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- [00:05]
A
Welcome to Educational Alpha. I'm Bill Kelly, your host, bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator, and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com in this episode, host Bill Kelly welcomes Tad Fallows and Matt Shechtman from Long Angle, a private community of high net worth individuals focused on wealth preservation, personal growth and alternative investing. Tad and Matt share their entrepreneurial backgrounds, discuss how Long Angle fosters unbiased peer learning, and explore the value of collective access to private market investments. The conversation also touches on health and wellness, mental health pressures tied to technology, and strategies for asset allocation, diversification and tax efficient planning in the wake of concentrated liquidity events. Ted F. And Matt Schekman, welcome to Educational Alpha.
- [01:38]
B
Thank you so much for having us here.
- [01:40]
C
Happy to be here.
- [01:41]
A
Great to have another dynamic duo. Not my resting pulse, but it works well. And when I can get two great minds as opposed to one, I think it's double the fun and double the content. And I should give a little bit of a head nod to Patrick Nolan, who I did not know, but I'm a senior advisor for Star Mountain Capital, lower middle market firm out of New York and Tampa, and I spoke at one of their conferences in Atlanta probably a few months ago now. And Patrick Sawyer had a CAIA pedigree as a KAYA member and he came up to me, made the introduction, told me a little bit about Long Angle, which we're going to talk about and I'm now a member of that community too, but that gives us a bit of an opening bid. There's a lot to cover, but before we get into any of that, perhaps we can start with introductions and sort of the street cred. And Tad, maybe I'll start with you.
- [02:28]
B
So my background and again, thank you so much for having us here, Bill. I actually am an entrepreneur by background. Spent about 10 years bootstrapping a software company selling to universities and hospitals, grew that to about 100 employees and then sold it to a strategic acquirer a little over five years ago. And that was kind of what led me into the world of private market investing and other kind of more sophisticated investing, where that exit meant that on one day went from having very little money to having a fair amount of capital to manage. So there's a whole bunch of new questions there, Some of them around investment management, a lot of them around non investment questions of okay, how do you raise kids with wealth? Or different estate planning and tax kinds of questions. We can talk more about Long Angle later, but led to the formation of that community of basically peer to peer people who've been fortunate enough to have accumulated significant assets generally a bit earlier in their careers and so looking to get peer advice on that. And so then over the past five years of managing that Long Angle community have gotten much deeper in the private market space. But I will probably let Matt actually speak a little bit closer to that. He's a partner of mine in leading Long Angle here and he actually leads our private market investing practice, so he can speak to it a little bit more fluently than I can. Yeah.
- [03:47]
C
And my background actually isn't terribly dissimilar when it comes to the entrepreneurial side. I actually started my career as a real estate finance attorney and clerked on the 5th Circuit Court of Appeals back in 2010, but then got the entrepreneurship bug and founded and exited two companies in the health and wellness space, which is actually after one of those exits. What got me exploring the same thing that TAD was of. I have all of this capital to allocate and what's the best way to go about it? At that time, given my real estate background, I was heavily concentrated in real estate and looking for a significant amount of diversification and started working with some family offices and that is where sort of the entire asset allocation bundle came into play. And so I've been exploring the space in depth since about 2016. And that is when coming into Long Angle, we saw a large white space to kind of attack this problem for those that are looking for wealth preservation and diversification of their assets. And so that's what we do here at Long Angle and I'm happy to be a part of it.
- [04:59]
A
Thanks, Matt. And maybe just a couple of quick follow ups. You mentioned the fifth Circuit Court of Appeals. It's been mentioned on this podcast before, probably well before your time, but it's become an excellent clearinghouse for the aggressive lobbyist. And we now have SEC regulation that's been beaten back a year or so ago and now an executive order opening up access to alternative investments and not so much trying to draw parallels back to your time or even take a swipe at that court of appeals. But what you would define as responsible access to alternative investments, now that we have it opened up beyond the crowd you might see on a long angle platform.
- [05:38]
C
Yeah, I mean, notwithstanding the politicization of the court, we've been talking about this for a long time. Where the current 506 rules require accreditation, qualified purchaser, qualified client status, and the current rules essentially based on investable assets are pretty arbitrary and have been fodder for a lot of debate on whether or not that's the right tool to use. Then on the other end is just complete open access. And I'm not sure that having the ability to invest in anything anytime for anyone is the right tool either. I've heard a lot of debate about whether or not using tests or other qualification metrics for certain levels of sophistication is a good idea. Fortunately for us, we have a net worth bar and a lot of our membership base is highly successful. They're investors, they're entrepreneurs. We don't run into the lack of sophistication kind of issue and actually have the ability to rely on our 5,000 plus members to really dive deep into diligence. So I'm happy to say we're a little bit insulated from some of the problems that can occur with no gating in terms of access. But it's not lost on any of us that there are certain slippery slopes and problems that can come from it.
