Episode Transcript
[00:00:00] Speaker A: I think Portable Alpha really was an implementation innovation that truly focused institutional managers, institutional investors and consultants on the need to understand what drives your alpha and what drives your beta and the impact of leverage and liquidity and things like that in the portfolio. If I think about other types of strategies, though, there are 130, 30 strategies which were just a form of leverage. I don't see that as a true innovation. It's just an implementation vehicle.
[00:00:28] Speaker B: Welcome to the Institutional Edge, a weekly podcast in partnership with Pensions Investments. I'm your host, Angelo Calvello. In each 30 minute episode, I interview asset owners, the investment professionals deploying capital, who share insights on carefully curated topics. Occasionally we feature brilliant minds from outside of our industry, driving the conversation forward. No fluff, no vendor pitches, no disguise marketing. Our goal is to challenge conventional thinking, elevate the conversation and help you make smarter investment decisions, but always with a little edginess along the way.
Welcome to the Institutional Edge. I'm Angelo Calvello and today we're discussing institutional investing and innovation and my guest is Greg Williamson, an institutional investor whose entire career has focused on innovation. Greg was early to the adoption and integration of technology into an asset owner's workflow. He was early to AI, but early to tokenization and early to energy transformation. Really important for this episode. He was early to Portable Alpha. Greg's the former CIO at the BP America pension fund. He also served as CIO at the American Red Cross. The audience, Greg, they know you. They recognize the contribution you've made, the standing you have in the industry. We'll put your bio in the show notes. I think I first met you, Greg, in 1988 when I was running stock index products for the CME.
[00:01:57] Speaker A: That's right.
[00:01:57] Speaker B: And I think we might have actually traded man on the floor of the cboe.
[00:02:01] Speaker A: I think we did, Angelo. We might not have seen each other, but we were definitely on the floor together in the mid to late 80s. So we have a long relationship.
[00:02:09] Speaker B: We do, and I appreciate it. Greg, let me ask you a few questions. Just quickly warm me up a little bit. Aisle seat or window seat?
[00:02:17] Speaker A: Always an aisle seat. Gotta be able to get to the bathroom when I need to.
[00:02:21] Speaker B: Fishing or golf?
[00:02:22] Speaker A: Oh, you know that Golf early in my career. Fishing now.
[00:02:26] Speaker B: Okay. And you travel a lot. I mean, what city that you travel to, have you found to be your.
[00:02:32] Speaker A: Favorite historically, other than Chicago? It was London and I still love London. Been in Tokyo a lot recently and I've always liked Tokyo, but it's really starting to grow on me as well.
[00:02:44] Speaker B: My last question, Greg. Arnold Palmer or whiskey Neat?
[00:02:48] Speaker A: Yeah, you know the answer to that. It's always an Arnold Palmer, Angelo.
[00:02:51] Speaker B: Okay, let me set the table here real quick. Look, I'm a big believer that if we want to be good investors, that is, if we actually want to deliver the best outcomes for clients and beneficiaries, we need to know our history. Ideas don't come out of nowhere. Ideas have a lineage.
Historical precedents shape how we invest today. But, Greg, in my view. Here's the thing.
We have almost no institutional memory in this industry, especially when it comes to innovation. That's a word that gets tossed around a lot. And it gets tossed around way too casually for me. I've said this in print, I've said it on stage, that since the 1950s, there have been very few truly innovative strategies. And by that I mean strategies that fundamentally change how we make investment decisions, how we run portfolios. What's usually called innovation. You know what that is? That's just the repackaging of some good ideas from decades ago. It's not anything that fundamentally changes how we think about investing. But there is one innovation that you can't argue with, and that's portable alpha. It has fundamentally changed how we manage beneficial portfolios.
So let me just give a quick definition. I mean, you and I know this stuff in our sleep, but to me, portable alpha starts with the simple premise that actively managed strategies, they got two parts, alpha and beta. And you should be able to evaluate these strategies based on their parts and not just their total return.
Portable alpha, what it really does is it disaggregates. It deconstructs strategies into alpha and beta, and then builds a diversified portfolio of the best alphas.
And it doesn't matter the asset class. You're just looking for good alphas. And then you gotta figure out the embedded Veda, the embedded beta, the stock bond exposure, whatever the betas are in the strategy.
