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- [00:00]
A
What's up guys? On this episode of Full Signal, I sit down with Hamilton Reiner. He is the head of US Equity Derivatives at JP Morgan Asset Management. He has a wealth of knowledge. We get into asset allocation, portfolio strategies and the funds and ETFs that he is personally managing. This is a fantastic conversation, full of insight. We even get into Lehman Brothers and his time there before the great crash. I hope you enjoy this conversation. Hamilton, it's great to see you. I would love to get into your high level view of markets right now. I know you manage a lot of different funds, a lot of ETFs. How are you thinking about stock exposure right now?
- [00:37]
B
Sure. So first of all, thank you for having me. As far as stock exposure, I'm pretty constructive on markets. And the reason is returns are usually driven by earnings. And when you look at the Overall market, the Mag 7 are wonderful because they have above average level of earnings. People are thinking let's call it the low 20%, let's call it 23, 24. But what's really cool is the other 493 we're expecting, let's call it around 11% earnings power out of them. And you blend that together, The S&P 500 people expect to have about 14% of earnings. Now, whether PEs stay the same or maybe even come in a little bit, the fact that we have 14% earnings growth means that we should expect high single digit, low double digit returns this year. But as I said, the other 493 are having earnings, some of the best earnings they've had in years as far as their growth. So we expect to see a broadening of the rally. I would say on any given year, stocks are up 75% of the time. So not being constructive on stocks means you're betting on the 25. I tend to like odds. I like the idea of staying with the 75% as a starting point and the earnings component as well.
- [01:47]
A
Yeah, I like the odds as well. When you think about the AI trade evolving this year and I see a lot of people, including people from J.P. morgan, talking about this shift into more, let's say, monetizable AI, how does that go into your strategy for finding what investment ideas to put into your portfolio?
- [02:10]
B
Sure. I think the focus on monetization of AI makes sense. If you're spending that much money, you actually have to see results. And it can't be just efficiencies. There's only so many efficiencies you could have. It needs to drive returns. It Needs to drive, as I said, some efficiencies, product, product innovation, shorting time of R and D. But you actually need to see results just like anything else that you invest in. And so when we think about investing, we view stocks and I'm lucky enough to not just be a one man band. We have 20 career analysts inside JP Morgan's core platform where I'm CIO and those folks do one thing and only one thing, and that is look at companies and trying to identify those stocks that over the medium term are going to have above average earnings power relative to what the market thinks. Every one of those analysts, the average age is at least 20 years in the industry, covers 20 to 30 names. And they're not looking at the daily wiggles and waggles in the market. You chop yourself up if you do that. They're looking out to the medium to long term, looking at what a company can make in a more normalized environment of three to five years. So when we look at the AI monetization, who's actually making money and going to make money based upon their investments? Today, if people are just throwing money in a black hole, probably not an investable asset for us. But those people that are building scale people are actually building the picks, the tools for other people to use. AI people are building some of the best AI large language models that are going to have monetization and the ability to have user engagement and charge for it. You know, we're finding a lot of constructiveness there. And then you got to power these things. So for us it's the entire ecosystem. It's not just saying, oh, you know, they're spending a lot of money, it's what are they doing with the money they're spending and are they being judicious?
- [04:06]
A
I think that makes sense. One thing that I have trouble thinking about and a lot of the investors I speak with do as well. What are the names that are going up like crazy in the AI theme or even the energy theme. But it's only because they have some tangential exposure to the theme. But they're not exactly a sustainable business. How do you differentiate between, all right, this is just something going up because a tide is lifting all boats versus this is a business that belongs in a portfolio.
- [04:38]
B
Sure. So we are only looking for sustainable businesses. That's how we think we think about long term investing. One of the things that you're seeing in the small cap space right now, and there's nothing wrong with it, but it's not how we invest. It's the idea of memes and themes, flying taxis, some of these quantum companies that you have no idea if they're going to ever make any money. There's nothing wrong with that type of investing. It's just not what we do. So when we think about the direct AI players as well as the tangential, it is actually all one thing. In order to do AI, you need to power it, you need the data, you need to actually use the data, you need to export the information, you need to find a way to integrate it. If I were to take half a step back, yes, a lot of software could be built with some of the newer AI models, but you're still going to need somebody to refine it or maybe even make it even better. And so I think right now software is a little bit dicey, but there's going to be winners and losers. And looking at it from a fundamental lens is going to be incredibly important to see who those winners are going to be. Three to five to even farther out.