- [07:02]
A
Yeah, and maybe an observation and I can move on. I want to ask you something about health and wellness, which you mentioned as well. I just did a podcast with the group from tif. That's the Investment Foundation Fund. It very much synced up with a post I just wrote on Kaya's blog about this whole democratization and the convening power of the DC holder is tremendous. It's $9 trillion. It's 15 trillion if you throw the self directed IRAs in there. Even if 10% of that opts into alternatives, you're talking about a pool of assets that rivals the Norway Sovereign wealth fund. And then I think the power of that in terms of manager selection, due diligence, negotiating fees, and that convening power would be awesome. I'm hoping the Department of Labor is listening to us today and maybe that might be a pathway forward. But I think we're more likely to find ourselves back in a certain court of appeals in New Orleans. But we'll see what happens. So I'll just park that. So Health and Wellness, we don't need to spend a lot of time. And I think Tad, you've done some work in the space too. But Matt, I'll start with you. There's a fella by the name of Sean Lesser who reached out to me a few weeks ago and he started something called the Real, which is mental health. And he asked me if I periodically would post something on LinkedIn wearing one of his hats. And I did that not even a week ago. And I think I had close to 40,000 engagements impressions with that LinkedIn post. And I'm not a social media animal like some of my younger kids and I was just amazed to see that level of interaction and maybe it's because of this age and place where I am, but I think mental health is at a crisis point for not only our generation, but I look at kids growing up and social media and so I'm just curious if you have any insights in terms of how we're doing as a society around more specifically mental health as opposed to health in general in a Tad, I'll get some of your thoughts too in a moment.
- [09:00]
C
My specific expertise doesn't lie in mental health. We actually, you know, my first company started out a chain of yoga studios, an online education platform, an international event business that we sold to a public strategic back in 2017. But I will say the appetite and demand for community engagement, which I think the underpinnings are heavily driven by mental health and a need for belonging, which I think in the Venn diagram of a lot of the things that you're talking about are highly intertwined. And I also consulted and came in and ended up managing the bankruptcy for a company called Yoga Works, which was a public yoga company through Covid and seeing the sort of destruction and mental characteristics tied to that, but the mental health epidemic firsthand, it's very, very clear that there is a lot to that and I think that there's a lot of work to be done with respect to the community that we run. And I think Tad has a lot of underlying data and anecdotal and otherwise is that even for those that are highly successful, high net worth individuals, health and wellness and mental health in general is probably one of the number one things that we deal with in the community.
- [10:27]
A
Thanks Matt and Ted, turning to you both on that and they may be broadly speaking the Long island community. And I think most entrepreneurs who have had a successful exit and I think this may speak to community, but you can correct me and a lot of them are probably north of 50 and I'm sitting here in my mid-60s and never before has health been such an obvious part of my day to day process. Because I would like to think in my 50s I had not reached the halfway point. At 65, I definitely have. Maybe you'll tell me otherwise, it'll be great. But if I do live that long, I want to be functioning and contributing and being able to interact with my grandchildren, et cetera. But if you have any views on the importance of health and then maybe you can use this as a segue to talk a little bit about the long angle community.
- [11:16]
B
Yeah, I mean, I think you put it very well there that probably for anyone, but especially as you get to a point where you've got significant assets, let's say you're in the eight figures, the odds that you are going to outlive your assets are very low. And so that no longer becomes the constraining factor on what you can get out of life. Really what becomes a constraining factor is how many years you have left and probably as important the quality of those years and so how much you can maintain yourself. And I think I'm not sharing anything unique there, but I think it is that combination of both physical and mental health. I mean, really the only thing I would add on the mental health dimension is I've got two younger kids, as does Matt. And actually many of our members, you were saying, in terms of the typical age, actually I'd say significant majority are under 50. It's often people who've had exits a bit earlier in their careers and so thinking about their kids, and that's where I'm probably most concerned and most aware on their mental health, particularly for girls. I've got one daughter and one son. There's a lot of pressures in a lot of direction and without falling into that trap of saying the world's more complicated now because it's always more complicated than it was a year ago. For me, on a personal level, the thing that I have, I think we've done many things wrong as parents, but the one that we've done right and most successful is just really refusing to let them have technology until far later than all of their friends. So my son's 14, he still doesn't have a phone. You know, my daughter is 10, doesn't have a phone. And I think, you know, when I look at a number of their friends, you know, girls who are 13 years old and they actually have Instagram accounts and not just surreptitiously, but their parents are aware of it, and helping them manage their Instagram accounts. I just think that can't lead anywhere good. You get to know your kids really well, and so you can see when they're in certain moods, and there's an extremely high correlation to if they've been on a screen or in those, you know, social media kind of interactions. So we may be getting a little bit further afield from the typical conversation you're having here. But I think if there's one thing where I feel like we've been making the right decisions, it's on reducing that. And I think especially, you know, a lot of our members are technology entrepreneurs. You know, maybe they live in Silicon Valley or somehow deeply plugged in there. And you will certainly find the better somebody knows technology, the less they want their kids having exposure to it until they get more emotional maturity and cognitive development to handle that.
