Our Next Event: Opportunity Zone Pitch Day - July 20th
Why Capital Preservation Maximizes Returns, With Darren Schuringa
Alternative strategies have grown increasingly popular with High Net Worth investors, and especially strategies that limit drawdowns during periods of market volatility.
Darren Schuringa, CEO at ASYMmetric ETFs, joins WealthChannel’s Andy Hagans to discuss his firm’s unique ETF offerings, and how they provide access to a unique capital preservation strategy that can help maximize long term returns.
Watch On YouTube
- Why High Net Worth investors, and family offices in particular, are so focused on capital preservation strategies.
- The mathematical concept behind the importance of capital preservation in determining long term returns.
- How ASEMmetric technology works, including its two major sources of data.
- Details on ASPY (ASYMshares ASYMmetric S&P 500 ETF), ZSPY (ASYMmetric Smart Alpha S&P 500 ETF), and MORE (ASYMmetric Smart Income ETF).
- Why Darren decided to wrap his “hedge fund” inside an ETF wrapper.
Featured On This Episode
- ASPY – ASYMshares ASYMmetric S&P 500 ETF (ASYMmetric ETFs)
- MORE – ASYMmetric Smart Income ETF (ASYMmetric ETFs)
- ZSPY – ASYMmetric Smart Alpha S&P 500 ETF (ASYMmetric ETFs)
Today’s Guest: Darren Shuringa, ASYMmetric ETFs
- ASYMshares.com – Official Website
- ASYMmetric ETFs – Official Website
- ASYMmetric ETFs on LinkedIn
- Darren Schuringa on LinkedIn
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Welcome to “The Alternative Investment Podcast.” I’m Andy Hagans, and if you’re interested in generating income in your portfolio but you’re sick and tired of so much market volatility, you’re gonna want to listen to today’s episode to the very end. Joining me today is Darren Schuringa, CEO at ASYMmetric ETFs. ASYMmetric Shares. Darren, it’s both, right? Both companies?
Darren: Both companies. Yes, you can get to our website either through ASYM Shares or ASYMmetric ETFs.
Andy: And that’s a common thing with ETF issuers, right? There’s one website for the ETFs and then there’s another for the management company or…
Darren: That’s correct. We have a third one too, asymmetricsolutions.com, which is our index website, all of our fund tracks. So, very complicated but…
Andy: You know what? I’m gonna link to all of them in the show notes. But just to kind of set the table, we recently did a webinar, you know, about your family of funds, about capital preservation strategies, about generating more income with less volatility. I just want to start there because I gave the keynote at OZ Pitch Day yesterday, and we were talking about why so many investors are getting into alternative investments and alternative strategies.
And historically…I think this is interesting, historically, I always gave three reasons. I said reason number one, alternatives are great, you know, higher returns. Number two, less volatility. Number three, tax advantages. I flipped it yesterday. I said, “You know what? The number one reason is less volatility.” That’s what I hear over and over from family offices and investors. They’re sick and tired of the volatility. Was that really the genesis or the concept that led to you creating this strategy, this family of ETFs?
Darren: Absolutely. Andy, a couple of things for us when you look at volatility, and it relates to your three points as well. Lower volatility actually leads to better returns. And I think a lot of people miss that when they get involved in investing. And the fact that a lot of people understand, “Well, if you don’t lose 50% of your money, then you don’t need to make 100%, so that makes sense to me.” But it’s actually more than that.
If you don’t lose, if you can maintain your capital base through preservation of capital across bull and bear markets and you can then incrementally add to that positive returns every year, they don’t need to be 20%-30% positive returns over time when they’re consistent to get to a place at the end of an investment horizon, you know, 10, 20, 30 years or more, which is what we’re all investing.
Where you actually have one, which means winning in investing, you’ve generated more wealth over that period of time with less volatility. So, it’s truly a win-win. It’s like you have lower volatility, which is what everyone is looking for in investing without sacrificing their returns. So, that’s just something that’s so fundamental to us. And I did mention it and I mentioned it often, when you ask Albert Einstein what’s the eighth wonder of the world, it’s compounding rates of return, which is exactly what I’m describing right there.
Andy: Yeah, and you…okay, so you mentioned, you know, the mathematical concept, and I won’t try and state it precisely because I’m sure I’ll screw it up. But, you know, when you have a 50% drawdown, you need that 100% climb back up to get back to even. If there’s a 30% drawdown, then…I can’t do that math, but whatever, 50% or 60%, you know? So, the idea is that, you know, in some ways, it’s more important to limit the downside than it is to have the upside, right, like, mathematically. But I think more importantly, psychologically, because…you know, let’s take the public markets and the S&P.
And, you know, I remember studying finance in college, you know, back in my glory days at the University of Notre Dame where Jimmy and I were taking finance classes together. And there was this idea of a historical rate of return for the S&P, except most investors, the typical investor lacks that return by quite a bit because of behavioral mistakes, not just because of fees, but because they tend to, you know, buy high and sell low. So, it’s like human beings are not computers, right? We’re not robots that invest like robots, we invest like human beings. We have behavioral biases, we make behavioral mistakes, and volatility I think mentally and behaviorally really brings out the worst in people. I know it brings out the worst in me.
Darren: Well, it’s interesting. When you look at ASYMmetric as a return profile, what you’re ultimately doing is you’re skewing the returns to the right. So, you’re cutting off your negative returns and skewing your normal return distribution to the right. So, that’s, again, a mathematical example. But if you look at behavioral investing, there’s an asymmetric payoff too psychologically. The pain…the pleasure of gains, let me start there, the pleasure of gains is much less than the pain of losses psychologically.