Then you use derivatives like swaps, futures, options to effectively manage the beta. And then you get your target portfolio. Now, we both know portable alpha is not something new and new. I don't mean 2004.
I mean, it's been around in my mind since the 80s. And one of the key developments was stock index, futures and options. That's when they were created.
[00:05:16] Speaker A: Absolutely.
[00:05:17] Speaker B: So, Greg, it's your turn. You were there at the Genesis along with your colleagues, Marv Damsma, Mark Thompson and others. But those are the two fellows that stand out.
You guys are running the Amoco pension fund. What's the origin Story. How did you come to to this idea? When did you come to this idea? And why did you come to this idea? The floor is yours.
[00:05:39] Speaker A: Oh, thanks Angelo, and appreciate all of the nice comments. Yeah, we were early adopters of portable alpha. Starting in the late 1980s and early 1990s after the mainstreaming of capital asset pricing model alpha beta separation, work by Markowitz, work by Bell Sharp, we said there's a better way to manage an institutional portfolio at that time. And historically, the original Amaco Corporation, which was acquired by BP in 1998, was running portfolios quite similarly to other large institutional investors. We had an internal team picking S&P 500 stocks.
We hired specialty managers in bonds. We had a little bit of real estate and a little bit of venture capital. I think we are early to both of those with regard to our institutional investment. But, but we realized that we needed to meet a broader objective more effectively than we were. That broader objective is the liability that was promised to our beneficiaries, but it was the liability based on the company's ability and desire to fund any shortfall that might occur from our investing. So we asked ourselves, how can we build a more effective solution?
Now, a number of us at BP at Amoco had come from the derivatives world, as you said. I had been on the floor. Two of my partners, Matt Smith and Beth Kostic, had also worked with me at the original O' Connor Associates, which is UBS O'. Connor. So we all had a background in which we understood arbitrage and that there were different ways to get exposures to different asset classes and investments. And so our realization was, can we build a portfolio that delivers the desired policy asset allocation that we seek very cheaply and efficiently, but deliver a very strong excess return? And at that time, if you could generate 50 to 100 basis points of net excess return, that was a target for many plans. Actually, it was probably closer to 150 basis points in some cases. But the goal was to figure out how we could do that most effectively. Now, we were fortunate that we were early investors with Pimco and Pimco was one of the first institutional managers to offer an alpha oriented product. Their Stocks plus program was a fixed income alpha with AN S&P 500 future on top of it. So we were able to see the development at the institutional level of these strategies. And then Ray Dalio in the late 80s was introducing, or it said that he could take his excess return and port it to any asset class that you want. So there were a number of Very prominent people in the market who were saying this was something that we should look at. And then internally we had had strategies where we were delivering alpha internally managed equity strategies. And we asked why can't we get this alpha in the fixed income world where the asset class for equity alpha 250, 300 basis points at the time in bonds it was maybe 50 basis points. Why do we have to get 50 basis points of fixed income alpha unlevered when I can get a higher alpha from equities? And that led us down the path of realizing that we could introduce alpha strategies at the aggregate portfolio level and then just introduce our desired beta using the derivatives markets. And so our first investments were in 1989 and a challenge with the committee to get that adopted because they were not used to these strategies and they were new to the marketplace. But as one of our, as the head of our investment committee said, I will give you enough rope to hang yourself with one manager.
Fortunately that first manager was Jacobs, Levy, Ken and Bruce and they delivered 10% alpha in the first year. So that gave us the bandwidth to be able to increase the number of managers and strategies by 5 to 6 total the next year. And then we continue to be successful and we moved forward really moving the aggregate portfolio to an alpha beta or portable alpha framework after that.
[00:09:35] Speaker B: Greg, you mentioned Pimco, did you invest in the Stocks plus program?
[00:09:39] Speaker A: So actually we did not. We were, we were original fixed income investors in Pimco, but we talked to them a lot about what they were doing in Stocks plus and we realized that and I think, I think John Casey at Rogers Casey published papers after that said alpha was more diversifying than beta. You could have many different alpha drivers that weren't beta based and you could have 10, 12, 15 alphas in a portfolio and still have a statistically significant improvement in your alpha risk return ratio by adding another alpha. Whereas in beta after you have four or five asset classes, you really don't get much diversification benefits. So we wanted to build a portfolio of more alphas rather than less Stocks plus was there, there were some other alphas there? We moved of course, and there are a number of other, there are a number of alphas and an alpha at its core may have beta embedded in it, but we liked pure alphas, arbitrage based alphas, essentially cash based alpha. So a market neutral strategy, a long short equity by definition is just the short rebate that you're getting from your short portfolio plus the alpha between the long and the short portfolio. And the reason we like those is that made futures implementation very easy. The cash is collateral for your future. You combine the cash return and the future return, you get the total beta return and you get the alpha today. They're called interestingly block strategies, but back then they were portable alpha strategies.
