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- [00:00]
Bob Elliott
Foreign.
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Host
Bob Elliott is the CEO and CIO of Unlimited Funds. They are an organization bringing indexing to the world of alternative assets and investing. He is a Bridgewater alumni and a Macro Investing expert. Welcome to the show, Bob.
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Bob Elliott
Thanks so much for having me. Excited to be here.
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Host
Excited to have you on. Tell us a little about your personal lives, more about your work and why you do what you do.
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Bob Elliott
Well, yeah, I mean, I've been a systematic investor for a couple of decades and as you mentioned, a majority of my career at Bridgewater Associates, which is the world's largest hedge fund, where I developed systematic strategies there. And after decades in the business, I increasingly recognize that most 2 and 20 strategies are really good for the manager and not that great for the investor. And the reason why that is, is that those managers generate good returns and then take them all away from investors and fees. And so that got me to start to think about whether there was a way to bring the concepts of sort of low cost indexing, which obviously totally changed stock and bond investing into this world of 2 and 20 and also make it available for not just the uber wealthy, but for the everyday investor. That's really what we're focused on. Unlimited is those low cost, diversified 2 in 20 style strategies like hedge funds, private equity, venture capital, but putting it into a liquid structure like ETFs and making it available for every investor because there's no reason if you have $20 to invest or $20 million to invest, there's no reason why you shouldn't have access to these sorts of high quality returns.
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Host
Well, there must be some reason because we don't currently have access.
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Bob Elliott
Yeah, well, I mean, I think, I think a big reason why that is, is the industry is just structured around very, very high fee, you know, structures that enrich the manager and also a whole, a whole feeling around exclusivity. Everyone wants to feel like they are, you know, exclusively getting access to the next great investment strategy, et cetera. And what that means is that if you're an everyday Investor investing your 401k or your taxable account or any of those things, you're basically locked out of these sorts of strategies. Or even if you have a relatively significant set of assets like $10 million, if you try to invest in these strategies, there's fees on top of fees on top of fees and it's very tax inefficient. All because the whole industry is organized around catering to those, those big institutional investors and not recognizing the value and putting together the structures that work for the everyday Investor. That's really what we're trying to bridge that gap. In the same way that Bogle bridged the gap between institutional equity managers and the everyday investor, we're trying to bridge the gap there in terms of these 2 and 20 strategies.
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Host
Can you tell me what 2 and 20 strategy is quickly?
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Bob Elliott
Yes, yeah, yeah, it's, it's 2 and 20 is actually a compensation scheme, not necessarily an investment strategy, but what it generally. And that's 2% fixed fee, which is 2% of 2% of assets under management and 20% of profits and almost all these. But what it really refers to is a, is a set of assets that institutional investors invest in. Things like venture capital, private equity, hedge fund style strategies, private credit, all things you've probably heard of in the news, but all sort of fall under this umbrella. A very, very high fee and exclusive to, you know, only the uber wealthy and institutional investors.
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Host
Thank you, I appreciate it. So you mentioned Jack Bogle, Vanguard. I think that so many people are familiar with that, how they pioneered index low cost invest, democratized it. That's been nothing but a good thing and that is important and it's a big part of the market. And but there is this whole world of alternative investments that you're talking about that the ordinary investor doesn't have access to for the reasons you've just described. If the ultra wealthy are investing in these things, does that mean everybody else ought to? What are the benefits?
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Bob Elliott
Well, I think if you look actually at why do the very wealthy investors actually typically generate better returns than the everyday investor? The difference is primarily around these alternative investment strategies. And so I think, and the reason why that is, is those alternative investment strategies are basically sophisticated investment approaches that help generate returns that are on par with or better than sort of traditional index investing and also typically are brought with meaningfully less risk, meaningfully less volatility. I'm sure many listeners have, let's say you've been holding your 401k since 2000. Like how many times have you been through a 50 or 60% drawdown in that 401k or 30% drawdown? And the whole point of these alternative investment strategies is to deliver, deliver stock like or better returns, but have a lot less of that volatility, a much more consistent return. And so I think for there's a reason, like if you go to the biggest institutional investors in the world, they have about 50% of their assets in these alternative investment strategies. About 50% is in sort of 60, 40 liquid markets, 50% in alternative investment strategies and these are folks who could invest in literally any asset in the world. The reason why they put so much capital in this investment, those alternate alternatives, is because they generate such a high quality, typically generate such a high quality, what we call risk adjusted return, which is the amount of return you're getting relative to the amount of volatility you're taking on on an ongoing basis.
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Host
So the 6040 liquid market that you referred to, that 60% equities, 40% fixed income, roughly speaking. And then there's this whole world of alternatives that they're taking advantage of. I think a lot of people would be surprised to hear that, that it's potentially less risky.