And I would back that statement up with this, if you ask an advisor when they’re getting most of the client calls, it’s not when they’re doing well and the market is going up and their portfolios are appreciating, it’s when we’re in markets like today when volatility has spiked, when portfolio values are going down, and people are fearful of losing their nest egg, which they spent their entire life amassing. And especially as you move into retirement, you don’t have the earning capability to get it back, you have to protect that nest egg.
Andy: Totally, yeah. And to add on to it, and I’ll avoid making this a political rant. But it’s one thing…you know, I remember reading Ben Graham’s book and it was “Manic Mr. Market,” right? That Mr. Market, kind of he’s too exuberant, and then he’s swings the other way and he’s too worried. And so, you know, the market kind of over cracks in one direction and over cracks in the other. So, if you’re going to be in the liquid markets and the public markets, you’re going to kind of go for a ride, go for that roller coaster ride. And to be clear, you know, I have money in normal stock, long-only stock funds, so it’s not like I’m all alternatives or anything like that.
But one of the things that increasingly is bothering me is I don’t feel like, you know, in the public markets, I’m really dealing with Mr. Market anymore and the volatility of Mr. Market. I feel like the volatility in that roller coaster ride is being manipulated, whether it’s been manipulated in Washington DC by the government or international situations, or, you know, zero interest rate policy for however long, bond prices, stock market prices, real estate prices, but especially in those public markets. And it’s just like I’m tired of it, you know, I want to invest in something that’s not constantly like a whipsaw being manipulated up and then down, and then up and then down. It’s just like exhausting, and I think that’s a big appeal of alternative strategies as much as anything, is just investors are just sick and tired of it.
Darren: I don’t disagree. And as you and I were talking earlier, is that the reason you want to look at alternatives is not just to mitigate volatility, because it’s one of the questions that gets asked me all the time. “Well, if I mitigate the downside risk, do I capture any of the upside?” And yes, you do but it’s a different path of getting there and it’s actually a path you would prefer because, fundamentally, if what we’re designing our strategies to do, and we call them our Smart Strategies or Smart Solutions at ASYMmetric ETFs, is they’re designed to produce market returns with a fraction of the risk.
Well, like you said, there’s the holy grail of investing, you’re getting the same returns with less risk. And in investing that’s always preferable. If you can give me the same returns with a lower risk profile, I want it. Otherwise, you are the type of investor that wants lower returns with greater risk and I have not ever met an investor that’s looking for that. So, this different path to where you’re going for, you’re not giving up anything, you have to rethink it and rethink your investment philosophy because it’s now…decouple yourself from the market as an investor. What really matters to you, and I think there’s…and I’ll simplify things, there’s two stages to investing.
It’s the amassing stage, you’re moving towards your retirement as an individual and you need to amass enough wealth so that you can retire and live off your assets for the remainder of your life. And the second stage is your retirement stage when you’re actually living off your assets and your assets are your productive asset now versus your job. And so, then you need to ensure that you don’t outlive those assets. And so, that produces even probably greater problems for investors because, especially today, we’re now having inflation again.
And so, inflation erodes purchasing power. If you started to see…and I’m not going to make any predictions on where inflation is going. But again, it erodes purchasing power because if you go back 10, 20, 30 years, look at the price of homes is a great example, and how they’ve appreciated. So, you need your assets to continue to at a minimum outpace inflation as you’re in retirement, or else, your purchasing power is gonna go down even if you don’t lose any principal value. So, it’s a tougher equation now, it’s not just…
Andy: Yeah, and Darren, the whole inflation thing, that kind of gets back to, “I’m tired of the manipulation,” because it’s like so much of this inflation baked in right now is because of policy mistakes and because of too much easy money and overspending and, you know, stuff that happened two or three years ago, mistakes made at the top now kind of, you know, regurgitated or whatever, it’s working its way through the system. And so, hopefully, you know, it’s starting to roll over it looks like. I don’t know if it’s ever going back down to 2%, we’ll see. But, you know, it looks like it’s starting to moderate a little bit.
But again, it’s just like if you just put all your money in the public market’s long-only instruments, you’re gonna go for a ride. And then depending on whether you’re in the stock market or in the bond market, not only are you going for that ride, but you’re looking at, you know, in many cases, the purchasing power that erodes because of a policy decision. And that’s really frustrating for me because then that starts to feel more like the game is rigged.
And one other point that you made about capital preservation and your focus on capital preservation, that’s really interesting to me because speaking with so many family offices on this show, and once you get to that level of the ultra-wealthy and running a…that’s their number one goal for their portfolios for most family offices is capital preservation, you know? Because it’s like they worked hard, maybe they build a business, and that’s a lot of work. Whether you’re ultra-high net worth or you’re just getting started, I mean, this represents a lifetime of savings. So, I think the focus on capital preservation, I think, is very underrated.
Darren: When I look at capital preservation…and sorry, I didn’t really answer your first question, what founded our philosophy? And going back to that was we look at risk at ASYMmetric on an absolute basis. And so our primary concern is, ‘How much money has this strategy lost in the past? How much money has this manager lost in the past?” And when you ask that question of any manager…
Andy: Wait, so you asked that before you look at returns? You look at losses first?
Darren: Look at that first because…
Andy: You just blew my mind. I mean, this should be obvious, Darren, but you still just sort of blew my mind. Okay.