[00:11:04] Speaker B: So you started in the equities but you moved across the entire portfolio, at least in public markets, correct?
[00:11:10] Speaker A: Oh yes, absolutely. So we started with equities in using the futures market. We started with S and P because actually early on there were no other equity futures that we could utilize. We did move into the international equity futures as soon as we could. We wore the open interest in the first mid cap futures when they were introduced in the, in the early mid-90s and that became a part of our, part of our portfolio as well. But we also utilized a number of swaps to the extent that we could. We, we actually looked at and talked to a number of brokers about doing a swap on my policy asset allocation benchmark. But then they had a, they had, early on they had issues in figuring out how, you know, they would be able to swap me a real estate and private equity returns.
So we stuck with basic asset class swaps. But we had systems in place. Angelo, because we'd been managing securities internally to be able to track every position in our portfolio. And as we moved into this space we continued to use that system. And even if we had external managers providing us alpha or beta exposure, we brought all of those positions into our portfolio management system so that I could measure what my beta exposures, my factor exposures were of my alpha strategies and of my aggregate portfolio and adjust the asset allocation exposure as necessary, depending on whether my alpha strategy's added value or lost value. The one thing we wanted to do is minimize the tracking error of our portfolio, which is another source of return. There's alpha beta and then there's error return. We wanted to minimize the error return, the biggest of which is tracking error. So we wanted to make sure that we had the right equitization or the right beta allocation and in dollar terms that match the alpha allocation that we also had. And having the systems in place to allow us to look at that on a daily basis allowed us to minimize that tracking error, but also to make sure that our alpha managers were truly alpha oriented and weren't just selling us beta or levered beta. And you talk about the timeframe over which and portable alpha became focused on in the market. You know, we can see over a course of the last, and I hate to say it, 50 years where we moved from pure alpha and arbitrage based strategies, whether it was market neutral or convertible arb, or just swap arb, whatever it might be, toward other market neutral type strategies which really weren't market neutral. They were more beta oriented. So unfortunately I remember a couple of plan sponsors who decided that hedge funds were just alpha and so they overlaid equity derivatives on top of hedge funds. But those hedge funds were actually just levered beta themselves. So when the markets went down, particularly in 2007, but also in 99, 2003 times like that, they found that they really had a levered beta portfolio that was in decline and it really hurt their exposure, it caused liquidity problems in their portfolio and it caused many other investors to just turn off from the strategy saying that these don't work, they do work, they just have to, you have to realize what you're investing in order to do to make them effective. And that required knowing what your positions were at any point in time. So you had mentioned that we looked. We're big in the use of data, use of analytics. That was always core to us being able to invest the way we wanted to invest and feel comfortable that the strategies that we were utilizing were delivering the alpha and the beta in the ways that we desired.
[00:14:46] Speaker B: Greg, what tools did you use back then? Because there weren't a lot of advanced quantitative tools. So how did you identify the alpha and then disaggregate it from the beta?
[00:14:58] Speaker A: Yeah, we were first original users of Bara. I had a computer that had dual 5 1/4 inch floppy disks. One which had the BARA program and the other in which I could save my analysis. And I can analyze 500 securities at a time. So I had to run the program five times to look at the 2,500 securities in our portfolio. And then we had, there were no, there was no real fixed income analytics at that time. So we were doing our own pricing and then creating synthetic pricing for securities that didn't have true liquid market prices. But over time we incorporated more sources of information.
