I- On a good week, it saves me 30, 40 hours of time, which means I'm doubling my productivity.
• 30:53
  Wayne: On a, on a casual week, it certainly saves me 10 or 15, and even if it doesn't save me time, it's, it's, it's making me better.
• 31:00
  Wayne: And when I talk to people about AI, they're always talking to me about how they're using it and, and asking me how I use it and experimenting and, you know, what else can I do with this thing?
• 31:11
  Wayne: And that's why I think there's so much upside on this.
• 31:14
  Wayne: Whereas when we would look at the bubble in 1929, just by way of comparison, what caused that, that growth in the stock market was a fellow by the name of Alfred E.
• 31:23
  Wayne: Loomis connected electricity between all the cities east of the Mississippi, which all the manufacturing facilities between the cities now were no longer using horsepower or water mill power.
• 31:36
  Wayne: They were using electricity.
• 31:37
  Wayne: We're 10 times more productive.
• 31:38
  Wayne: And everybody said, "Wow, they're producing 10 times the product for the same amount of overhead," thinking what a, what a gift this is, except there was no buyers.
• 31:45
  Wayne: We didn't have 10 times the demand, hence the bubble.
• 31:49
  Wayne: I don't think we're anywhere near that close to a bubble in AI and, and I'm not gonna be worried about it until people start telling me which AI companies to buy.
• 31:58
  Wayne: When they start telling me which ones to buy, then I'm gonna be a lot more cautious.
• 32:01
  Wayne: But right now, they're just telling me how to use it and asking me how I use it, and I think that is going to continue this explosive growth that we've seen for the, the at least the next three
• 32:12
  Wayne: or four years
• 32:13
  Ryan: Yeah.
• 32:14
  Ryan: I love that you brought up, Wayne, about s- it's so hard, impossible to compare today's market to ju- like you said, just 2010, right?
• 32:24
  Ryan: Which really wasn't that long ago.
• 32:25
  Ryan: It's just, you're exactly right.
• 32:27
  Ryan: Markets move quicker than ever.
• 32:29
  Ryan: This isn't the markets from our grandparents.
• 32:32
  Ryan: This is a new type of market and market cycles, like you said, it could be three-month, six-month cycle, i- isn't unnor- unusual really.
• 32:42
  Ryan: So back to long-short strategies real quickly.
• 32:46
  Ryan: We'll finish this conversation up going back there.
• 32:48
  Ryan: What role do long-short strategies play in investment por- portfolio?
• 32:52
  Ryan: Should they be like a, risk, obviously a risk management strategy, but like a core holding?
• 33:01
  Wayne: I know people think of them as being innovative, but the reality of it is a-a-another let me think of his name right now, Alford Winslow Jones.
• 33:12
  Wayne: Sorry about that.
• 33:13
  Wayne: Alfred Winslow Jones started the first hedge fund, first long short fund in 1949, and over his 35-year career generated a compounded rate of return of 23% a year, even after charging two and 20.
• 33:31
  Wayne: 2% management fee, 20% of the profits.
• 33:33
  Wayne: Generated 23% compounded rate of return over 35 years.
• 33:36
  Wayne: Had three losing years With when that was published in Finance Magazine in the '60s, there were lots of copycats, and firms have been doing that ever since.
• 33:48
  Wayne: But because of the rebalancing and the tax exposure, they've been doing it for 501[c][3]s like college endowments and, and, and things like that.
• 33:59
  Wayne: So now they're going to be available not just from me, but from other ETF providers that you've got me with forty years experience putting together the best long-short portfolio that I can design, and I've invested...
• 34:13
  Wayne: This is a fund of funds.
• 34:14
  Wayne: I've invested in funds that are run by fund managers that each and every one of them manages more than a billion dollars.
• 34:20
  Wayne: So trust me, they're some of the most talented people on Wall Street.
• 34:23
  Wayne: So now you've got this incredible coaching team from the top Overall coach to the offensive and defensive coaches and individual, you know, linebacker coaches, tackle coaches, receiver coaches, all working for you to produce this great portfolio in a
• 34:41
  Wayne: tax-efficient package.