- [05:48]
A
Okay, I want to get into the tech investing specifically that you're working on.
- [05:54]
B
Sure.
- [05:54]
A
One of your funds, the ticker is heqq. And if I have this written down right, nasdaq Hedged Equity Laddered Overlay etf.
- [06:04]
B
That's a mouthful.
- [06:05]
A
It is a mouthful. Can you explain why? Well, one, why this product exists and maybe the pitch for it. And yeah, I didn't really understand what it was about, but maybe you can help me think through this.
- [06:19]
B
Sure. Let's just take half a step back for a second. My background is over 35 years of investing in equity and equity option strategies. Worked at a few different firms. The very, very first firm I worked at, coming right out of the University of Pennsylvania Wharton School, was one of the original option Bellwether houses, a company called o' Connor and Associates. Really it was college for options once I graduated. So I went through another set of college, if you will, by working for this firm. It was a wonderful, wonderful firm. And the idea of options is something that goes back years and years and years. Actually, it goes back over a century where farmers used options for their crops. Farmers would want to hedge their crops because they just spent the last two and a half months fertilizing, watering, you name it. And then they were worried about the last two weeks. Drought, fire, theft, you name it. So they'd want to hedge it. The other way farmers were using options back then was they had no idea what to plan. They had no idea what in three months time they're going to be able to sell their crops for that they were planting today. And if someone said, I'll pay you 40 bucks an acre for your wheat, and they're like, well, it's going to cost me 20 to plant and fertilize and harvest. Yep, I'll take the 20 bucks. You know, sell for 40. Cost me 20. If it goes above 40, that's okay. I'm happy I locked it in. If it goes below, I'm really happy. So where does this all fit into? Heck, the idea of hec, which is NASDAQ hedge equity, is helping people protect and invest in the NASDAQ 100. As we've seen over the last couple weeks, investing in the NASDAQ has some pretty good days and some not so good days. But what a hedged equity strategy does is it gives people staying power. You don't have to look at the individual wiggle and waggles. You can actually look at point to point, sort of like you would do on any of those driving apps. Whether you go on a lot of different roads now, it's not as relevant. Did I get from point A to point B? So a strategy like Hec is saying, I want to own the NASDAQ 100, but I want to own it with guardrails. And what I would say is, yes, we use options, but it's less about the options we use. Think about it as Mr. And Mrs. Smith, are you willing to give up some of the upside of the Nasdaq in return for not having all the downside? And many people would own more stocks and own more nasdaq. So, you know, that's kind of the overall conversation on the strategy. So to be a little tongue in cheek, would people like to own a little bit more NASDAQ 100? Absolutely. Heck, yeah.
- [08:59]
A
Okay, I like it. I like it. I'm not sure I fully understand options as hedging. Can you explain that a bit more? Because I hear people talk about it. But in practice, for, let's say a retail or an independent investor, what does that actually look like?
- [09:17]
B
Sure. So options are not insurance. So let's just start off by saying that. But there are some similarities. A put is the ability to buy a security that if the market goes below a certain level, you'll stop losing money and actually start making money on your overall portfolio. So if you bought a put, if the market's at 100, if you bought a put at 95, you'd expose on the first 5 exposure. But if the market went to 90 or 80, that put would increase in value. Now let's take a half a step back. You and I both have car insurance, right? It has a premium. Well, guess what puts have premiums. Your car insurance has a deductible. Guess what puts have a strike. And below that premium, below that deductible and below that strike, if something unfortunately would happen to your car or to the market, somebody's gonna make you whole. So when you think about buying an option as a hedge, what you're looking to do is have some exposure. But after a greater magnitude of a sell off, or if the market goes down, you'll start making money. So you'll stop losing money on your overall portfolio. And that's what a hedge does. It gives you staying power. You know, during Liberation Day in last April, nothing happened in April. The market finished flat, the VIX finished flat. But what's interesting is if you actually look at the day to day movement of the market that month, a lot happened. At one point the VIX was, you know, over 50. At one point, the market from its peak was down over 19%. And what was the best thing any of us could have done? Nothing. A hedged equity strategy helps you stay invested.