Darren: Look at that first because the returns are so easy and greed sets in and we all want bigger returns because we know we’re gonna get richer by bigger returns. But the point is, what’s my risk? And risk needs to come to the forefront of investors’ thinking, it’s how much can I lose here. And really, whether it’s an institution…I spent most of my life in institutional management. Actually, bringing the technology that powers our suite of Smart Solutions or ETFs came from one of the largest institutional hedge fund seeds and I’ve taken that technology, it’s quantitatively based, it removes the human element of fear and greed from it, and it’s, again, a disciplined, repeatable process.
Andy: Well, sorry, hold there for just a sec. So, I was talking about family offices before and their focus on capital preservation, and then you mentioned you had a background in institutional investing. Family office institutions, they’re focused on capital preservation, they oftentimes are using hedge funds, right? So, I mean, this kind of your background is you’re seeing larger investors, more sophisticated investors use these kinds of alternative strategies to preserve capital and then you kind of…you’re saying to yourself, “Why isn’t this available to individual investors?” Was that kind of the thought process that led to ASYMmetric?
Darren: Very much so. Because institutional investors have…for decades now, had access to asymmetric return-producing products, products that are focused on capital preservation.
Andy: What are those? You know, break it down for me.
Darren: So, hedge funds are one, private equity is another. So, anything, private debt, when you start to get outside the public markets, real estate becomes another thing where small investors, because they weren’t accredited investors, had been precluded from gaining access to these type of financial solutions. And so, they just had basically antiquated tools, stocks, and bonds to develop and manage portfolio risk. And if you look at the way that most retail portfolios are structured today, it’s still the 60/40.
That was the big talk when interest rates went to zero and then it became bigger talk when actually treasuries sunk by mid-teens and into the 20s in 2022 because interest rates went up and bonds went down, which is what happens. But if you look at institutional portfolios, the amount of public equities in there is shrinking because the amount of alternatives, asymmetric return-producing investments is growing because it’s a superior investment product. They’re uncorrelated to each other, which is the problem again with…
Andy: Or at least…well, let’s say less correlated.
Darren: Less correlated. Yeah, I agree, because sometimes they don’t work either, so, you know, not all strategies do, but less correlated. And so, tools that investors need and advisors need today on a retail level, they’re antiquated. I mean, stocks and bonds, they’ve been around since, what, the Netherlands in 1600, correct?
Andy: Yeah, and I have stocks and bonds in my portfolio. You know, I’m hosting “The Alternative Investment Podcast,” so like, I believe in a balanced portfolio, you know, kind of an all-weather portfolio kind of a thing. But what’s interesting to me, you’re talking about alternatives and asymmetric products being used by institutional investors and family offices, you know, ultra-wealthy or institutional-type investors. But then it’s one specific…is it one specific strategy that you’re using with your ETFs, right?
Darren: Oh, sure.
Andy: Because there’s all kinds of different hedge funds, right? There’s like, whatever, five or six different categories or subcategories. So, what led you to focus in on one particular alternative strategy?
Darren: Sure. Okay. So, life experience, for me it’s is very true. Everything I’ve learned in life has come with a price tag, and generally, it’s a higher price than I ever wanted to pay. And so, in investing, I lost money and I lose clients in losing money. So, when I developed this technology, it had one main investment objective. And that was, “Can we provide a systematic approach to limiting losses in a portfolio?” Nothing else. And if that’s all we can do…it’s not going to be good enough because you could be in cash, right? But if we can’t limit losses, then we don’t have anything. So, can we limit losses and still then provide upside participation in a portfolio that will ultimately produce market returns with a fraction of the risk by limiting, again, losses or downside, so limiting volatility?
Andy: So, that sounds like a hedge fund to me, you know? It makes sense, okay.
Darren: But the basis of our hedge fund, so the way we manage risk is we ultimately dynamically manage net exposure in the portfolio. But that’s not what’s key to our technology because anyone can do that, you can be net-long and you can be net-short, right, on a hedge fund. What we’re doing in our technology, our technology accurately measures market risk. And so, that’s a big statement because if you know whether you’re in a bull market or a bear market, then if you have the ability to change your net exposure in a bull market, you want to be net-long to capture the majority of the upsides. In fact, you’d, like, leverage, if you’re absolutely certain you’re in a bull market, leverage would be great because you’re gonna get alpha, you’re gonna get multiples of the return of the market. And then in a bear market, if you absolutely certain you’re in a bear market and the market is dropping, then you’d want to be net-short because you have some profits.
Andy: This sounds to me like trend following or almost akin…you know, it’s like managed futures or like some sort of strategy that is technology or algorithm-based. Just kind of judging whether the market is on an uptrend or a downtrend. Is that basically…?
Darren: That’s it, and so that aspect is a trend following nature. So, what we’re doing here, what again differentiates us is that our technology…I spent years and a lot of money trying to come up with a way of predicting the market, right? Hedge funds is always, “What’s your edge? What’s your edge? What’s your edge?” You know, my edge was the John Bogle moment and John Bogle did a study, found that most active managers do not outperform the index. Excuse me. So, the best you can do is index performance and pay lower fees because 80% of the people would be better off with that. So, our John Bogle moment ASYMmetric-wise, it’s impossible to predict where the market is going. So, don’t even try.
Why is it impossible? Well, mathematically, correlations change over short periods of time. And so, if a correlation has changed, then your algorithm is wrong, you’re accounting for something that no longer exists, the relationship has changed. But even more common sense, black swan events exist. And if you’re unaware of something philosophically, it doesn’t matter what it is, you can’t plan for it. And so, the same way with an algorithm, if there’s unknown information that your algorithm is not capturing, you’re going to be wrong, or you’re going to be lucky and you’re going to be right, but either way, you’re lucky. And so, what we’re doing is…let me just grab a sip of water.