You know, whether it was original bondage product or we were getting the currencies from Reuters, we were able to include those in our portfolio. But we also realized that our portfolio management systems were very asset class centric. So you had one that was good for equities but didn't work for currencies or fixed income. So as quickly as we could, and this was in the mid to late 90s, we transitioned away from using CAN software to a true open architecture database where we brought in all of our positions and then all of our, all of the risk information we had about each of the securities in the positions from any source that we could get. So MSCI provided us our international exposure. We did have bondage. We had, you know, the U.S. securities. We got a lot of prices from Bloomberg as soon as Bloomberg became available. And that allowed us to most effectively look at the positions and analyze the strategies to determine what their true drivers of risk and return were. And if there are betas embedded in an alpha strategy, we were able to incorporate those betas in our asset allocation modeling or just decide that we didn't want that beta and sell off the. Either sell off that particular beta or close down the strategy. So it was really something that was built from software that existed, but then we migrated to something that was much more customized open architecture for our end so that we can most rapidly include all new sources of data and analysis that we could.
[00:17:05] Speaker B: It's interesting, Greg, in your earlier remarks you mentioned 2008, 2009, when a lot of the asset owners became disenfranchised with portable alpha. You mentioned how they had a lot of hedge fund exposure. I think they also were, how would I say this politely? Using a lot of leverage.
Because you could use a lot of leverage in these strategies. And I think that caused a lot of the problems that they had between the embedded beta and the.
And the leverage.
[00:17:37] Speaker A: It absolutely did. The history of asset management is filled with either fraud. Well, not either, both fraud. And I don't want to say incompetence over exuberance, something, I mean long term capital was run by very qualified people looking at fixed income arbitrage, at bond spread arbitrage. And they looked at it very appropriately. Their issue is they had $5 billion under management.
The banks lent them another 20 billion. So they had 25 billion five to one levered. And they invested that in derivatives with a $1 trillion notional value, assuming that they were never going to lose money on these bond arbitrage and spread strategies. And of course they ended up losing a lot of money. A lot of it was liquidity driven. They weren't dumb in terms of understanding the underlying exposure, but they did not recognize what the market impacts of a negative return would be on a levered position. And they were very, very highly levered in their strategies. A lot of investors who invested in those strategies of course were also negatively impacted. But then you have the outright frauds, the madoffs of the world, and originally Eiscabowski, people like that, that you just you have to do due diligence, appropriate due diligence, not just investment. Although if you'd looked at the investment returns of any of those, you would have said these are unlikely. One of the big institutional ones was Westridge WG Trading, which was a stock stock futures arbitrage. A number of investors, Kern county and others were very significantly impacted by that fraud. That's a different type of due diligence that might not always show up in just traditional security based risk return analysis. But one of the things that is required if you're going to utilize any strategy in your portfolio, Angela, and I don't care if it's portable out for a long only is you've got to have transparency into the underlying position positions. If you don't, you're just investing on a wing and a prayer that somebody that says that they're adding value truly is. And you have no way of knowing whether it's levered or it's beta in disguise or what it might be. So, you know, we had a very rigorous process in which we had to identify what all of the drivers of risk and return are and they had to fit in our aggregate portfolio strategy. And we did regular organizational due diligence to make sure that, you know, the organizations were sturdy and on the up and up and that kept us out of WD trading and long term capital and people like that. But you know, I, I treat us as fortunate because a lot of other very smart people who did very strong analysis ended up investing with them and lost money as a result.
[00:20:11] Speaker B: Yeah, I mean that WG trading that happened right around 2008, 2009, so. And they were selling it as an alpha enhancement that if I remember they.
[00:20:20] Speaker A: Said it was a stock index arbitrage strategy, that they were buying the index and then buying or selling the futures. They were arbitraging the difference between the futures prices and the underlying prices. And people who knew the derivatives market knew there was not a lot of arbitrage opportunity there. And yet they said they were delivering 5 to 10% Alphas consistently some years, 20% Alphas, which we could never understand. And I think a lot of other people didn't understand them either. But they trusted that those numbers were not fraudulent, that they were accurate and that they were viable and they just were not. So, you know, for us it was understanding what the drivers of risk and return were and making sure that they fit in our portfolio. And it was done still in a fiduciary, prudent process.
[00:21:07] Speaker B: We talked about portable alpha, we talked about it historically. I appreciate the comment about the Mid Cap futures contract. I launched that at the CME when I was there.
If I said CBOE in my earlier comments, it was wrong. I was at the cme. I also launched a contract that you probably know well, it's the FTSE 100.
I got Tony Ryan to trade that when he was at Panagora and I think he still has that position on because there was no liquidity.