- [13:34]
A
Excellent points. And I've got five kids, one late 20s, three in their 30s, and we've got a big gap between four and five. So my youngest son, Will, turns 21 next week, and he was the only one that kind of grew up with social media. And parenting is a hard business, full stop. And there's plenty of ways you can screw it up, but you dump social media into the mix, it becomes so much more complicated. And I feel fortunate that I did not have to directly deal with it as a parent, maybe tangentially with Will, but it is something you point out we have to be very, very mindful of. And I've got now two grandchildren who are very young. Neither one of them are even six months. But if you're sitting there and the TV is on, boom, they go right to it. So it is a magnet. And we do have to be very, very careful. So some excellent points there. So maybe turning the page on that to maybe long angle and what you're looking to accomplish there, very interesting network. As I said a moment ago, I'm part of it myself. I'm happy I joined it. I have not really found my resting pulse of getting engaged because I guess I'm not a social media guy myself too. So I really haven't found a way of utilizing it. But it's interesting that there have been some investments I have made over the last six months or so when I've been been part of long angle. And I'll go on and just look at what the chatter is. And there's not a single investment that I've made that not. There's at least somebody that has an opinion on it, and that somebody is like me, they're an investor and they're not looking to sell me something. And I've also engaged with somebody recently who is moving from the west coast back east and asking questions about some local independent schools. So is not just investment advice, but maybe sticking with this podcast platform. Maybe you can put some of our time and effort there. What are you looking to accomplish with Long Angle and what makes up this membership group?
- [15:30]
B
Basically our objective there is to create a space for people in this demographic. So generally our members are probably somewhere in the what banks would call very high or ultra high net worth demographic of maybe having more than 5 million and but below family office territory, so less than a quarter billion but somewhere in that fairly broad spectrum. And generally first generation wealth creators who now have an amount of assets that they didn't have growing up. And so they have a bunch of new questions again, some of them investing related, some other personal finance and some just on these things like travel and raising kids and that kind of thing. And they want to get advice from people who have walked a mile in their shoes and going through those same questions and not trying to sell them anything. That's kind of what we set up the community to do and what we're still trying to foster is a totally solicitation free space for peer to peer collaboration. So nobody trying to sell life insurance or wealth management or accounting or any of those services. Just people connecting of hey, you know, I'm having this challenge, my cousin's asking for money. You know, what do you do in this sort of situation? Or hey, I've outgrown my accountant. I need somebody who can handle these international issues or these crypto issues or you know, whatever those issues are. Who do you guys recommend? Who do you actually use? That's really what we are trying to accomplish there and have built the community to do. We've talked a bit about the alternative asset investing and that actually was not originally part of the scope of when we launched this. It was just a kind of online community for these private, confidential, transparent conversations. And then as we've been going, we've found that there's a number of kind of unmet needs that people in this situation have. And one of those is people. A lot of our members, a significant majority of them actually totally self manage their own portfolio. So they're not working with JP Morgan or Credit Suisse or whoever to put them into a 6040 portfolio. They're allocating things themselves and they say, okay, the 70% of my portfolio is in public markets. I certainly don't need to pay somebody 75bps to buy an SPY index fund. I can just do that myself. But for a significant number of them, they want some level of exposure to these private market assets, whether that's private equity and private credit or stuff that's a little bit more esoteric like litigation finance or oil and gas or GP stakes, what have you. They say okay, for those both, I can't meet those minimums personally. If I have $20 million, I don't want to put 10 million into a single vintage of a single private equity fund. That's irresponsible. But collectively, if we say a hundred people are each putting a hundred thousand into that, then you hit that 10 million or the 15 or whatever it is that minimum. There's and then also a bit of the kind of shared expertise and diligence and this is, you know, what Matt's team leads there, but basically allows people to get that we're looking for institutional caliber access to alternative assets, but on a person choosing on a case by case basis and just that portion of their portfolio that they want to have in alternatives. Matt, I don't know what you'd add to that.