Andy: Yeah, and, you know, I’m thinking about trend following and that’s very, you know, based on, I don’t know, market internals, technical data. The black swan feels like something different, right? That makes me think of hedge funds in 2008 and 2009, right? A few of them performed spectacularly and a lot of them got creamed as far as I know, right? Just totally hammered.
Darren: Okay, so the way we avoid that, because those are the right questions again, which go back to the question of how much did you lose? So, cut through all of the marketing noise, how much did you lose? That’s my risk now of your fund or your strategy. And now, flip over, well, how are you going to prevent it? So, how does ASYMmetric Risk Management Technology, which is what we call our technology, avoid that in our John Bogle moment? We look at the movement of the market. How do we make money as investors? We make money in the market. So, back to trend following, don’t try to predict the market but with a high degree of accuracy, our technology can tell us where we are currently.
And that’s the benefits. We use two price base signals to identify where we are. One is technical, that’s absolutely trend following, so we’re looking at a simple 200-day moving average on whatever market we’re managing risk in. We want to know, if it’s above the 200-day moving average, that market is trending up. So, that’s one bull market sign. If it’s below the 200-day moving average, that market is trending down, that’s one bear market sign. And then the other price movement we look at is we look at the underlying securities within that market and we’ve developed our own measure of realized volatility.
So, realized vol is looking at the price movement of the underlying securities and measuring what their dispersion is. And so, what you see with realized volatility is number one, it’s always accurate because it’s measuring actual price movements versus trying to predict where the market is going to go, like implied volatility through VIX and it can be right or wrong. But we know when you measure quantitatively or statistically what the dispersion is of returns within a market, it’s right. So, we look at that, we look for a market in a bull market, is the market trending up above the 200-day moving average and volatility is low.
Andy: I mean, bear with me, I’m kind of a person who, you know, as soon as there’s pure math, I have a hard time, so I use metaphors to get stuff straight in my head. So, bear with me. But trend following is almost like a 2D type of thing. You know, simple in a good way, I think, some trend-following systems in the sense that they’re discipline, they’re just an algorithm, is the market going up? Is it going down, 200-day moving average? But what you’re talking about is almost like three-dimensional, you’re looking at the realized volatility of the individual securities within the index. So, it’s adding…it’s almost adding more context or depth to the trend following.
Darren: It is, yeah, it’s taking it to the next level. It’s saying, “Okay, this is…we make money in the market, so every investor would like to be net-long through the entirety of a bull market and net-short through the entirety of the bear markets.” So, that’s trend following. And then we don’t want to get whipsawed because you described earlier retail investor, fear and greed, emotional-driven investing, you’re gonna get in when it’s too late, it’s like, “I’m missing it all and I gotta get in now.” But at that point, you should have gotten in when there’s still blood in the streets, right? Everything was beaten up, that’s the time you want to be buying when assets are really cheap. Be fearful when others are greedy, greedy when others are fearful. And so, if you’ve missed that…
Andy: Does that work against the trend following, though, because…?
Darren: Trend following, the weakness of trend following is you’re never going to get the top and the bottom because the markets got to turn over, right? It’s going to turn up or turn over. So, what we’re looking for is long-term signals. This isn’t a day trading strategy, it’s a long-term buy and hold vehicle, and what it’s looking to do? ASYMmetric Risk Management Technology has captured the majority…again, we want to be net-long the entirety of a bull market and we don’t want to get whipsawed on any given month. It’s rebalanced on a monthly basis. It was rebalanced on a monthly basis, it’s an institutional product, it’s rebalanced, it’s the same technology, it’s rebalanced in an ETF form. And so, we need to pick up long-term trends because volatility on a daily basis or a weekly basis, you’re gonna get whipsawed, especially in these markets, they’re terrible, right?
Andy: Yeah. Now, Darren, so this is…this strategy is being employed or wrapped in ETFs. Was there something similar in the illiquid, like, hedge fund world previously? Did this kind of system already exist for institutional?
Darren: Yes, yeah, absolutely. So, as I mentioned earlier here, the ASYMmetric Risk Management Technology was behind a quarter of a billion-dollar hedge fund seed. And so, it was one of the largest hedge fund seeds in 2016 and it was an organization. PAAMCO, Pacific Alternative Asset Management Co., they’re fund of hedge funds, spent a year analyzing the technology and they’re here in the liquid alts space. At that point, it was an algorithm and back-tested data that they looked at, and no one gets a hedge fund seed based on back-tested data because the theory is anyone can make a back-test look good. And it’s true, if you have…
Andy: Yeah, I’ll just run the 1,000 simulations, and so I’ll find…yeah.
Darren: Yes, if you torture the data enough, it will confess, you know, it’ll give you what you’re looking for, right? But ours was systematic and it’s like, here systematically, it’s applied to this index and it’s looking at the trend following, the technical movement of the index, and the underlying volatility of the index, and you can apply it and we apply it to different scenarios, we apply it to different indexes. And so, we took the technology to see how robust it was and we started with it in energy application and then we took it…I asked one of my analysts, “Can we apply it to the S&P 500? And then what about the NASDAQ? Does it produce asymmetric returns? Does it provide protection on the downside? Does it capture the majority of the upside so you’re getting that same market returns with a fraction of the risk?” And the answer was yes.
So, this institution after a year of doing their due diligence, said, “Darren, we’d love it. What you said it, it actually does, which we call that fund integrity. It’s so unique these days that someone actually delivers what they say they’re going to do. And it’s an elegant solution, it makes sense to us. It’s not complicated.” Like you said it, there’s an easiness to understand and we’re not trying to hide it in a black box. We’re very transparent. Look at our website, we publish on a monthly basis, “Here’s what our signals are telling us, you can look at the levels. Based on these signals, here’s the way the portfolio is positioned.” So, we always want you to have the tools so that you understand what’s going on within any of our fund products.
