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What's the Alternative? | Episode 3 | Building Portfolios with a Third Wire featuring Dan Harms
9 Plays1 year ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode "Building Portfolios with a Third Wire" Shana is joined by Dan Harms, Founder and CEO of Third Wire Asset Management. Third Wire Asset Management provides turn-key risk managed alternative investment portfolios for accredited investors built with advisors in mind. Shana and Dan discuss their shared philosophy in building diversified alternative investment portfolios and provide a road map for advisors to do the same.
In addition to being the CEO & Co-founder of Third Wire Asset Management (TWAM). Dan is also Co-chair of the TWAM Investment Committee. Having spent 19 years in various wealth management roles, Dan leads TWAM with a deep knowledge base of portfolio construction & alternative investments, along with a healthy dose of cynicism toward wirehouses.
Prior to founding TWAM, Dan operated a proprietary trading platform across 40+ futures markets. Additionally, Dan was a Partner and Co-founder of a Chicago-based independent RIA, a firm with expertise in providing wealth management for ultra high net worth clients. He has also led a $140mm single family office, managing both sides of the balance sheet, which primarily focused on high-end investment management, complex estate planning, and tax strategy. Dan began his career in wealth management at Smith Barney advising high net worth families while also conducting equity research & trading for a resident portfolio manager.
Connect with Dan on LinkedIn: Daniel Harms
Learn More About Banrion: Banrion Capital Management
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana 𝕏: @shanas621
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program are participants on Banrion Capital Management’s platform. As such Banrion may receive payment for their participation as a platform partner.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
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Transcript
Introduction to 'What's the Alternative'
00:00:02
Speaker
Welcome to Bonnie and Capital Management's What's the Alternative podcast. Joining host Sheena Orsik-Sicil, the queen of alternatives and founder, CEO of Bonnie and Capital Management as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
Featuring Dan Harms of Third Wire Asset Management
00:00:30
Speaker
everyone to episode three of What's the Alternative? And today, our special guest is Dan Harms of Third Wire Asset Management. Dan is one of our original clients, one of the first folks that showed us, that they believed in us and very excited to have Dan on here.
Dan Harms' Career Journey
00:00:54
Speaker
He has a great product that is specifically for advisors
00:00:59
Speaker
takes into consideration the way the advisors talk to clients and how advisors manage client money. So I'm pretty excited to have Dan here. Welcome, Dan. Thank you for having me.
00:01:12
Speaker
Pleasure to have you. Please like to get started with a little background on what kind of brought you to where you are today, what inspired you to launch Third Wire Asset Management, and kind of the experience that you have, that you bring to the table for advisors who are interested in working with you.
00:01:32
Speaker
Sure. Well, in 2002, I cut my teeth at Smith Barney doing research and trading and then was an FA in my last year there. I really got to see what limited availability to alternative investments were there for the high note worth enough clientele.
00:01:51
Speaker
of wire houses in general and it was ridiculous. Seven years after that I ran a single family office, about 140 million and that's really where the wool was pulled up from over my eyes and I got to see what
Third Wire's Investment Approach
00:02:07
Speaker
the 1% and the access to alternatives that they have and how much less they pay in costs and expenses to gain that exposure versus what I had seen previously at the wirehouses. I launched an traditional RIA with an acquaintance of mine and subsequent to that, I traded my own account for about five and a half years across 40 plus futures markets.
00:02:37
Speaker
And then I decided to go back to my bread and butter, which was overall portfolio management. And I ended up creating a joint venture with a company called Keter Strategies. And they predominantly appeal to the institutional investor side of things, pensions and endowments. And there wasn't really any effective outreach to RAAs.
00:03:00
Speaker
you combine that with what was available to independent wealth management firms and just the limited and expensive accessibility and predominantly there's just access only platforms out there where you pay to gain access and then you have a hundred or five hundred individual single managers and you run into the paradox of choice and analysis paralysis and
00:03:27
Speaker
you're just sitting there, what do I do with this? How do I build out the alt portion of my client's portfolio using this?