- [18:26]
C
Not necessarily just entirely around investments. I think people that have a lot of wealth aren't typically all that different from everybody else. It just happens to be highly concentrated and usually tied to some sort of entrepreneurship. And so we see that people a from an experiential background have gone an inch wide and a mile deep in something and been great at it. But then they have a whole slew of questions about what to do next, whether it's with respect to their life or how to handle it emotionally, how to deal with their family, how to handle travel, how to extend all taxes, estate planning, all of these types of things. And they want to come to an unbiased place where they're not going to be sold anything. And so I think that that's first and foremost a key reason why most people end up coming to join and interact with other members. And it's not lost on us that your asset allocation and investment decisions is pretty tightly correlated with that. I think where people, they start to accumulate a significant amount of wealth and they think a lot more thoughtfully about the long term. And when they see hyper concentration either with respect to their business or how they've built their wealth or just allocating to spy like Tad said, and they see 40% concentration in a handful of companies, people aren't necessarily saying it's a bad approach to put their assets into the S&P 500 or VTI or something similar. They're just saying I'm not comfortable with all of it being there. And you're seeing more and more of that across the spectrum when it comes to asset allocation, whether you're talking about family offices or more of like an endowment pension style approach. But the key differentiator there is access to the best managers in the business. And so what we did at the very beginning is we said we have a slew of highly successful members. Can that help us get access? And how do we get access? Usually it's through knowing somebody, getting your foot in the door and then being able to commit sizable sums. As Todd mentioned, if we can put a hundred people in at $100,000 each, then we can meet a $10 million commitment barrier. But that's just the first step, right, of being able to get Aries and TPG and Blue Owl and hig's attention. The next step is making sure that we're doing diligence in the best way that we can and we're not shy and there's no ego tied to it, but we use our member network in the same way along those lines. And Bill, you mentioned it, there's not an investment out there that somebody doesn't have an unbiased opinion on and we see it across the realm from oh, I've invested with those managers and they've been wonderful or it's been problematic for these reasons. But then it gets even more nuanced of well their strategies in lower middle market industrials and I've been running on the operations side an industrial manufacturing company for the last 20 years and I can tell you what I see about the forward looking CAGRs in the macro environment and we use those people in order to help diligence or people sold a company to the manager, they used to work at the manager, they went to college with the manager. There are a myriad of touch points that as we're touching on close to 6,000 members here, we can pretty much extrapolate any manager, any investment to make sure that we are taking that next step in order to get to the top quartile managers and strategies which really is where not just the outperformance comes, but avoiding those zeros and the bottom quartile managers.
- [22:14]
A
I will admit I missed my new member orientation session with long angle so this is going to prove that case in point. I didn't realize, maybe I did, but I didn't occur to me until I heard both of you now that the convening power of long angle where they can collectively get the individuals to come in and act as a single lp. And I'm just curious if it and I think you said it, maybe it's both. Would you come in as an investor in a single portfolio company as an opportunity or come in as an LP and fund XYZ of pick your gp or is it both?
- [22:48]
C
We put together an SPV into fund level investments, typically not into single asset directs. Now that being said, after we've established a relationship with a manager, we will do direct investments alongside them in order to blend fees down on co invest where those typically have zero fee, zero carry or something similar. As an example, we were able to get into an early anthropic round alongside Lightspeed because we have a very significant eight figure investment with Lightspeed and then we're able to come in on anthropic directly and then there's a handful of other examples along those lines but typically for a variety, either structural or sort of bimodal outcome reasons, we're not going into here's a nascent seed series software company that we're going to do the lead check in for instance. We don't typically play in that space.
- [23:45]
A
So Tad, I think both of you but maybe it was you more than Matt before we came on, you specifically mentioned this annual asset allocation survey that long angle does and I'm not looking to name a specific fund and I think even the danger of saying well we like hedge funds, what the hell does that mean? There's so many different flavors and even there performance dispersion can be quite wide as well. But are there particular segments of the market that you find interesting at this phase under this survey or maybe not even you your members?
- [24:16]
B
I mean a few things that are interesting from the survey that kind of get to the question of allocation and again with the demographics here typically being people, let's say in the eight figures of net worth, first generation creators as kind of the context and often people with either they are continuing to earn a lot of money or they have the potential to earn a lot of money. And I think that'll be relevant because what's probably most interesting is the approach to debt and credit instruments where there's two simultaneous behaviors that they are logical together but might be a bit surprising. One is that the members tend to have a very conservative approach to leverage. So if the average portfolio is a hundred dollars, they're going to have something like $5 of debt on that portfolio. About half of members have A mortgage on their primary residence, about half of them don't carry that beyond those residential mortgages, very little debt overall. So then taking a fairly conservative risk posture from a downside, but then in terms of where they're actually putting that equity to work de minimis amounts in bonds or other bond like instruments of people basically saying, hey, I have a long time horizon. I am comfortable with volatility. I don't think volatility and risk are synonyms saying, hey, what I care about is where am I going to be in 20 years? Not exactly how smooth is that path. And so you'll see them very heavily investing the equity they want to put to work in either public equities or in private market equity instruments, whether that is venture capital, private equity, something else where you get a higher expected return. I think that one is probably. So it doesn't look anything like your typical 60, 40 portfolio. It looks like maybe you have 60% public equities, 5% bonds, and then 35% in these other asset classes. Again of whether that's crypto, private equity, venture, et cetera. The other thing that is pretty interesting and just kind of a funny anecdote to this question of working with a wealth manager. I would say earlier on in my post exit journey, I was violently opposed to the wealth management industry. I felt like, hey, it doesn't make any sense to pay anybody 75 bips. That's just way too much money. I've actually become a lot more neutral on the question and I think that there are very valid reasons why somebody might want to do that. Maybe they just don't have time to manage things themselves. Maybe they don't have an interest in it. Maybe they know emotionally that they're going to be the kind of person who panic sells in a downturn and so what they're buying is a steady hand at the wheel, et cetera. But from a pure asset allocation perspective, we asked our survey respondents, there's, you know, well over a hundred so statistically significant, the portfolios are within less than a percentage point different from the members who work with wealth manager and those who don't. Their asset allocation to every single category is almost identical. So I think you find that people come out to that same answer whether they're doing it themselves or not. So I think that's just an interesting anecdote from that survey.