Transparency is so important to us for a number of different reasons. You’re not always right, technologies aren’t always right. Remember, the technology, the benefit of looking at price movements, you’re always right right now but it doesn’t tell you tomorrow. So, if the Fed does something tomorrow that changes, cuts interest rates, raises interest rates that cause the market to go up or down and you’re on the wrong side of it, you’re going to be…the portfolio will be incorrectly positioned for a short period of time until the signals at the end of the month corrected. So, you want to be communicative. Nothing will always work but it’s the disciplined approach, the disciplined repeatable process of this algorithm that enables us to get the results over time that we’re looking for, again, because it’s price movements in the market…
Andy: Yeah, and for any alternative strategy or for a hedge fund, you know, at least what I’m looking at is a full market cycle, right? So, there’s going to be weeks of underperformance or overperformance. You know, typically, these strategies, you really need to see the trough, you know, over a period of time. So, you have this technology that you’re using, is the technology creating an index that the funds follow? Or is it the technology providing the information that you need to, like, actively manage a fund? I guess I’m asking are these passively managed ETFs or are they actively managed ETFs?
Darren: So, the technology is baked into an index, so the funds follow an index that’s powered by ASYMmetric Risk Management Technology. So, the knowledge on a monthly basis is applied to the S&P 500 or different asset classes, the portfolios are…the indexes are rebalanced and then the portfolios are rebalanced to match the index exposure, so they’re passively managed.
Andy: Okay, so when you say you’re communicating, which I love, I mean, I think that’s…in today’s world, I think that’s a must, you know, for asset managers. I mean, one thing that I like with an index product like this in alternative strategy, it’s like the index or the algorithm is not going to have feelings, right? Like, I think that can be good, right? Because we were talking about behavioral biases. So, when you’re communicating what the technology is doing, that’s almost just communicating…you know, you’re not necessarily making those decisions day to day, it’s more the technology is acting in a certain way because it’s designed a certain way and you’re communicating, “It might be doing this because of whatever external event,” you know, the bank run on Silicon Valley Bank or whatever. Is that basically what you mean by the communications?
Darren: That’s attribution analysis. So, if it performed, if it underperformed, why did it underperform? And so, by knowing the way the portfolio was positioned, that’s going a long way to determining why it did what it did. And being positioned like that, did it do what you expected it to do in three-risk environments, risk-on, risk elevated, and risk-off? Bull, uncertain market, or bear market. And so, these are all, to us, accountability, proof statements. Did it work? Did it do what it was supposed to do?
Even if it was incorrectly positioned, it said we’re in a bull market but it was a bear market, did it go…did it do what it was meant to do? And so, if it’s positioned for a bear market, it should go down, and if the market goes down, the portfolio should go up. So, if you’re actually positioned for a bear market and the market went up, did the portfolio actually go down proportionately to the market, which you’d expect, right? Because oftentimes, things don’t do what they’re supposed to do, investment solutions don’t do what it’s supposed to do.
Andy: Well, that’s a double problem, it’s like the…yeah, that’s a second order problem. It’s like maybe the strategy wasn’t good in the first place, you know, in some cases with hedge funds, but also, did the hedge fund even do with the strategy it was supposed to do, to your point? So, let’s actually get into some of these specific funds, though. So, you know, I think I get the concept of the technology, I understand its appeal because, you know, these kinds of alternative strategies are things that big investors have been using for years, and finally, they’re being wrapped in ETFs and available to retail investors, which I think is awesome. You know, you have to cheerlead for the little guy, right? I love that accessibility. But why don’t we start with ASPY? So, this is the ASYMshares, ASYMmetric S&P 500 ETF. Was this your first ETF?
Darren: That was the first ETF. It was, yeah.
Darren: Andy, that falls under our Smart Equity category. And why is it smart? Because it’s designed to generate market returns with a fraction of the risk and that makes it smart. Again, market returns with a fraction of the risk. And so, ASPY is based on the S&P 500. So, our ASYMmetric Risk Management Technology is measuring the risk profile of the S&P 500 in real-time. And at the end of every month, we look at the two signals and we say, “Okay, this is our price momentum indicator, the technical indicator, 200-day moving average, is it risk-on or risk-off? Above or below?”
And then the second signal, our price volatility indicator, which is our proprietary measurement of realized volatility, is it high or low? And so, when they both are either risk-off, you know, broken down market with high volatility, the probability is we’re in a bear market, high probability we’re in a bear market because those two conditions historically have come together when we’re in bear markets. And if the market is trending up and the vol is low, we’re in a bull market, those conditions historically have come together when we’re in a bull market.
So, once our technology is effectively and accurately measured the current market risk environment, then the second question is, “Well, how do you manage risk?” So, measure, monitor, and then manage risk. Well, it manages risk by changing that exposure relative to the S&P 500. So, in a bull market, we want to capture the majority of the upside, so the portfolio is going to be 100% long the S&P 500. In fact, it’s gonna be 100% long min vol constituents of the S&P 500. So, it actually adds another component, min volatility, to the portfolio. And the reason why we do that in the portfolio is because we view ASPY as a core holding, a core equity holding.
It’s the slow and steady within your portfolio, it’s designed to generate equity returns with a fraction of the risk to keep you, again, on target, whether you’re moving towards retirement and amassing the wealth you need, or you’re in retirement and you don’t want to outlive your assets and you need to, again, preserve the purchasing power. So, ASPY produces equity returns across bull and bear markets, slow and steady wins the race, we make it the core equity holding and then build your portfolio around that.