Portfolio Management and Advisor Insights
00:03:34
Speaker
And it's so complex that
00:03:40
Speaker
there needs to be help. So that's what the genesis of ThirdWire was, to create multi-strategy and multi-manager portfolios that span the liquidity spectrum. So an advisor only needs to determine suitability and amount to allocate, and we do the manager selection, the portfolio construction,
00:04:01
Speaker
facilitate all the investment process and operational efficiencies that we put in place and deliver monthly reporting or as frequent reporting as possible based on the underlying managers to either the client's custodian or whatever performance aggregator they happen to be using. And for expenses, it's a handful of bits more than an individual would pay going direct to a single strategy.
Challenges in Alternative Investments
00:04:32
Speaker
Yeah, it's funny when you were saying that you did the kind of the FA thing when you were at Smith Barney. I started my career as an FA too, so I totally understand that and I think
00:04:48
Speaker
I don't know about you, but for me, I feel like it gives me a really unique insight into the day to day life of an advisor and doesn't even have to be a broker dealer advisor. I think generally speaking, an advisor's way that they go about conducting business is generally the same. Would you agree? Yeah, I think that.
00:05:09
Speaker
Advisors are used to having some sort of centralized investment committee that will give you the approved managers to use in a, like an equity style box, large value, small growth. Here are three managers in each and
00:05:22
Speaker
all of those are chosen to keep the advisor out of as much trouble as they try to inflict on themselves. Basically, they're all safe. They will either equal or beat the benchmark, ideally. Same thing with on the fixed income side, but when it comes to alts, nobody's really doing that. It was just, here's a list that we have done basic due diligence on, operational due diligence, and we know somebody's picking up the phone, but we're not
00:05:49
Speaker
qualifying or necessarily recommending that this is a manager that you should go into. And if it is a manager you should go into, you're still exposed to single manager risk. Like if something happens to that particular fund manager, you're in a world of hurt.
00:06:05
Speaker
Well, not only that, but that's if your firm, for those broker dealers and more captive advisors, that's if your firm even lets you do that. If they have a more open mindset, usually it's just stocks, bonds, that's it.
00:06:20
Speaker
And there's no real options. You're totally understand that.
Third Wire's Solutions for Advisors
00:06:25
Speaker
So tell me a little bit about third wire you know you kind of touched upon the relationship with Keter you touched upon what drove you to get there but how does third wire work with advisors and you know why do you think
00:06:38
Speaker
the products are unique. I know the answer to this question and I just want you to tell our audience, you know, why you think your solution is really tailor-made for the advisor market.
00:06:51
Speaker
I think that for an advisor with their book of business, we've effectively created plug-and-play alts allegations where they were designed to be long-term diversifying holdings that jive with the goals-based planning that they're already practicing within their firm.
00:07:10
Speaker
So, for example, you've got a client running the ubiquitous 6040 asset allocation. You can draw a line straight across to the corresponding third wire portfolio, make a 20% allocation to that, and you're getting exposure to currently seven underlying individual
00:07:28
Speaker
unaffiliated third-party strategies where there's no fee sharing. We've assessed them purely on quantitative and qualitative analysis. So you're mitigating single manager risk. We've got monthly liquidity, 15-day notice.
00:07:42
Speaker
If the proverbial excrement hits the whirling blades, there are two things the clients are usually worried about. What am I doing against the S&P and can I get to my money? So in the world of alternatives and private investments, monthly liquidity with 15 day notice is about as liquid as you can get. No redemptions, no lockups. So we're providing the ability for an advisor to rebalance as often as they dictate with their clients as well.
00:08:07
Speaker
But it's all uncorrelated, or is zero correlated to the S&P 500 total return, the Bloomberg AG, and then the 6040 asset allocation benchmark as well. So what X does does not dictate what Y does.
Diversification and Risk Mitigation
00:08:24
Speaker
sort of the foundation for how I came up with the third wire name itself. If you imagine an investment portfolio like an elevator, you've got one wire that's stocks, one wire that's bonds, and you look at any big downdraft in the equity market, and all clients would really have preferred to have a third wire attached to their investment portfolio. So, at best, it keeps you going in the right direction, or at worst, it prevents you from hitting the ground at terminal velocity.