• 34:43
  Wayne: I may be on the cutting edge of that technology and bring this to the public, but in five years, I promise you, it's gonna be everywhere.
• 34:52
  Wayne: Why?
• 34:52
  Wayne: Because it should be the foundation of your portfolio.
• 34:55
  Wayne: If you can get equity returns of ten to fourteen percent a year with half the risk that you have to take today, it's, it's going to be very powerful.
• 35:04
  Wayne: It's gonna be a great opportunity.
• 35:06
  Wayne: And by the way, there's a huge untapped market for that because there are a hundred and fifty American households that have retirement accounts, IRAs, 401plans.
• 35:16
  Wayne: The median value of those accounts, ninety thousand dollars.
• 35:20
  Wayne: Nobody's helping those people 'cause the accounts are too small.
• 35:24
  Wayne: You, you, you-- It's, it's a very difficult situation because you can't scale yourself, so you have to use a scalable product.
• 35:33
  Wayne: This product is completely scalable.
• 35:35
  Wayne: It'll help even the smallest of accounts, and that's why in years to come, there'll be many copycats.
• 35:41
  Wayne: I hope some of them are better than me.
• 35:43
  Wayne: Some will be better, some won't.
• 35:45
  Wayne: But this is-- this wrapper to the public is literally the best deal that an investor's gonna get because you have the three Ns, inflation innovation, and increased population working for you.
• 35:59
  Wayne: Then even passive funds, ETFs, are rebalanced quarterly.
• 36:04
  Wayne: And what they're doing is they're throwing out the dogs, and they're bringing in companies that they believe will be better.
• 36:09
  Wayne: They're not always gonna be right, but they are gonna be right a lot.
• 36:13
  Wayne: And just to help you understand how important that is, in two thousand and one, the S&P dropped Enron when it went bankrupt, just pulled it out of the S&P five hundred.
• 36:22
  Wayne: They replaced it with a company nobody had ever heard of before, Nvidia, which is now up forty-seven thousand percent since that time.
• 36:29
  Wayne: So ask yourself, how did that one company lift the value of the S&P all by itself?
• 36:37
  Wayne: Because none of the other companies did that, or a few of them, right?
• 36:40
  Wayne: So I think that this long-short strategy is a, is a packaged investment strategy that is going to help investment advisors help their clients by making this the foundation of their portfolio, and then with their expertise, plugging in the
• 36:59
  Wayne: other tax-efficient strategies and perhaps the special situation strategies that they identify that the, the client should be invested in.
• 37:08
  Wayne: And it's also gonna help them by helping their million-dollar AUM client help its other family members that doesn't have much money.
• 37:18
  Wayne: And heretofore, they'd be embarrassed to ask you for help, but now they're gonna know I can go to you and you can help me.
• 37:25
  Ryan: Yeah, Wayne, that's great.
• 37:26
  Ryan: And I love that you brought up a scalable package, a scalable investment strategy for risk management because like we-- going back to what you said at the beginning, Wayne, is that, being a financial advisor is very difficult today.
• 37:43
  Ryan: Being able to offer risk management strategies that are scalable a huge value to financial advisors.
• 37:50
  Ryan: Are there any other value...
• 37:51
  Ryan: you brought up y- a lot right there.
• 37:55
  Ryan: What other values do you think, or value do you think long short strategies bring advisors?
• 38:01
  Ryan: Do they offer some other benefits just to their practice?
• 38:09
  Wayne: To, to me, it's it's a great substitute for the S&P 500.
• 38:14
  Wayne: I mean, I, you know, I, I don't know...
• 38:18
  Wayne: I, I know a handful of, of financial advisors personally from the country club and things like that, and they're always very reticent to talk about precisely what they're doing.
• 38:29
  Wayne: And, and so I, it's hard for me to answer that question directly, but my vision is that you do wanna help your clients.
• 38:38
  Wayne: It's in your-- it's obviously it's in your long-term interest to do a great job for your clients.
• 38:43
  Wayne: And and so if you can, if you can help them have the confidence that I'm gonna put you in these things and, and, and, and the-these are plug and play.