So, part of that is min vol. We don’t want to disappoint investors, so by offering min vol exposure on our long book, it’s adding to accomplishing our investment objectives, market returns with less risk. Min vol, in and of itself, achieves that. So, that’s our long exposure. Our short exposure ultimately is our hedge or our insurance. We don’t use derivatives, there’s a lot of different types of strategies out there now. Structured notes, ultimately, they were retail products that were repackaged into exchange-traded products and use option-based strategies. We don’t use options, so we’re managing net exposure.
So, our short exposure, which is our hedge or our protection, is we actually short, in this case, the S&P 500 because if we get our signals right and ASYMmetric Risk Management Technology is correct in identifying a bear market and the portfolio then is short the market, what’s going to happen? Well, if the market is going down and then we’re shorting the market, portfolio is going to go up. So, it’s gonna give us the outcome we’re looking for versus other long-short strategies where managers are trying to generate alpha on long and short books, you may or may not be right. You may be in high alpha stocks, you maybe in low alpha stocks, you may be in the wrong sector.
Andy: I see.
Darren: Right? For us, like, this is insurance. It’s not insurance but, you know, it’s the principle, we want to make sure that…
Andy: Yeah, so you’re not picking stocks then, you know, like a long-short fund where you basically need to divide up the S&P into good and bad. This is more holistic and looking at the market organism as a whole and hedging based on that. Yeah, I get it. Well, then, I want to ask about ZSPY. So, this is the Smart Alpha S&P 500 ETF. So, what’s the difference between ZSPY and ASPY? How does ZSPY work?
Darren: So ZSPY falls under our Smart Alpha series of ETFs. And in Smart Alpha, what makes it smart is greater upside with a similar risk profile, right? So, greater upside with the same risk. Well, that’s a good risk-return. And so, what ZSPY is doing, and I mentioned it earlier in our conversation, is that if you’re right in identifying a bull market, that would be the time you want to add leverage because you’re gonna get more of what you’re looking for, you’re gonna get more upside. So, volatility in ASYMmetric Risk Management Technology and volatility in the S&P 500 is low, the market is trending up.
At that point, instead of just being 100% long on the market, ZSPY will actually add leverage to the long book. So, now it adds another 100% leverage versus 200% long the market, it’s not designed to pick up 2x the upside of the S&P 500. So, since ZSPY is very different from a portfolio perspective, it’s a new take on alpha. And managers today or investors today have, you know, a few choices for alpha, they can pick the stocks themselves and hope they do well…manage the risk themselves and hope they do well. They can look for active managers and hope they do well and the strategies work.
They can try to be in the right asset classes or the right sectors, all of these have risks, you’re either going to be right or you’re going to be wrong, then you’re going to generate off or you’re not based on whether all of these factors come together. And there’s a number of variables there but quite simply, if the market is trending up and we add leverage, you’re going to…this product is going to deliver exactly what it’s designed to do, it’s going to deliver a multiple of the market. And so, in this case for ZSPY, we actually are long the S&P 500 because, again, managing expectations.
If it’s going to give tax returns with the S&P 500, investors are looking at it as an alternative source of alpha, a more consistent source of alpha, then we want it to…if the S&P is up 10%, we want it to be up 20% so that it actually achieves its goal. So, two things that make ZSPY unique. One is over a traditional leveraged product, it addresses the weakness of traditional leveraged products, which are leveraged daily returns because they use all derivatives or most of them. So, the market is up 10% on any given day, you’re up 20%, and then it drops the next day, and then it goes up and down. You’re not going to replicate over a period of a year…
Andy: Yeah, those kinds of products are made for traders, right?
Darren: For traders.
Darren: And this is not a trading product, this is a buy-and-hold product that you’re gonna get period return. So if you held ZSPY for 10 years and it stayed risk-on for 10 years, the market was up, you know, 10x, you can expect ZSPY to be up 20x.
Andy: Well, I liked that. I think, you know, that kind of points to the evolution in the ETF space, it was like the first wave and the second wave of ETFs, you’d have all these long-only ETFs, very big broad asset classes, SPY, VTI, LQD, just all these kind of big…and they’re fine, they’re good products. And then, you know, I remember, like Direxion, they had all these different products and the Direxion products were great, it’s just like you gotta know what their specific uses. And for most people, you know, they didn’t have any…they shouldn’t have Direxion ETFs in their portfolio, like a 2x or 3x ETF because, like, this is meant for traders, they’re using it in very specific ways. And so, it was like you had these short-term ETFs for traders, you had these long-term ETFs.
Now it’s evolved and I just like that there’s way more on the menu, there’s way more options on the menu, products like yours that are bringing some of this leverage and some of these alternative assets to buy-and-hold investors, you know, who may not want to be long-only. They want to, you know, use alternative strategies, use some leverage, but they don’t have any reason…you know, they shouldn’t be buying those Direxion ETFs or those ETFs that are meant for traders. So, for me, it’s fascinating because I started, you know, in the financial media space, I started in 2009-2010, and just, you know, checking in on the ETF landscape 15 years later, it’s a whole different world.
Darren: Very much so. Yeah, this is…the ETFs are winning, you know, because it’s a killer app, it’s a superior solution. Liquidity, transparency, lower fees, and tax efficiency, for any one of those, you pay a premium. But in an ETF, you actually get them at a discount. So, there’s a reason why ETFs are growing and mutual funds are shrinking. And when you look at our strategy, because ultimately, they’re hedge strategies or hedge fund strategies, the ETF is actually superior to commingled funds, so our commingled funds, because what it does is it’s tax efficiency, this ETF structure, the creation and redemption process, we don’t need to sell gains and realized gains in our portfolio, right, in our accounts. And so, we can get rid of gains and they’re not taxable events.