- [27:05]
A
I just want to come back to something you said, Tad, about the use of wealth managers. And I don't know if they're going to find the next great investment idea any better or worse than maybe somebody in your community. And I think you said as much. But then I do wonder your views on using the wealth management space for estate planning and tax work and introducing life insurance as an asset, not just a payoff upon death. And as you get older, there's some effective strategies there. How important is that amongst your membership base is that. And maybe they're young enough that only me worries about it. But how do you see that factoring into the calculus?
- [27:45]
B
I mean, I think there's two separate questions there. One is how important is your estate planning and thinking about tax implications, that kind of thing? I think that is crucially important can go into that more. The second is how important is the wealth manager in that role? And I would say that's probably in that category of a good reason to use a wealth manager if you don't want to figure it all out yourself. Like I would be the first to admit, there is a lot of complexity of trying to quarterback between your estate attorney who's telling you one set of things you want to optimize, maybe your CPA who's telling you from this year's taxes or something else you want to optimize, and then either yourself or an advisor who's trying to maximize returns and that trying to get all those pieces to plug in together in a way that is not an undue burden to manage administratively, an ongoing basis. I personally do that myself. It's possible to do it themselves, but I would not claim that is an effort free activity and so certainly have to put time into maintaining it. Then the separate question of how important is it? It's interesting because nobody, regardless of their age, wants to think about their mortality or optimizing for what happens when they're gone. And it's also one of those things where you start going two levels deep and just your head hurts because there's all these trade offs of okay, well if we want it to work from a tax standpoint, it's gotta be irrevocable. But now my daughter's 10, I have no idea how good a wealth manager she's going to be later. And so if I make this irrevocable decision, how do I maintain enough control that I can, you know, tweak the dials if it turns out she's either more or less responsible than I expect? But then if I'm in too much coverage, is the IRS going to really believe that I've actually let go of the assets? And what about creditor protection? So I would say If I look on average in our members, it probably is one of those things where it's a back of the mind lurking concern of, hey, I really haven't done what I ought to have done here, I should do better. It's never making it to the top of my priority list. I know I forced myself to do a big push on it in December of last year to try and get some things in before the deadline. And probably up there with some of those other existential things of nobody feels like they really have it nailed, but everybody's putting some time into chipping away at the problem.
- [29:46]
A
I think that the challenge we face as individuals, and particularly the cohort that make up long angle, is there's going to be a big beautiful bill tomorrow that's going to have something very different in it than today. And planning for the long term, are you doing that against a political climate that has a two to four year fuse on it? So I think you've got to sort of manage sensibly around maybe the 50 to 60% that is, quote, unquote, maybe more guaranteed than not. But you do have to constantly be paying attention and hitting the reset switch. And I think it's an important reminder that I don't know what the estate shelf life is, but it ain't a decade plus. So I think looking at it on a semi regular basis is very good advice that I take away from that. TED so, Matt, before we leave the survey, you mentioned SPY as an example, and anybody that thinks they're getting true diversification there is delusional. If they think they're getting a value, they're delusional as well, that it's very richly priced, priced to perfection. Can't say it can't go up from here, but I do wonder specifically, and I mentioned hedge funds, and I want to bring that back up how the base that you deal with thinks about hedging out risk and volatility. And if I think about strategies that help accomplish that, it is hedging, and maybe not hedge funds, but I assume some of your members, they may have a lot of their wealth tied up in a single industry or a single stock, and I think there's some strategies you can do around that, because if it's a health care or AI exposure, you're sitting pretty fat today. But if it's less than liquid, maybe you want to offset some of that risk as well. So how do you or your members think about hedging, either under this survey or just for from what you hear from the rank and file.
- [31:31]
C
I might punt a tad for some of the partnerships that we have with, you know, other ETF partners and things like that and tools that people are using. But in general in terms of asset allocation, I think there's specific funds and investments that you can allocate to multi strat. Hedge funds for instance, are you know, notorious for providing extremely good sharp ratios and smooth returns that essentially give or take, match the S and P but with no drawdown kind of approach. I think in general what people are looking for is limited correlation as possible and making sure that they're touching on diversification across channels. So you know, sequence of returns, risks and drawdowns. It's not necessarily like the biggest issue for our members. When you're getting past the 10 million plus range in terms of investable assets, you don't need to be pulling from your assets in order to fund your lifestyle in the event of a significant drawdown which ties to what Todd was talking about in terms of the types of investments. And are members really not putting a lot into credit and bond type thing because they don't need the income, they don't like the tax implications and what they know is equity because they've built their businesses in equity sort of mindset.