• 38:56
  Wayne: And really what we're doing from time to time is allocating b- how much goes into bucket A, B, and C.
• 39:02
  Wayne: But we want to own all three of these things, and, and based on your risk profile, that allocation will be specific to you.
• 39:11
  Wayne: But in reality, you're, you're probably gonna have three categories of risk profile.
• 39:15
  Wayne: You're, you're gonna have new start outs with no money, you're gonna have start outs with twenty years of earning power, and you got people at or near retirement.
• 39:23
  Wayne: And, you know, just simplify it, and you have plan A, B, C depending upon which bucket they fall into.
• 39:29
  Wayne: And, and as I say, there's always room in a portfolio.
• 39:33
  Wayne: Client comes up, like e-even our clients we, we only put them in EMPB and some level of treasuries depending upon their risk tolerance.
• 39:43
  Wayne: Unless they say, "Oh, but I want to own.
• 39:46
  Wayne: I s- I have this vision that this company is gonna do well."
• 39:48
  Wayne: I love it when they do that because, one, I can say, "Listen, w-we'll do that with 5% or 2%.
• 39:53
  Wayne: We'll pick a number."
• 39:55
  Wayne: But when we go back next year and look at what the customer picked, and rarely does it do well, they're like, "Okay, let me, let me, let me, let me think about not being a stock picker, which I'm
• 40:07
  Wayne: lousy at.
• 40:08
  Wayne: Let me think about a portfolio strategy that my advisor is helping with, so that every year I have the confidence that I'm gonna get the kind of returns that will allow me to achieve my retirement goals on schedule,
• 40:21
  Wayne: if not early."
• 40:24
  Ryan: Wayne, that is awesome.
• 40:26
  Ryan: I think that's a great way to end this conversation of so much insight you brought, so much information.
• 40:33
  Ryan: I loved it.
• 40:34
  Ryan: I'm gonna have to go back and re-listen, I think, just to soak it all in, Wayne.
• 40:38
  Ryan: Great job.
• 40:39
  Ryan: Where...
• 40:40
  Ryan: Thank you so much for coming on.
• 40:42
  Ryan: Where can our audience get more information about Next Gen EMP?
• 40:47
  Wayne: Well, thank you.
• 40:48
  Wayne: So our-- you, you can start by researching our ETF, which the symbol is EMPB, Extra Mushy Peanut Butter or Echo Mike Papa Bravo, but Extra Mushy Peanut Butter seems to stick, pun intended.
• 41:04
  Wayne: And then and then our website is www.nextgenemp.com.
• 41:08
  Wayne: N-E-X-T-G-E-N-E-M-P.com.
• 41:14
  Wayne: On, on that website I strongly encourage you to look at our pitch deck, and there is a brief history on, on long-short funds that will help you understand why these are so powerful and, and why they really weren't
• 41:27
  Wayne: available to you until we could bundle them into an ET-ETF package.
• 41:31
  Wayne: So it's, it's really great.
• 41:33
  Wayne: And, and my personal contact information is there, so if you want to learn more or earlier in the broadcast, I podcast, I alluded that there's a spreadsheet that you just plug in the symbol and it'll, it will track
• 41:45
  Wayne: your high watermark versus drawdowns so that you can analyze a-any publicly traded asset that you're interested in getting a, a drawdown perspective on how much risk you've got.
• 41:56
  Wayne: Ha-happy to send that along to you.
• 41:58
  Wayne: It'd be my pleasure.
• 42:00
  Ryan: Awesome, Wayne.
• 42:01
  Ryan: Fantastic.
• 42:02
  Ryan: Fantastic conversation.
• 42:04
  Ryan: I really enjoyed it.
• 42:05
  Ryan: Thank you so much.
• 42:07
  Ryan: And thank you everyone for listening to this episode of Zephyr's Adjusted for Risk podcast.
• 42:13
  Ryan: You can watch all of our other episodes on the Zephyr YouTube channel and all the other platforms that you listen to your, catch your favorite podcasts.
• 42:21
  Ryan: Please be sure to like and subscribe to those channels, and give us a follow on LinkedIn.
• 42:26
  Ryan: Thank you very much, and have a great rest of your week