- [11:13]
A
Real quick. We'll get right back to the interview. This episode is sponsored by Amber Data. In digital asset markets, the gap isn't between people who have data and people who don't. It's between teams that can connect the signals and those that are still working in fragments. Amber Data Intelligence is built as a one stop institutional hub for for digital asset market intelligence. It brings together derivatives, DeFi, stablecoins, spot markets and institutional metrics in a single interface, all on top of enterprise grade data infrastructure. With conversational AI and no code analytics, Amber Data Intelligence shortens time to insight and reduces the operational drag that slows decision making. As this market matures, understanding liquidity, positioning and structure is no longer optional. If you want to keep up with how digital asset markets actually work, Amber Data is worth knowing. You can learn more at Amber Data IO. That's Amber Data IO. Now let's get back to the episode. So if someone came back to you, someone being me, right? If I said, look, I like the idea of less downside, but I don't like the idea of capped upside. Why would this strategy make sense?
- [12:29]
B
Sure, there's a couple components of that. First of all, nobody likes capped upside, me included, even though 90% of my assets are in the strategies that I manage. But what I would say is this. You can own more equities if you know that you've reduced Some of the downside, you could actually own a lot more equities. So if a traditional investor, maybe somebody slightly older than yourselves, has 50% in stocks and 50% in bonds, they could probably own even more equities from a risk and risk tolerance perspective if they know they have some protection to the downside. Now, if you're all in on equities, there's no more than being all in. You could be 100% equities. But unfortunately, with all the market volatility, what we've seen recently and what we've seen almost since I've started my career over 35 years ago, staying invested is sometimes the hardest thing to do. As you know, there's just so many places where people get information that sometimes freak them out of the market. I'm not sure that's an investing term, but they challenge their conviction. A hedge equity strategy helps you stay the course. Should it be your only equity allocation? Absolutely not. But if you're 50% stocks, perhaps you can go to 70%. If another 20% of its hedge. If you're 30% and you can't get to 50 even though you're trying to be, perhaps that helps fill the gap. But in that environment, the goal here is how do I get more equities into your portfolio? But do it in a way that stays true to your risk and risk tolerance.
- [14:02]
A
Okay, so it's like staying in the game longer with less things to stomach, maybe.
- [14:09]
B
Yep.
- [14:09]
A
Okay.
- [14:10]
B
And you know what? There is an inordinate amount of cash on the sidelines. And a strategy like this can enable people to have less cash on the sidelines.
- [14:19]
A
Yeah, I, I think that makes sense. Let me ask you about these income ETFs that you manage. The tickers are JEPI and JEPQ. Why would an investor go to income these days when let's say there is so much opportunity in the market? At least from my perspective, you have the AI trade, you have tons of momentum, you have the metals rally. Everything seems to be going up right now. Tell us about these income products.
- [14:49]
B
Sure. So I agree there's a lot of opportunity in the market, but creating a diverse source of return is one of the best things you could do for your portfolio. So whether it be Jeppy or Jep Q, when these strategies have a multi prong approach to total return, they're going to give you some dividends, some options premium, and then some of the upside, just like that farmer I alluded to. The income that you're going to get will be in return for Potentially giving up some of the upside. Just like that farmer that sold his wheat at 40 was like, I'm willing to get that 40 today in return for potentially that wheat going to 45 or 50. Well, that person that invests in an income oriented or driven income strategy actually says, I'm willing to take that income today in return for potentially giving up some of the upside in the future. So a strategy like JEPI or JEBQ is really about helping you create a diverse set of returns. For example, if the market's flat, you're probably going to be flat ish on your equity allocation. But one of these strategies, you're probably going to get some income, some, you know, some dividends. And if there's no upside, you won't get any upside, but you'll probably get some of your dividends and some of your options premium. But what's really interesting is it complements your equity allocation, it complements your fixed income allocation. And very interestingly, the reason I think these strategies have really resonate with investors is there's multiple things that are evergreen in investing, but these strategies do three of them. And I think they do the three things pretty well. First of all, income is evergreen. Everyone loves income. It's always nice to get that check in your account or check in the mail every month where the markets are up, down or flat. The second thing that they do is they're active. So those same analysts that help us do that stock selection, help us pick the stocks for these respective portfolios. And then the third thing that they do is they have less volatility and less beta than their respective indices. So income, less risk and wonderful stock selection. That's pretty good. Three things to put together from a client perspective.