- [32:55]
B
Right.
- [32:55]
C
So what we see a lot is sometimes like certain types of hedge funds but a lot of attraction to very, very limited correlation approaches. And so like that's not necessarily private equity. Anybody tells you that there's no volatility in private equity, it just like just doesn't understand how quarterly reports work. But we'll see lower middle market in different types of sectors like industrial and service sector. That's not super tech correlated. You know, we invested into a lower middle market industrial fund based in the North America with the kind of the goal from the members being how do we insulate ourselves against a potential forward looking tariff based economy but also something that's service related and is going to have limited correlation to tech and the current market and mega cap stocks. Right. So that was really interesting to people. That's just one example of that type of thing. So you know, in general I think it's more of like a limited correlation approach more than hey, here's a very specific strategy from a hedge fund in order to hedge specific types of risk. It's more, well I would like a little bit of oil and gas exposure. I would like some lower middle market or general private equity exposure. I'm really interested in litigation finance which has essentially, you know, zero correlation or other types of investments. But outside of a community like this, where we have people who've been in the industry who've been investing in it for a long time, they wouldn't necessarily feel comfortable in going into an asset class like litigation finance, for example, without the backstop of a community and the diligence that we do.
- [34:34]
A
The wrapper matters a lot. And back to the wealth space too. Providing equity or private equity exposure in an interval fund or a daily traded etf, I can't imagine that your members would have any interest in that type of wrapper. And it is for the long term investing regardless of what your net worth is. And if you're going to come into this space, it's got to be done with long term mindset. And I think, Matt, you said as much a moment ago that these drawdowns can be periodic and painful, but the market usually finds a way of snapping back quite strongly over the long term. So I think if your horizon is kind of forever, and it should be for all investors for some portion of their portfolio, exposure to some of the private markets can make sense there too. But Tad, any further thoughts on how your investors either think about hedging? And I take Matt's comments at face value, but I still wonder if somebody's got an undue exposure through a liquidity event where they've maybe highly exposed to a particular industry. Are there discussions around how to hedge shake exposures like that?
- [35:39]
B
That last point. Well, first, I agree with everything that Matt said there, but to your point specifically, yeah, the risk that people are probably most interested in hedging is that single asset risk. I think if they look in totality, they say, hey, if there's another pandemic and my portfolio drops 30%, I can live with that. I've seen it before with COVID I've seen it before with the GFC.com, whatever it is, this too shall pass. I do agree. Let's say I've been at Nvidia for the last 20 years and now I have $20 million of Nvidia stock and $2 million of other things in general. I'm probably a bull on Nvidia, but I'm still not comfortable with that. Everything can drop. Berkshire Hathaway dropped 50% a number of times and so I don't want that risk. And I think the big challenge, the obvious thing in that case, say, well, I'm going to sell my Nvidia stock and I'll put it into something else. The challenge there really becomes from a tax perspective, if you have a super concentrated position you probably have a close to zero tax basis on then. So you say well I don't want to necessarily give up 23.8 plus my 13.3 in Cal to reduce that. And yeah, there are a couple of things that people can do just you know, very tactically on those especially in positions are larger. Three fairly obvious ways to go about it. One is if you have a philanthropic or charitable interest, you can of course donate your most appreciated assets to a donor advised funds or directly to a recipient. And you know you're going to get your deduction at the current price and you're not going to pay for the gain there. And so of course you are giving the money away. So it you're just not ending up in your portfolio. But it's very efficient way to fund those charitable interests. A second one is what's called an exchange fund. You're probably familiar with that. And I think traditionally those have been more limited to somebody with very large positions or somebody working with a JP Morgan or another wealth manager. There are some providers. You know, for example, we partner with a company called Cash and you know, to get our members preferred pricing where I can put in my $5 million of Nvidia, you put in your Exxon stock and Matt puts in his bank of America stock and it creates basically a composite that tracks the S and P or the triple Q pretty closely. And then even actually after a certain holding period, I believe it's five or seven years, I can actually withdraw not just my Nvidia stock, but I can withdraw pro rata all different holdings in that. So it basically allows you to diversify into an index fund without crystallizing a capital gain. You still have that low cost. So when you want to sell your ultimate holdings or your diversified holdings, you're going to pay the gains. But it's a very effective diversification. Another thing that people use that is similar end result but different strategy is direct indexing. In this example, as Matt mentioned, we partner with a company called frec, which again provides much lower minimum, lower cost direct indexing. And so in that case, rather than putting a million dollars into spy, I put that million dollars into the 500 components of the spy and then they're continuously tax loss harvesting. So if oil goes down, they'll sell Exxon and buy Chevron. They'll crystallize the game but not actually have diversified out of oil. And so they find that over a long period of time you can recapture something like 40% or if you take a long short approach, close to 100% of the amount of money that you put in there in terms of capital gains loss, which you can use to offset the sale. So those are some strategies specifically to diversify out of single large positions. I would say just one other comment on holistically the approach to hedging. I think when you get in this position of having a lot of money, so let's say you've got $25 million, you could either say, hey, I have enough money that I don't need to take risk. I can just move into a capital preservation phase and be very happy getting a safe 4% real return. That's a million dollars a year. I can live on it as long as I want to. Or you can take the exact opposite approach and say, I've got $25 million, I can afford a 50% drawdown that will impact my lifestyle. So I actually want to take a risk on approach and maximize the amount that I'll have in the end that I can leave to my kids, that I can donate to charity, have impact, et cetera. They're both totally valid approaches, although they lead to totally different conclusions. On average, our members, more of them skew toward that ladder of saying, hey, I am willing to accept volatility in order to get better long term returns. Your point? About 50 years old, only being halfway. If I think I've got a 50 year horizon ahead of me, I don't want to just settle for 4% returns. I want to get 10% equity like returns for the next 50 years because it's going to compound to a far different number. And basically I will pick up the volatility premium, the liquidity premium, et cetera, in order to get better returns.