If you look at ASPY, which has now gone through two tax seasons in an ETF form, no capital gains in the first year, no capital gains in the second year. So, for family offices, taxes are extremely important in the overall…and hedge funds are extremely tax inefficient. So, in and of itself, the fact that ASPY is able to offer hedge fund returns and a tax-efficient structure, that’s a game changer, right? That is a tremendous game-changer. And then ZSPY now, you look at it, and you’re taking a brand-new take on leverage, it’s more what investors are looking for. It’s buy-and-hold leverage, so investors want more leverage on the upside, they don’t want leverage in both directions, which is trading leverage, they want more on the upside. And so…
Andy: Yeah, and I don’t want daily leverage, you know, I’m looking to the enhanced long-term returns,
Darren: Because I need alpha in my portfolio, I need something that’s going to give me that growth, right, that’s gonna give this portion of my assets that ability to outpace inflation without getting way over my risks, where all of a sudden, I can lose 80% of my money. I’m not interested in losing 80% of my money, but I’d like to pick up some alpha on the upside and have something in my portfolio. So, ZSPY is a satellite position. ASPY is a core position for equities, ZSPY is like all alpha-producing positions, it should be a smaller percentage of your overall portfolio.
Andy: Yeah, I get it and I liked that you’re using the same technology with these different funds, they can occupy different slices of a portfolio. I know we’re running short on time, but I wanted to ask about M-O-R-E, MORE, the Smart Income ETF as well. So, there’s one other ETF in your ETF family, right?
Darren: Sure. So, MORE is part of our Smart Income solutions. Why is it smart? Because it offers more income with less risk. And so, income investing…and again, powered by ASYMmetric Risk Management Technology. So, in this case, it’s a little different structure than ASPY and ZSPY, which are both based on the S&P 500. MORE is looking to generate not only high income, but high-quality income, because again, one of my life lessons as an investor is that income, in and of itself, and more specifically, high income is really of no value if I can lose 50% or more of my principal value, it takes too long to recoup it. So, again, probably even more importantly in income investing, you need to preserve your principal value.
Andy: Pretty hard to do when inflation is 6% and yields are 3%. I mean…
Darren: Absolutely, you’re upside down already. So, what MORE is doing now is looking at alternative sources of income. So, it’s looking at three different asset classes. MLP, so U.S. energy infrastructure or energy infrastructure, it’s looking at REITs, and then it’s looking at utilities. And it says, “Okay, the same technology,” it’s looking at the three asset classes, are they in…what’s their current risk environment? Are they in a bull or a bear market? And if everyone…
Andy: And those three asset classes that you mentioned, those are inherently going to track better with inflation over the long term, I would think, like REITs and, you know, MLPs. So, that already, it feels like a little bit, you know, different risks than bonds. But my point is if you’re buying bonds and you’re already upside down before it even gets to anything else, you’re already negative 3% purchasing power. It’s like I’ve already tried to minimize my exposure to bonds, period, I’m looking for other forms of income, right? So, this is really interesting to me that you have an income product that is not based on bonds at all, you know?
Darren: Right. And then you go back to those questions, “Well, what’s your maximum drawdown?” To understand what the risk parameters of the investment solution are. And so, what the technology is doing in the portfolio is it’s, again, measuring market risk and if one of these asset classes drop into a bear market, so risk rises, the portfolio moves out of that asset class and we want to preserve the principal and into the other asset classes. So, another one drops off or all three drop off, then the portfolio, because the technology is smart, it says, “All right, this is an income-producing strategy but we’re not just looking for high income, we want high income that’s secured. So, can we go to fixed income now? How do treasuries look? Are treasuries in a bull market?” Because traditionally, you have an inverse relationship between stocks and bonds. And so, then we look to 30-year 10-year, 90-day T-bills and says, “Are any of these in a bull market?” If so…
Andy: Oh, I see, so it’s tactically changing between these different asset classes that all yield significant income but it’s doing that tactically with like a similar technology, similar kind of algorithm following trends, market internals. That’s really interesting. Wow. And then at the forefront of it all or behind it all is this focus on capital preservation because, as you said, you don’t just want…five percent income is no good if there’s a 25% market drawdown. You know, what good is the 5% yield, right? You gave it all back times four or times five.
Darren: Correct. And so, the beauty of ASYMmetric ETFs is that they’re all powered by ASYMmetric Risk Management Technology, so it’s a technology that’s been institutionally vetted and proven, we’re one of the largest hedge fund seeds, brought down to individual investors. It works in the indexes, you can see that on asymsolutions.com, look at the historical performance there, it’s worked since going live, it worked in the hedge fund, and now it’s working in ASPY. In 2020 when it was launched, it was one of the strongest bull markets in the last decade, captured 81% of the upside, then we flipped over into 2021, and then in 2022, you hit a bear market, cut losses in greater than half, you put the two together, and it’s doing exactly what it should be over a very small period of time, right? A couple of years. It’s giving market returns with a fraction of the risk.
Andy: And Darren, are you seeing even just with that track record, I mean, I feel like there was like a self-contained bull and bear market just in the last two years. Do you find that even just having that track record and people can kind of see, “Here’s what it did this year, here’s what it did the next year,” does that help get investors more comfortable with, you know, an alternative strategy?