- [17:09]
A
When your clients see the prospectuses for these funds and the way you explain it right now, it almost feels like everything you need is right in these products. Um, is there a, you know how, I guess why would a client take their money and put it anywhere else if these products are so compelling?
- [17:32]
B
So it's a good question. I would hope that they actually give me some of their money. But I want them to create a diverse portfolio. I mean, one of the interesting things is to be a great long term investor. It's not just what you buy, but how much of it you buy. So it's not just stock selection, it's how much of it you buy. And so just as much attention should be placed on what strategies, ETFs, mutual funds or stocks you buy, as well as how much of them you Buy. I mean, there are a lot of great stocks out there, but being too overweight, any individual theme or stock or strategy can actually unfortunately create some real staying power issues like we talked about before. So these strategies, whether it be my hedge equity strategies, and we have an S and P version. Hello, don't say goodbye to your equities. Say hello. We have hec, which is the NASDAQ version. And then we have Jeppy and Jeb Q. It always in my mind starts with what type of stock exposure do you want to have? If you want the S and P in a hedge way, buy hello. If you want the NASDAQ 100 in a hedge way, then buy. Heck, if you like higher quality names that are more defensive in nature, and right now, given how the market's playing out, you're kind of happy with being more defensive in higher quality names. You should kick the tires on Jepi. But then there's those people that say, you know what? I like growth, I like tech and I like income combined with growth in tech. And those people, take a look at Jep Q. These strategies are not meant to be 100% of your portfolio. Even if they're nearly 100% of mine. They're meant to actually complement other parts of your portfolio when it comes to your stocks, your bonds, and other things. I would say that these strategies are meant to complement your experience. And then the last thing I'd leave you with is many folks like this idea of generating income. And with Jeppy and Jep Q, to not have any duration risk, to not have any credit spread risk, but to still throw off a fair amount of income as a goal, but not as a target. Jeppi is designed to give our investors 7 to 9% paid monthly. JEP Q9 to 11. And then the last thing I'll leave you with is volatility. We all live it, we all know about it. But for many portfolios, volatility is the enemy, right? Stocks probably go down when volatility goes up. When stocks go down. Credit spreads probably widen when stocks go down and volatility goes up. All the strategies I mentioned earlier have volatility as a tailwind. It's pretty neat that we can add value to that portfolio construction that when volatility goes up, up. It should not always, but we would expect and should give you a better experience going forward. It's kind of a nice compliment to all the other wonderful things people do in their portfolio constructions. Phil.
- [20:27]
A
It's very compelling. I mean, when I'm, you know, I'm just listening to the description you're giving of all these different funds and it's hard to, let's say, poke holes in the approaches just from a high level. One thing that I've been watching very closely is this over concentration in tech in the broader market. And we've seen some rotation, I think to start the year. But generally a lot of investors seem concerned that if I buy into the S&P 500 that suddenly gives me, you know, a third exposure to big tech. How are you thinking about that?