And I will tell you, when I was in that job at the cme, there were some other asset owners that would call. And sure enough, one guy called one day saying, I want to do a portable alpha on lumber. I said, there's not a lot of liquidity in that pit. I said, it's a great idea, but you bring a five lot in, those five guys in the lumber pit are going to be limit up or limit down on that five lot. I said, you'll never get out of that position. So there was some thinking, but there were some practical barriers to actually implementing some of these ideas.
[00:22:04] Speaker A: Well, as you know, the entire big short housing crisis, Angelo was, was based on, you know, liquidity of the housing market and could you buy it or sell it? And, you know, you created positions but you found out that you were the only person with that exposure. So when you went to sell, you were beholden to whatever the holders of the other side of that contract were willing to sell it to you at. That's interestingly, when we built our policy asset allocation, we built it around contracts that we knew we could get exposure to with a lot of liquidity in the marketplace. So we didn't adopt certain exposures like hard assets, lumber, commodities, things that we thought we might not be able to get in and out of. As a part of our beta, we only, we used, you know, large cap, mid cap and small cap, US equities and then the global international equity markets and a fairly broad based fixed income strategy as a benchmark.
[00:22:57] Speaker B: Well, Greg, let's move beyond portable alpha and talk about a couple other ideas that you and I have seen during our career. The first one I'll mention is one that that's top of mind. It's Portfolio Insurance 1987. You and I were there for that one. Is that a real innovation, do you think? Or was it just a.
I don't know how to describe it. Just a fad.
[00:23:17] Speaker A: Portfolio innovation, I think was a risk control strategy. It was based on the fact that as equity markets fall, you can sell into them and eliminate your losses, which theoretically makes sense, except when everyone wants to sell, there's no one to buy and you end up increasing your losses. So it was really not an academic issue, it was an implementation issue. And I don't think that it was really an innovation as much as it was a strategy that truly isn't operational when you most need it, which is in the time of real crisis.
If market conditions are normal and the markets are down 1 or 2%, you want to protect yourself. Sure, you can use a type of a sell strategy to minimize your losses, but you can't do it when everyone wants to minimize their losses. And there are certain strategies that exist where that's the case as well. One that I think of as convertible bond arbitrage. Convertible bond arbitrage makes perfect sense. If, if the convertible bond and the equity are trading out of line with each other and the bond can convert into the equity, well, there should be an arbitrage. You can take advantage of it. But when everyone is doing that strategy and everyone wants to get out, there is no arbitrage left whatsoever. And the bonds and equities can disconne in terms of their pricing for a long time, ruining the alpha from the strategy. So you have to be cognizant of whether you're in a portable alpha strategy or just any portfolio strategy, that these liquidity events can cause the normal correlation, the normal relationship between a beta and an alpha, or numerous betas to fall apart, and that they will impact your overall risk and return profile. You decide how much exposure you want in situations or when those situations occur and how much you can bear, and you build your portfolio accordingly.
[00:25:05] Speaker B: I think that was another problem back in 2008, 2009, with portable alpha correlations, you know, just, you know, kind of.
[00:25:11] Speaker A: Converged back 2008 and 9, not related to the housing crisis itself, but you'll remember there was the quant meltdown that occurred for about two months during that period when all traditional factor relationships went perverse. These were what you thought was at most ever going to be a 2 1/2 standard deviation event turned into a 20 standard deviation event.
And a number of traditional strategies, very good quant managers that existed, and you can think of the Wellingtons, the numerics, saw that their strategies that were never going to have these levels of risk and return and dislocation did dislocate. Again, driven by liquidity. The underlying premise was still sound. You just hit extremes of the return distribution. Another big one that people don't remember as well, that wasn't driven specifically by the housing market. It was just driven by liquidity in the quant factor space. And so you have to understand what your exposures are and your risks are and your strategies. Innovations in our industry in terms of strategy are really difficult to think about. I think portable alpha really was an implementation innovation that truly focused institutional managers, institutional investors, and consultants on the need to understand what drives your alpha and what drives your beta and the impact of leverage and liquidity and things like that in the portfolio. Yeah, if I think about other types of strategies, though, there are 130.30 strategies which were just a form of leverage. I don't see that as a true innovation. It's just an implementation vehicle.
[00:26:44] Speaker B: How about ETFs? ETFs?