Darren: Absolutely, it’s a proof statement. Hopefully, you understand two price base signals. Thirty-day moving average, technical look, trend following. The second one, price movement of the underlying securities. Has vol spiked? Is the market broken down or trending up? Those two things, they are price movements in the market. Easy to understand. Once you know that, you know what the risk profile of the market looks like. And then the final stage, measure, monitor, and manage risk, then the portfolio, the algorithm decides what the risk parameters should be and the exposure to the portfolio to capture a bull market upside or provide protection against a bear market downside, so it’s always the same. So, if it’s worked at one, the same technology is applied to another asset class with these two parameters, conceptually, it makes sense.
Andy: It does, it does, Darren. I gotta say, to me, it’s just cool, it’s inspiring, and it’s fun that you could have done all this in a hedge fund with 2 million or 5 million or whatever minimum investment and made it available only to institutional investors. And instead, you know, you build ASYMmetric Shares, ASYMmetric ETFs, and you launch these strategies in an ETF wrapper. And I mean, that’s the change from 2021, you know, the current era versus 20-30 years ago. It’s just so cool and so gratifying to see, you know, that’s how you decided to package the strategy.
Darren: And Andy, it’s better for investors too. You get the tax efficiency, so whether it’s an individual or a family office, you have a better solution. So, for me…
Andy: Yeah, that’s a good point. Just because it’s an ETF doesn’t mean it has to be small investors, right? Institutionals are buying ETFs too, family offices are buying ETFs.
Darren: So, you get liquidity, you don’t have a lockup, it’s lower fees. So, we are helping the little guy but if you look at our strategies too…like I said, people don’t understand motivation, I think it’s another good thing, if you understand the drawdown, you understand why someone’s doing something. These are high-capacity strategies. I mean, we can manage tens of billions of dollars, so we’re not gated. Our first one ASPY and ZSPY spy are on the S&P 500, the most liquid equity asset class, it’s a $100 million trade in ASPY and it’d be 1% of average daily value traded of the underlying. So, these funds, I asked our two prime brokers at JP Morgan and UBS and they came back and said, “How much could we manage in ASPY before we would affect liquidity in the market?”
It came back with two numbers. They were 5 billion apart, the midpoint was 40 billion. So, these are large-capacity strategies, investors pick up on them. If the performance continues to do what it’s done historically, is doing it currently, and will do going forward, well, you know, I envision this being one of the…had the potential to be one of the largest hedge funds in the world. But offering it through this brand new wrapper, better for investors from a tax perspective, better for investors from a fee perspective. And why would we do that? Well, because we can manage a lot of assets. So, there’s still a ton of motivation for us in doing it, really good for investors because they need it, and really good whether it’s retail or institutional. Retail needs it more because they don’t have access to these types of solutions. So, there’s just a lot of…
Andy: So, Darren, you get to have your cake and eat it too, right? Because you get to help the little guy but then you also have a vehicle that scales up to past, you know, billions of dollars. So, yeah, you know, maybe I shouldn’t have ascribed all those good motives to you’re helping the little guy, maybe it’s just the most efficient way to wrap up this kind of a strategy.
Darren: And it’s scalable, the technology is highly scalable, we have a number of ticker symbols reserved to roll out new strategies and solutions. And really, at the end of the day, when you look at the correlations too in these funds, I mean, ASPY got a 0.3 correlation to the S&P 500. So, extremely uncorrelated, more something similar to it. ZSPY is higher but still…
Andy: And that’s really low, I mean, 0.3 is really low.
Darren: Right, not even 1. So, you really have wonderful diversification tools to add to a portfolio that are liquid and transparent, and then we add our own transparency in addition to what the fund transparency offers. It is a virtuous solution but it works. If it didn’t work, nothing would matter. I mean, so it produces asymmetric returns, these smart categories, and then one thing I can guarantee you we’re always going to be. We’re not going to work every day, week, month, quarter, or even every year, nothing does.
But overall, what I’ve learned and what I’ve experienced is that in the investment race, truly slow and steady wins. And winning is very clear, you have a bigger pot of accumulated wealth at the end when you won from an investing perspective. We can’t hide from that, you know, it’s like you can make up a lot of excuses but at the end of the day, if you’ve won and done well, you’ve actually amassed more wealth with less risk or you’ve amassed more wealth, let’s even put that aside.
Andy: Totally. Yeah, and the track record, these funds launched in 2020 or 2021, and now they’ve gone through some ups and some downs. I think at the end of the day, the track record speaks for itself. No matter what we say on this podcast episode, right, people can look them up. So, that being said, Darren, where can our audience of family offices, high net-worth investors, and institutional investors go to learn more about these ETFs? I know you mentioned you have two or three websites, so I’ll try to list them all.
Darren: Let me simplify, definitely. So, to learn more about the ETFs, ASYMshares, so asymshares.com. You’ll see the ETFs on the side more, ASPY, ZSPY, and I think you can find a little bit more information there. Then to look at the indexes that they follow, go to asymsolutions.com, and then you’ll be able to find more information on the indexes and look at the historical results and get a good idea of where they would fit in your portfolio. And then if you want to have a conversation with me, please pick up the phone, dial 212-755-1970, would love to speak to you in person, answer any questions that you have, and dig deeper into these solutions because they work, they do what they’re supposed to do, and that makes them really unique.
Andy: And listeners, I can tell you I’ve talked with Darren a lot, you know, the past month or two, had several conversations with him. He’s a super nice guy, a very approachable guy. So, don’t be shy. If you want to learn more about these strategies, don’t be shy to get in touch. And Darren, I can’t thank you enough for coming on the show today and sharing your knowledge. I really appreciate it.
Darren: Thanks, Andy. I really love being here. Thanks for your time.