- [21:06]
B
So, couple things I would say, Phil, the reason that exposure is what it Is with nearly 36 to 38% in tech is because those stocks have done quite well. So if you've been along for the ride, you're pretty happy having been on that ride. But here we are today. You know, those companies, it's about, you know, if you think about market capitalization, it's price times shares outstanding. So the price is actually in many cases warranted and the valuation warranted because these companies are earning. But you do have a lot of eggs in a smaller basket. And so as a function of that, there are ways of diversifying that. Perhaps you want to add some value to your portfolio. Perhaps you want to add Jeppy because a strategy like Jeppy actually has more defensive, higher quality names in it. We're not looking for those companies that are a little spicier meatball. We're looking for the exact opposite companies with predictable earnings. And we are very diversified. You know, we cap every name at just over 2%. We cap every sector 17 and a half. So it's a very diversified portfolio. So I don't fear the concentration of tech. What I fear is those people that over concentrate to that over concentrate to that concentration. So when building a portfolio, as we said earlier, it's not what you own, it's how much. So if you have something that's very concentrated, like the Russell 1000 Growth or the S&P 500, add some other things to complement it. You know, your portfolio is meant to be like a fine meal where it's a lot of different components and pieces that come together real quick.
- [22:45]
A
We'll get right back to the interview. Just wanted to pop in and say if you like this content, I write a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market, asset prices, why things are going up, why they're going down. And if you want to get that for free, you can sign up at the link in the description. Let's get back to the interview. That's a good way to think about it. I. My hesitation is that if you don't know how concentrated, let's say, the general s and P500Is, which I imagine is most investors, if they just have it in their retirement accounts, almost everybody is passively getting overexposed to tech. And I'm very bullish on tech, so I don't know if it's innately an issue, but if you're worried about concentration, risk, it seems so difficult to avoid in this market.
- [23:36]
B
Sure, without a doubt, if you just do the s and P500 or the Russell 1000 growth. But we are seeing expansion of the rally this year. We're seeing other stocks participate. And when you begin to see other stocks participate, people's intent, I go up and say, where else can I get exposure to energy or metals or staples or back half of last year, healthcare began to perform better. I think once there's a hint of better performance in other parts of the market, people start beginning to do the work and say, where can I get exposure to those type of stocks? So I think sometimes you may miss the first couple percent of the rally because you have to wait for something to happen. But in building your portfolios, you begin to dust off some of those older stocks or older styles or older sectors that can complement your S and P or your growth parts of your exposure. I'm also bullish on tech. It's transformational. The growth of earnings, the ability to be revolutionized. What we do, how we do it. I mean, even what we're doing right now, I'm not sure if the ability to do what you do and what I'm doing even today as well, five years ago, eight years ago, maybe even three years ago would be where we are today. So tech is actually changing what we do. And I'm bullish on it. But I think creating some balance from an individual investor is pretty important because we should not be investing for the next week, month, or year. I mean, let's go out a little further. I mean, our retirements and our money should be out 5, 10, 20, or 30 years. And with that mindset, stocks tend to go up. Let's continue to own stocks, but let's create some balance in our overall portfolios.
- [25:29]
A
What are the things that your clients are most worried about right now?
- [25:35]
B
There's a lot. And what I would say is being a little bit of an options geek. People talk about the VIX being the fear index, and it's not about fear, it's about uncertainty. The VIX is Actually the uncertainty index, and it goes higher when there's more uncertainty around things. So let's just think of what there is to be uncertain about the Fed Fed independence, interest rates, geopolitical, political, earnings margins. There's a lot of stuff that could happen. But if you think about investing, you kind of have to eliminate the noise and just invest for the medium to long term. Technology is wonderful. Wonderful. One of the greatest things that was ever created is both a blessing and a curse. The ability for you and I to go on our phones and look at our personal account, that's a blessing. It's also a curse if it forces us or recreates action. Anytime you sold stocks over the last five, 10, 20 or 30 years, you've never gotten back in, in time to reparticipate. So the idea is just find a way to get invested, stay invested. And if that means my strategies, great. If that means other strategies, that's fine too. But staying invested is the most powerful thing that any of us can do. I'm not sure if it's Einstein or Buffett, Warren, not Jimmy, that coined this idea that the eighth wonder of the world is compounding. Well, you lose all compounding when you're the sideline and go to cash. So staying invested is incredibly important. And that's kind of why we designed the strategies that we did that use options to help people stay invested, whether it be income helps you stay invested or hedging helps you stay invested.