[00:26:46] Speaker A: I think ETFs are more, again, an implementation vehicle. They have a lot of advantages, though, in terms of their liquidity, in terms of their low fees, in terms of, you know, reasonably, their transparency. There are still liquidity dislocations that can occur when everybody wants out of an etf. At the same time, it can trade at a discount to the true underlying value of the securities in the portfolio. And you don't really know if it's an actively managed portfolio of security, how the active strategies are truly performing at any or the active investments are truly performing at any point in time. But it is highly efficient for an investor, whether institutional or individual, to use in the portfolio. I don't know though, that it's really a true implementation or a true innovation. It's just a repackaging of strategies in a and perhaps a more efficient way of doing the implementation. I think you Disagree. You think ETFs were quite the innovative instrument that came into the market. I don't disagree that it's unique, but I see it as more of a packaging rather than a true investment check.
[00:27:51] Speaker B: I mean, what got me, Greg, was the creation redemption function that they built into it. I think that kind of took index funds beyond index funds. So let me ask you another one, though. What about currency?
[00:28:04] Speaker A: I don't disagree with that.
[00:28:05] Speaker B: What about currency overlay?
[00:28:07] Speaker A: Well, I think currency was always embedded in your asset class allocation. So, you know, when you're looking at equities or fixed income, you were looking at the currency in which they were derived and you were asking yourself whether you needed to hedge or not hedge that and whether the currency added value was a diversifier or not. I think ultimately it comes to an aggregate portfolio concern.
What currency do you need to pay your liability in and the day that you need to pay that liability. Are you Going to have that currency available? Are you going to have to sell certain currencies and buy others in the marketplace?
Essentially it comes down to the same problem as being a 401k owner and you're near retirement age.
Do I want to have equities in my portfolio when they could be very volatile and the day I go to retire and redeem my 401k, I am going to be in a downdraft and lose a lot of my assets? I think it's the same problem that occurs with currency and you just have to look at the volatility that the currency provides to your portfolio. I think it's an embedded volatility that's always been there and people lived with it.
But focusing more on it, again, I think it was always there. It's just a change in focus, not a real innovation. With regard to your aggregate portfolio management.
[00:29:19] Speaker B: How about Greg, risk parity.
[00:29:21] Speaker A: Risk parity, again, just recognizing that bonds and equities have different risk and return profiles. At its base level, there are a number of people say that bonds and equity should trade at the same price with the same volatility because essentially they are the same. Equities are just a levered version of bonds. I disagree with that. In the listed space they certainly have a growth premium that bonds don't. And in the unlisted or the private space they have an innovation concept that bonds will never capture.
So I, you know, I don't think that risk premia is in and of itself a unique strategy and in many ways is a flawed philosophy. But if you have a liability that you need to deliver and that liability is coming up and you know what it is, then you can essentially hedge or mitigate the deviation of your assets versus that liability by using a risk appropriate strategy such as, you know, a fixed income approach. So you know, that type of a fixed income versus equity model and using leverage to get that same level of volatility may make sense in certain instances. But then again, you're inducing leverage into your portfolio and you may have liquidity issues resulting from that leverage that make liquidating the strategies much more difficult.
[00:30:39] Speaker B: Greg, let me give you a couple names. I'm going to shoot them at you. You tell me, innovator or just great investor? Jim Simons, Innovator or great investor? I mean, not to say you can't be an innovator and a great investor, but you get my point.
[00:30:54] Speaker A: Both, absolutely. Jim recognized, I think, was the first user of big data in the marketplace and also a rapid trader incorporating the analysis of that data, making decisions effectively and then trading very quickly. But the use of big data was the primary driver of a lot of his returns. And I think he was a true innovator from that perspective.
[00:31:16] Speaker B: Now we're going to go to number two. Number two, John Bogle.
[00:31:19] Speaker A: John, of course, recognized the benefit of index investing. You know, at the time that was probably an innovation because the world was focused much more on active strategies than it was index or just beta generation. But he made clear the fact that beta over the long term can generate a very strong return and an appropriate return and you can get it in a very cost effective manner.
So I think that was an innovation at the time. You know, Burt Malcol and others kind of led Bogle's move into that space.
In hindsight you would say, oh, we should have recognized that. But it takes someone to originally recognize the importance. And I think John did a great service to the industry in doing so and in focusing on it as much as he did. It's only for John's reasoning and purpose that I think we see that we can get equity exposure, any index exposure for fractions of basis points these days when it used to cost 20 or 30 basis points for that same exposure.