- [40:08]
A
A quick follow up on that, Ted, I think perhaps your membership community and certainly myself as well, if there's anything that tops my worry list, it's inflation. I don't know where the long end of that curve is going to be. I think it's got to go up because I don't know who's going to be buying our Treasuries on the long end at 4% or 5% when the risk is going up, given the size of our deficit and debt. But with all that being said, inflation is not going to sustain a two or two and a half. I don't know if it's going to be five or six, but if I'm earning four and inflation is kind of right in that zip code kind of running in place. And I think if there's anything that can really be destructive to wealth. It is inflation. Any views on that?
- [40:50]
B
I mean, I think that ties directly this idea of not holding credit instruments, saying, hey, if the bond's yielding 4% nominally, I'm basically guaranteed over the long term to get 4%. And that's just not interesting. So that's probably the most direct. I think there's some other things you can play in terms of, hey, do I want crypto exposure? For example, I think without getting into is there a fundamental utility to crypto? A lot of people who are worried about declining value in so called fiat currencies do find that intriguing for some portion of their portfolio. And it also just reinforces the idea of real assets, whether that's real estate or whether that's equity. I also think in particular on real estate, during COVID I was very much in this thesis of, hey, the government's spending money like a drunken sailor and I can borrow money at 2%, why on earth would I not lock in as much 30 year fixed debt as I possibly can and turn around and invest that in real assets, which are almost certainly going to grow faster than that. So in that window, I was super bullish on buying as much personal direct real estate as I could and doubled down on that. I wouldn't be surprised if in a couple years, let's say that Fed rates go down because of a recession, because Trump bullies Powell into lowering them for whatever reason, and you get another window to lock in low fixed rate debt. If you're a believer in long term high inflation, I feel like that's a trade that's probably smart to make.
- [42:09]
A
Again, it doesn't happen very often, but I think in the cycle of our lives and investment horizon, these fat pitches come along, not all the time, but coming out of COVID as an example, or when rates were historically low, as you indicate on the other side of COVID it's back to truck up time. And I think investors have to be very, very careful about putting too many chips on one number. But when these risk on trades are there, the greatest risk investors make is not coming in soon enough and then leaving or coming in maybe when values are pretty much reached their tipping points. Tad, I'll just start with you quickly. I want to get closing observations from both of you, but the listener is going to listen to this and say, well, it sounds like an interesting community. What problem were you looking to solve when you created it? Do you have competitors? And then ultimately, how can somebody join? I don't think it's a click and join type of thing, but sort of a three part question. You can wrap that into maybe closing thoughts too.