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Bob Elliott
Yeah, well, I think part of the reason why that is, is that these strategies are really centered on finding the best opportunities in the market. If you invest in, let's say the S&P 500. Right. There's a lot of, there's a lot of risk in the S&P 500. There's lots of companies that you know, could do well at certain times, but also could do poorly at at other times and have done poorly over the last. We've had three drawdowns of 30 plus percent over the last 25 years in the stock market, for instance, in the hedge fund space. What those managers are looking to do is find opportunities that generate similar returns but just have less risk. So buying assets or companies that are more cheaply priced, who. Or using other instruments like hedges, I mean in the hedge fund space, hedges that can help protect in the event of downside risk in the market. And really when you look at these strategies, in many ways they're pretty boring to look at because what they are are that they generate pretty good returns when things are doing well and they basically limit, they preserve capital when things aren't doing well. And if you put those two things together, actually that generates a pretty good return over time with a lot less volatility. So it's more around the SoR, sort of like in many ways almost boring prudent risk management that is driving a lot of the outperformance on a return relative to risk basis.
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Host
So you are on the investment committee at Bridgewater. You've just been doing this stuff for a long time. What was it that you said? You know what, it's time for me to try to bring this to more people?
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Bob Elliott
Yeah, I mean I think for, for me I had a long career as a systematic investor building proprietary strategies and actually my co founder Bruce as well had decades of experience doing the same thing. And I think you know, the idea of starting our own hedge fund or something like that, which is what typically managers do. You work in a big manager and then you start your own fund. You know, it's not that interesting, I think, because it's been done before. We've been doing it for a long time. And I think for both of. And you know, we're both quite successful at doing it. I think for both of us, the exciting thing, the challenge and the opportunity we saw was how can we bring these strategies to the everyday investor, to the, to the investor that has, you know, $20 or $200 or $2000 so they can get access to those strategies. When I looked across the landscape, there's a lot of work being done to give people access to alternatives in all sorts of different ways. But the biggest problem with those is almost all of them are layering fees on top of fees on top of fees and are further enriching everyone but the investor that is putting their capital on the line. And the real big success for investors, if there's. Basically the biggest successes for investors over the last 50 years have been the advent of low cost, accessible stock and bond investment strategies as well as others, and in particular now the ETF wrapper. And so there's a huge opportunity I saw in order to bring those sorts of sophisticated strategies to the everyday investor with this core idea being more access, lower cost, and that's really what gets me out of bed in the morning. That's an exciting mission to build over time because if we can bring these strategies to investors, they can then have better, more consistent returns, less risk, plan for retirement, better have better life outcomes that come with a more prudent management of their investments.
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Host
Sounds great. So you set out on this journey. How long have you been working on it now?
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Bob Elliott
I. It's kind of amazing. We've only been at this actually for 18 months, which it's been quite the whirlwind, you know, starting our, you know, essentially starting our own small business from scratch, building the technology. We launched our first product a year ago. It's been in the market and is, you know, doing exactly what it's supposed to be doing in terms of, in terms of bringing those, you know, 2 and 20 strategy to the market. And now we're very excited. We just raised a series day in order to be able to basically build out a full portfolio of these investment strategies that we can bring to the everyday investor.
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Host
So you actually put a product into the market pretty quickly.
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Bob Elliott
Six months.
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Host
Wow.
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Bob Elliott
Yeah, Yeah. I mean, it's been, I think, I think in part it speaks to the fact that we're really benefited from the fact that both Bruce and I have decades of experience in this business and really have a lot of understanding about how these strategies work and can quickly and efficiently craft our technology, which essentially replicates how the managers are positioned in close to real time. We were able to stand that up pretty quickly based upon that, that experience. And, and the reality is we're sort of in a unique position because most folks who have the skill set to be able to do that effectively, they're out there running 2 and 20 money, right? They're running institutional money because it is a lot more, it's really on an initial basis, a lot more lucrative for them. And those people who are into low cost indexing typically don't have the skill set to be able to, to actually bring, you know, sophisticated strategies, to build sophisticated strategies because they're focused on how do we reduce costs and index more effectively. So we were sort of uniquely positioned to start running facts right out of the gate.
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Host
Fascinating.
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Bob Elliott
So.
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Host
When you're looking back on that, were you surprised by anything or has it gone exactly as you expected? Was anything harder than you expected or.
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Bob Elliott
Well, let's just say this. The life of a small scale entrepreneur working in a highly regulated industry is no easy task. And, and you know, it's part of the. I had various entrepreneurial experiences before and actually when I started at Bridgewater, which is now the world's largest hedge fund, there were, you know, it was, it was very small, let's just say, and felt very entrepreneurial as well. And so I sort of enjoy that, you know, learning all there is to know about, about, you know, a new, new area of the market which is, you know, publicly traded 40 ACT products and all the regulatory infrastructure related to that, building a business from scratch. But you know, there's a lot, there's a lot more that it may seem on the surface. Everything from, you know, dealing with the regulators down to making sure that you're, you know, making your, your disability payments to the State of New York and such.