[00:32:15] Speaker B: Yeah. And Greg, I would add, I would add especially what he did for the retail investor made a big difference because he delivered the whole idea of index funds to those investors. Okay, my next one for you is Louis Ranieri at Salomon Brothers. Louis Ranieri. Our listeners may not know who this guy is, so we may have a little debate. But what do you think about Ranieri and what he did with mbs?
[00:32:37] Speaker A: Well, he certainly made MBS a focus. He focused MBS as an investable asset class and one that was diversifying relative to traditional bond NDCs, which were just corporate bonds and government bonds. Yeah, innovation at the margin. I'm going to say that was innovative at the time, but over history we've seen a move from, you know, basic financial instruments to being investable, to essentially everything is investable. So Lou was one of the guys who showed that there were other fixed income instruments, the, you know, the fannies, the Freddy's, the mortgages that could be a part of a beta solution for investors.
Of course, now everything is investable, including things that have been created that we didn't know existed are investible. And we can talk about maybe that, that other source of innovation, the one other source of innovation that I think is a true innovation that has occurred since portable alpha is crypto and blockchain, essentially Math and computer science have become an asset class and that's something that hasn't. It's not physical, it doesn't have a cash flow behind it, but it is an investable asset class that of course a number of individual and institutions are putting capital to work in. So that creation of that new math based non physical asset class is quite interesting. And I think that truly is an innovation. But the blockchain behind it is probably the most important and innovative aspect of the crypto market. But everything has been extended into being investible. Whether it's wine or art or timberland or certain commodities, whatever it might be, are a part of policy asset class allocations these days.
And because of that it's very tough to find additional diversifiers and it's very tough to find really diversifying alphas as well. One thing about alpha is that we know that by the law of arbitrage, alpha should go away. They should become efficiently priced and they should go away pretty quickly. And I think during the early to mid-80s and 90s we saw that alphas could be persistent. But as institutional investors moved a lot of capital in and we saw a move to the family offices and the high net worth individuals moving into these spaces more quickly, Alphas do get arbitraged away pretty quickly, particularly when the arbitrage can be closed quickly. Having these other strategies where perhaps there are liquidity issues or other constraints that might allow the alphas to exist for a longer period of time is something we're all searching for or we're just looking at for a conditional state where an alpha does exist. And we want to be some of the first people to try to arbitrage that alpha away. That means that our policy alpha portfolio is not static, but has to be very dynamic. You take advantage of alphas when they exist and then when they're closed up, you move on to another Alpha. You don't just wait for it to exist.
[00:35:27] Speaker B: Again Greg, that's an interesting point about alpha. I've always described it. Let me see if I could remember it. It's been a while, Jim Dunn.
They're scarce, transitory and capacity constrained is how I described alpha.
[00:35:40] Speaker A: Absolutely.
[00:35:41] Speaker B: But you know, Greg, you kind of touched on something here and that's tokenization. Because as soon as you talk about the blockchain and everything could be an asset, we're talking about tokenization. I'm going to do a whole series on that in the future and I'll certainly use you as a source. But what do you think about that tokenization Innovation going to change the way we invest?
[00:36:01] Speaker A: It absolutely can.
You'll be investing in a lot of the same things, but you'll be able to do it more quickly, more cost effectively. You should have transparency, much more transparency into any investment that you're making via the token and custody changes. Instead of having specific assets being held at your bank and they're charging you by position and the accounting becomes a nightmare via the token. You can price everything really in real time, you can have transparency in real time and the holdings should be much cheaper and more efficient to maintain. So I think it changes the way that big institutional investors are going to be able to build and manage and their portfolios in a cost effective manner. So I think the box chain is, is going to be, you know, hugely beneficial to investors. And the last big benefit is that because it's a known contract where anyone can get transparency into it, the risk of fraud is much less reduced, particularly in areas where, you know, fraud might have been prevalent, like in real estate holdings and making sure that, you know, your seller, something you're trying to buy, actually has the rights to, is the right owner and has the rights to sell that real estate. Hopefully it will reduce the instances of fraud that occur in our businesses. I guess the one risk with it is if we do move into Quantum computing and, and someone can break your password on your, on your account, your digital account, you know, there's a lot that could be at risk. But then again, you know, then everyone's, everyone's personal information, bank accounts and, and other information is going to be a risk. When that occurs.