- [27:29]
A
Timeless lessons. I want to ask you about a bit more personal. Your time at Lehman in the lead up to the 2008 crisis, what was that like? And I mean, you know, in hindsight, everything is so obvious, but I'm sure at the time, maybe it was less writing on the wall as far as this great crash coming.
- [27:52]
B
So I have to correct you a little bit. It wasn't until the crisis. It was through the crisis I lost everything at Lehman Brothers. It was devastating. You really weren't allowed to sell your stock at Lehman unless you were buying a house or paying for a wedding. And by that point, I already had bought a house, and by that point I was already married. So I owned a lot of Lehman stock because they wanted you to be employee owners of, of the business. And so a lot of lives were ruined when Lehman went bankrupt. I was lucky enough that I was young enough and I had a cool, still the same one cool wife that said, just get off your butt and figure it out. Still married to her, which is cool. But it was devastating. I mean, for a large major player like Lehman Brothers to actually go bankrupt was devastating. It was devastating personally, it was devastating professionally. But what it also does is investing is about life's lessons, right? Looking backwards and saying, you know what, I'm not going to make that same mistake again. Or what did I see somebody else do that I'm also not going to going to do. So some of the things that you learn about Lehman Brothers was it was probably one of the greatest equity buying opportunities of all time when Lehman went bankruptcy. But more people were selling rather than buying. The game is not rigged. It was just more sellers than buyers. And Lehman went bankrupt. And unfortunately, because people remember 2008, a lot of people said, I'm not going to buy stocks. But if you look at the compounded return since 2008 or 2009 or even 2011, when the US debt got downgraded, the US debt got downgraded in 2011 and the market went down 14% in a two week period. And a lot of folks that got burned by Lehman actually said, I'm not going to deal with this every two or three years, I'm going to just get out of stocks entirely. Probably one of the worst investing decisions ever. Having been at Lehman, what did I learn? Diversification. I learned about finding a way to stay invested. When I think about my overall strategies, my goals, to actually use those lessons I had from my Lehman days and actually invest in a way that enable people to not only get invested, but stay invested.
- [30:10]
A
What do you think you and your colleagues at Lehman missed at the time?
- [30:18]
B
Trust. I think we trusted senior management. I think we trusted that they would never let it get to the point in which it got to. I think we trusted that the treasury or the Fed would not let Lehman go bankrupt. Too big to fail, probably was too big to fail, but they still let it fail. And then a lot of other companies got bailed out, either via mergers or via just government money. I think what we missed was there was trust. And I still trust. I work at JP Morgan. How can you not just trust our senior leadership? It's incredible. Whether it be from the very top, you know, with Jamie, or even in asset management with Mary Erdos and George Gatch. That trust I have in them is, you know, undeniable. But at Lehman, I think perhaps we trusted a little bit too much that, you know, they weren't going to let this happen to us because there were rumors for months and months around Lehman Brothers and their balance sheet and other aspects and we thought it would never happen. So trust but verify.
- [31:28]
A
So the rumors that were circulating, did most traders or money managers inside the company just dismiss them?
- [31:38]
B
I think because those rumors had existed 10 to 12 years prior that Lehman was on the ropes. And there's other issues, and it never came to fruition. Made it a little bit easier for people that were there that 10 to 12 years before to dismiss it. I wasn't there back then, so I can't tell you whether I dismissed it or not for that reason. I just felt as though, you know what, we're a large investment bank with a lot of global systematic risk. You know, either senior leadership or the government would figure it out. Neither one did.
- [32:12]
A
Wow. Yeah. I can't imagine. Must have been a unbelievable time to be a professional person on Wall Street.
- [32:20]
B
Yeah, I didn't sleep much. Yeah.
- [32:22]
A
Yeah. Hamilton, where can people find your work online or more of your research?
- [32:28]
B
Sure. First of all, I hope people watch this. That'd be great. But as far as online, jpmorganassetmanagement.com they could find out more about our strategies. Reach out to your JP Morgan representative. Reach out to some former JP Morgan. And myself and the team are always happy to chat.
- [32:46]
A
Fantastic. Really appreciate your time. And we'll have to do this again soon.
- [32:50]
B
Absolutely. Thank you for having me. It was fun.