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Host
Right. So many moving parts. I mean, just the, the super basic stuff, which is really, really hard. But then I was, I can't imagine it's easy to try to bring a new investment strategy approach into the mass market. What is, for lack of a better term, the strategy of the current offering you have and how many more are you looking to launch?
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Bob Elliott
Yeah, our first work is really focused on the hedge fund space, bringing those sorts of strategies to the market. So we started off by creating a low cost essentially index fund which is intended to replicate the returns of the overall hedge fund industry, but at a much lower fee structure than would be available if you invested directly in the funds themselves. And so over time what we're looking to do is we're actually building out a suite or portfolio of different hedge fund style strategies available to the everyday investor as well as thinking about how to combine those strategies in the most effective way possible. In a way, institutions combine those strategies and then we've set our sites also looking at how do we bring investors access to things like buy out private equity type returns, which is a cornerstone of any big institutional investor portfolio, by creating portfolios of lookalike companies in the public markets and then going on to venture capital and private credit and other areas of the market like that. The real, the real mission here is, what we're creating is a whole portfolio of products really centered on this mission of diversified low cost index products for the, for the 2 and 20 part of your portfolio.
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Host
And when you say low cost, what is that? What does that mean?
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Bob Elliott
Well, if you think about it for you know, 2 and 20, there's a reason why I say that that is the typical fee structure. And so what that means is that they, a lot of these products have, let's say a 10% target gross of fees, returns or the return before fees, take the two off, take the 20 off. And that's something like 400 basis points, 4% that exists in fees. And we're looking to bring these products to market at under 1% fees. So about a quarter of the fees or less. And then I think another critical, important a thing to think about for the everyday investor who has a taxable account is taxes matter. And there's a good, there's a critical reason why we construct these products in an ETF structure. And that's because ETFs are much more tax efficient. Which means that when you buy the etf, and typically when you hold it for more than a year, you pay capital gains tax at the time of sale. Whereas lots of these other alternative investment strategies, collectibles, all sorts of different things, you're forced to pay taxes at a higher rate and often even before you sell the position or the security. So that's what we're really focused on is something like a quarter to a fifth of the fee load and half the taxes of typical 2 and 20 products for a taxable investor. So that's the idea, the all in post fee, post tax cost Something like one tenth of what it would have been for to traditional.
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Host
That's, that's fairly incredible. When other people look at you, they're like, how are you doing this? Oh, they're like. Or you're, you're pulling the curtain back. Knock it off.
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Bob Elliott
That's right. That's right. No, there's, it's always great to talk to folks in the, in the 2 and 20 business, in the hedge fund business who you know in a public way will say there's no way they can do that. I don't believe it. And you talk to them privately afterwards and they'll say you got something, you got a pretty good idea here. You know, this is where the industry is going. And you know, I'm just, you know most, most of what they say is, I'm just trying to hold on before you get really ramped up is what they mostly say.
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Host
Funny.
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Bob Elliott
Yeah, they're self aware at least.
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Host
Good enough. Good. Do you see a future where you are, are you currently able to be inside of IRAs and 401ks?
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Bob Elliott
Yeah, well, I mean, you know the four. We could probably veer off and have a long conversation about the 401k industry which is controlled by, you know, a very small handful of operators that have fund structures that are way too high fee and inefficient. So you know, we're not going to get into those structures anytime soon because of their structural exclusion of sophisticated or different investment strategies in those products. But for investors who have self directed IRAs, self directed 401ks or taxable accounts in particular, these structures are particularly beneficial, beneficial in taxable accounts because the ETF wrapper allows you to trade or invest in these products as if you would a single stock. And that has a lot of tax advantages over time by shifting what is often would look more like dividend income or distribution, short term capital gains distributions into a longer term capital gain structure. So it's actually quite a good, you know, we think of it as a product designed for, for taxable accounts as well.
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Host
Yeah, that makes a lot of sense. I love it. Well Bob, thank you so much for coming on. Where can people learn more about unlimited funds and where can they buy them?
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Bob Elliott
Yeah, if you're interested in our product, they're available on, on all the major platforms. So you can go out there and look up, you know, unlimited on the platforms and you'll find our products. You can check out more about what we're doing with our products@unlimited funds.com and for those of you who are regularly engaged in the markets or interested in following the macro economy. I also, as a side hustle, run a pretty active macro Twitter and YouTube where you can find me at Bobby Unlimited. Definitely check that out.
- [20:33]
Host
Excellent. Well, if you enjoyed as much as I did, show Bob your appreciation and share today's show with a friend who also appreciates good ideas. Go to unlimited funds.com and find Bob's offerings wherever you do your investing and just search for unlimited funds. And then what's the handle on the social media sites?
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Bob Elliott
Bob E B O B E Bob E Unlimited.
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Host
Yes, Bob E Unlimited. And we will link all those in the notes of the show. Thanks again Bob.
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Bob Elliott
Thanks so much for having me. Appreciate it.
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Host
Till next time. Remember, do your part by doing your best.