- [43:07]
B
The problem that we were looking to solve is really this unbiased advice that I think if you're looking at, I'll call it general mass, affluent kinds of questions, like how do I set up a 529 for my kids? There's a lot of good data on general websites, on Reddit, et cetera, for those kinds of questions. I think when you get into the things that are more high net worth, very high net worth, ultra high net worth, specific, you know, again, estate taxes being a good example of those. You go to most mass market sources of information, the answer is going to be, look, there's a $30 million estate tax exemption, so nobody hits it, don't worry about it. Which is accurate but not useful. If you are actually worried about it, but then wanting the information, not from somebody trying to sell a service, not asking the barber if you need a haircut, but actually asking other people in that same situation, hey, you know, what are you doing? What mistakes have you made? What's worked for you? So that really unbiased peer community, peer information is the problem we're trying to solve in terms of, you know, are there direct competitors? I think there's a lot of versions of a lot of things out there. There's nobody doing specifically what we are doing, but I think there's, you know, if you have a Venn diagram of all the groups out there, there's groups with various kinds of overlap. Rather than trying to kind of go into specific ones, maybe it actually parlays into your third question of if people find this interesting, how would they join? So one thing to be clear, we do not charge membership fees. We are selective in terms of who joins. So if anybody's interested, they can go to our website, longangle.com they can browse around there. We actually publish a lot of these things like these benchmarking reports. It's just information that's available to the general public, but if they think it's a fit for them and they're interested, they can click the apply button there. That will basically it's a very short like 30 second form, but sets them up for an interview with a current member. And so one of our current members, we've got, you know, several dozen of them who take these interviews and they'll just explain more about our community, how it works and the person can talk about what they're looking for. We don't have a single background or what we'd call in the tech industry a Persona. We don't want. Only guys like me and Matt who are say, you know, in your 40s, build a software company, sold it and you're, you know, in this exact situation, we want a diversity, geographically, professionally, age, et cetera. But really people who are coming out with a peer to peer learning mindset, not seeing this as a place to attract new clients. But anyway, they can set up an interview there and join.
- [45:27]
A
I will say, having gone through that process myself, it was about a 30 minute conversation, quite enjoyable and I had to certainly prove that I was financially worthy of coming into the tent. But that was sort of, maybe just sort of the final few minutes. But I did learn a lot and joined with conviction. So before we turn it to Matt, we covered a lot. Tad, any sort of closing observations, either some point you want to hammer home or something.
- [45:50]
B
We missed one thing. When you guys were talking early on about just this idea of democratizing these alternative assets, the question I would have is in terms of what are you trying to accomplish in terms of doing that? Because I think there's different reasons that private markets have delivered value to institutional investors historically. Some of that may be what Matt's talking about. In terms of low correlation, that seems like a good reason. Some of it may be things like the liquidity premium, which again is probably a good reason. But the thing I would just be careful on there is I think that part of the reason that some people have had very good success with these is because of this information premium and the complexity premium of if you are blindfolded picking individual public securities, those markets are very liquid and very efficient price discovery and you'll do just fine there. That is firmly not true in the private markets. And so I think the question is either does the government figure out a way to make that true and create pure information and pure price discovery? In that case, are you just recreating the public markets and that arbitrage goes away or if they don't do that, are you putting people in a situation where they are picking blindly in a market that is set up for good information to be rewarded much more than it is on the public side? So I don't know the answer, but that was a kind of public policy question I'd ask before going too aggressively on that.
- [47:06]
A
Yeah, excellent point. And I think if you look at who is saying the 60 40s dead, it's the purveyor of product that's trying to access the wealth advisor. And I'm not saying there's not nuances to that. When I think about the 60 equity exposure, you can get that in a lot of variety. So it's not dead, it's just widened. But it may not be for Everybody. And the 6040 remains a tough, tough index to beat. You cover any 10 year period, including the very ugly 2022, it's compounded at 7%. And if you go all the way back to the 1930s, 100 years, you cannot find a rolling 10 year period where that 6040 was not in the positive territory. I think we have to be realistic about investors access and I think there are challenges for the ultra high net worth, just the mass affluent and everybody else in between. So a great closing point which I echo tremendously. Ted, Matt, final word on conversations and you were a little bit of a bonus round. I didn't expect you to join but it's been great to have both of you on. And I'll leave the final word to you.
- [48:13]
C
I'm the cherry on top.
- [48:14]
A
Exactly.
- [48:15]
C
Yeah. No, I mean I think on the 6040 point is interesting. I think if anything people are quibbling on the 40 which kind of just goes to the era that we've been in over the last 10 to 15 years. Like who's buying long dated 1% treasury bonds in a ZURP era, it was just doomed for poor outcomes. But we're not in that world anymore. Right. So I think it's kind of a little bit more of how you're going to break up the pie versus the sort of equity and credit breakdown changing all that much.
- [48:47]
A
I think the credit side. I think you raise a very interesting point because I think there have been some fundamental changes in who the lenders are in the marketplace and we talk about maybe some of the risks inherent with private credit approaching $3 trillion on its way to maybe 5. I think offsetting that is the fact that the banks are not lending nearly as much anymore. So the broadly syndicated market is not what it once was. And I think if you're thinking about the future home for yield, it's going to be in these private markets and you've got to be very careful. And again Matt, your earlier points, manager selection and due diligence is everything and just falling in love with the yield is very dangerous. But I think focusing on the 40 is excellent closing advice. So I appreciate both of you joining. I'm now going to try to be a little bit more of an active member of Long Angle because maybe this is my orientation meeting and it took a podcast to get there, but I went all the way to the top, which is always a good place to start if you're looking for answers. Tad and Matt, thank you for your time today.
- [49:49]
B
Thanks for having us.
- [49:50]
C
It's a pleasure.
- [49:52]
A
Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Kai association and subscribe to the show@kaya.org that's C A I A dot org. See you next time.