We'll just need new security measures once Quantum is fully operational.
[00:37:41] Speaker B: Greg, we could stop it here. I appreciate the overview. You've given us a portable alpha. Your thoughts on innovation, what counts, what doesn't count, and you're still out there trying to find the best ideas. I know that. So thank you.
[00:37:55] Speaker A: My pleasure, Angelo. I think people will continue to be innovative.
Maybe we haven't seen as much innovation in the institutional space over the past periods of years. I mean, institutions aren't paid to be innovative. They're paid to deliver risk and return in an acceptable manner. So innovation is new and thus you don't have track records, you don't have assets under management. You might not have the capacity that exists in current existing strategies and the institutional market hasn't been quick to deliver them. But certainly, you know, private investors and certain foundations, endowments, family offices who don't have the same requirements have been much more adaptive of some of these more Innovative strategies. I think we're going to see a lot more innovation going forward as a result. But it might be restricted to some of the smaller users as opposed to the large institutional users for a while.
[00:38:48] Speaker B: I mean, it's interesting you say that Greg, but you know, going back to the beginning, Amocol was not a small plant at the time. I mean, maybe now it would be, but we found innovation there. And you know, also Weyerhaeuser was doing something similar. So it kind of came out of the, you know, a true bona fide asset owner that had size.
[00:39:07] Speaker A: The difference between then and now was that you still had a culture of risk taking in investment nowadays with all of the lawsuits that will come about in defined benefit and defined contribution plans if you're not fiduciary prudent.
The consultant model, which has taken over much more of the universe where you pay an independent third party to be your prudent fiduciary, has reduced the incentive to take a lot of risk or to try new strategies in portfolios. So you just don't see that same level of innovation in the big plans that could be exposed to these types of risk. And then you have a number of organizations, big institutional investors who are just moving toward ocio.
They're getting rid of the obligation and turning it over to a third party. And those third parties have absolutely no incentive to try anything new with these assets they have under management, because if they were to underperform, they themselves are going to have to pay, they pay out of the pocket the liability that they've promised. So that was promised. So there just isn't as much incentive in this new environment or in this changed environment to take that level of risk.
But there are a lot of individual investors and wealthy investors and funds that are investing primarily their own capital that are looking for every advantage that they can get in the market. And we'll take these exposures on very quickly, but also manage them very effectively. So they're not long term exposures, they're opportunities that exist that they will trade into and out of quickly. My biggest question has always been what once a, say a hedge fund manager or a very wealthy individual who has made money in the marketplace gets wealthy, they become a family office and they hire the best and the brightest traders to come work for them to manage that billion or $2 billion that they have. Amoco in its earliest days was $5 billion, BP $55 billion. If you have that much money, why aren't you hiring the best and the brightest traders to work proprietarily for you and to deliver risk and return and apply prudent, efficient manner, but also take advantage of the opportunities that exist in the market. I've thought that should always be considered the most fiduciary, prudent manner of investment, but the world has gone in the other direction. We'll see how it plays out over time.
[00:41:26] Speaker B: We'll see.
Greg, thanks a lot for being on the show. All right, Angelo, and appreciate the show.
[00:41:31] Speaker A: What else can we talk about today?
[00:41:33] Speaker B: Thank you.
Thanks for listening. Be sure to visit PNI's website for for outstanding content and to hear previous episodes of the show. You can also find us on p and I's YouTube channel. Links are in the Show Notes. If you have any questions or comments on the episode, or have suggestions for future topics and guests, we'd love to hear from you. My contact information is also in the Show Notes and if you haven't already done so, we'd really appreciate an honest review on itunes. These reviews help us make sure we're delivering the content you need to be successful. To hear more insightful interviews with allocators, be sure to subscribe to the show on the podcast app of your choice. Finally, a special thanks to the Northrop Family for providing us with music from the Super Trio. We'll see you next time. Namaste.
[00:42:27] Speaker C: The information presented in this podcast is for educational and informational purposes only. The host, guest and their affiliated organizations are not providing investment, legal, tax or financial advice. All opinions expressed by the host and guest are solely their own and should not be construed as investment recommendations or advice. Investment strategies discussed may not be suitable for all investors, as individual circumstances vary.