00:08:52
Speaker
Yeah, it's funny. You know this because we've talked about this like our philosophical belief here when it comes to alt is completely aligned and one of the reasons why I really like third wire on our platform is because it is sort of the next
00:09:10
Speaker
next possible way to do what I do in our liquid alt models. I'm using ETFs and mutual funds, which is fine, but as you know, there's limitations there. The offerings in the space are super limited. You're not always getting the best that there is, and you can almost certainly do better with a broader universe of private product, LPs and the like, which is what ThirdWire does.
00:09:34
Speaker
aligned entirely in the way that you build portfolios. So the way I build portfolios, which is why when we originally connected, it was like finding your tribe and it was such a good fit for like much made in heaven. Yeah, exactly. So what do you think like the biggest challenges are for you when you talk to advisors? Why do you think that advisors in general have not
Misconceptions About Private Equity
00:10:00
Speaker
really allocated to alts in a meaningful way over the last decade? There's actually the predominant issue and then what we've done to solve for it. Whenever I speak with an advisor or an RA and assess sophistication and experience and allocating to alts,
00:10:21
Speaker
nine out of 10 times, it's, oh yeah, I've invested in a couple, three private equity deals. And it's just a forehead slapper. It's like all private equity or else, but all else are not just private equity. There's an entire universe out there. And I'm not talking about crypto or fractional shares of a Ferrari or vintage wine. This is liquid hedge funds out to private equity real estate venture, more traditional hedge fund structures that have
00:10:50
Speaker
one or multi-year lock and then semi-annual liquidity. Well, the other thing about that is, and you know this, is that private equity isn't really a diversifier. No, not at all. Like, you're just- Exactly, and I- It's illiquid beta. Yeah. Yeah. And I think that's one of the largest misconceptions. It's like, oh, private equity doesn't have the volatility that the public market gets to. Like, well, yeah, no kidding, because they're only reporting every quarter and usually on a quarter or two quarter lag. So by the time they have a downdraft,
00:11:20
Speaker
The public markets are already on a rebound and nobody cares anymore, but they're feeling the heat just as much as the public markets are. They're just not, they're not under any obligation to report it.
00:11:32
Speaker
No, I agree with you completely. On our platform, we do offer some of the things that you just touched on, venture capital, commercial real estate, things of that nature, but we're always very clear. These things have a place in our portfolio, but not necessarily your alt sleeve because they're not necessarily diversifying. Private equity is really just, should be part, at least in my opinion, I'd love to hear your thoughts. Private equity should be part of your equity.
00:11:58
Speaker
It's just you got to figure out how much you're comfortable with a liquid, but it's still equity and I would argue the same with private credit. It's still credit and fixed income. I think the majority of.
Private Equity's Role in Portfolios
00:12:10
Speaker
either SMA or 40 Act Fund managers, specifically in the large cap space. I mean, you can read any number of studies where year by year, half are beating the index, half are trailing it, and then they swap. And over time, it's really the spread in fees and they end up underperforming.
00:12:29
Speaker
I think in that case it's better to buy an index ETF as cheap as you can get and get your broad market public equity exposure there where it's actually worthwhile to pay for active management would be in a private equity fund and you can slot it in and beneath the small cap call it the micro cap or
00:12:53
Speaker
equity plus or however you want to label it, but I absolutely agree. It should be in the equity portion of your overall asset allocation, not necessarily in the alternative sleeve. Like the alternative sleeve should be anything, and this is literally the definition, anything but public stocks and bonds. So when you have, or
00:13:14
Speaker
generally equities and debt. But when you have a fund manager that's buying individual portfolio companies and buying their equity, I mean, it's the same exposure. Completely agree. So talk a little bit about what you invest in and how it's diversifying.
Illiquid Investments by Third Wire
00:13:32
Speaker
So going back to those conversations about assessing sophisticated experience.
00:13:38
Speaker
by advisors, we actually expanded into the illiquid end of the alternative space. And I mean, it's still private equity, real estate venture generally is considered an alternative investment. So rather than having them make
00:13:57
Speaker
Maybe an ill advised decision on fun selection. We know we we do liquid alts better cleaner and cheaper than anybody else out there. So we provided the same sort of multi manager vehicle on the illiquid side.
00:14:11
Speaker
So we have a version for private equity, a version for venture, a version for real estate, and you get the same level of portfolio construction manager selection and research and due diligence that you do on the liquid side. To your question, on the liquid end of things, we use a combination of liquid hedge funds and CTAs. So one of the major criteria, in addition to
00:14:40
Speaker
risk return profiles and higher sharps are good, but higher Latinos are better because it's my belief you manage the risk and the returns will show up.
00:14:54
Speaker
And so we've created a multi-strat vehicle, five of them, each of them tied to the commonly used risk buckets in wealth management, conservative to aggressive.
Strategy with Medium-Sized Managers
00:15:05
Speaker
And the 6040 was the first portfolio to launch. There are seven individual strategies there.
00:15:13
Speaker
It's a large swath of strategies that encompass futures markets, options, long, short relative value, but we're essentially playing money ball with the portfolios where we're not chasing big 10, 20, $30 billion fund managers and brand names. It's, you know,
00:15:38
Speaker
a statistic that you can read in a study, the best returns of any individual manager of the first three years of their lives. So we're looking for the smaller, not necessarily small, but smaller to medium-sized managers and using them. And it's not just the selection of the one, it's how they all play together and provide the non-correlation to the corresponding asset allocation. So you can really,
00:16:06
Speaker
plug and play on the liquid end and feel confident that you've mitigated a lot of the single manager risk, but you don't have so many individual managers and strategies that you're getting index-like returns. And it works really well. I mean, what we launched in May, we're up about, let's just call it 2.5% since. It continues to have no relationship with the S&P.
00:16:37
Speaker
and it's operating as designed.
Advisors' Challenges with Timing and Allocations
00:16:40
Speaker
Yeah, it's funny, you know, when I talk to advisors, what you normally hear is I did alt once and it, to your point, it's always just one manager, poorly timed, cause there was performance chasing involved, completely not understanding like the role of alt and just taking a flyer and then they get burned. And that can be hard to overcome. So when you sit down with advisors, when you hear that kind of experience, how do you address that?
00:17:08
Speaker
I really address it in terms of, I mean, the engine for the overall goals-based financial planning is the investment component.
Support in Portfolio Construction
00:17:18
Speaker
I mean, you can have the estate planning on how much gets passed down, inter-generation, tax strategy and accounting for, it's not how much you make, it's how much you keep, but if you don't have the six, seven, 8% annualized returns,
00:17:35
Speaker
going forward you're not going to reach the dollar amount that gets set for you to attain whatever goal it is whether it's retiring at 55 or buying the vacation house or something more simple that the higher up the wealth spectrum you get a 3% cash burn rate and you just need to exceed that. Using alternatives in that fashion you're not just
00:18:00
Speaker
picking one manager and slotting them in and some token amount, 2%, 3% and that's it. Alternatives need to have a meaningful allocation to effectively diversify the overall portfolio. If you've only got two, three or 5% and that's the total of it, it's not going to move the needle when everything else is going wrong. So anywhere from
00:18:26
Speaker
call it 15 to 30% of an overall portfolio, depending on your risk tolerances, investment objectives, time horizons, and every advisor is familiar with this, determining suitability, it should be part of their onboarding process. Based on that, you come up with the amount to allocate and we effectively do the rest. We do all the heavy lifting and we'll give the advisor four or five talking points on
00:18:52
Speaker
the third-wire portfolio itself, one or more that they may be allocating to, and then on the individual managers that are underlying so that they can speak intelligently to their clients about what are they putting them in.
00:19:06
Speaker
And then if the client is more astute or wants to get into the weeds on specific strategies, we are happy to sit in on prospective client meetings, quarterly annual reviews, and we will act as part of their team. The client doesn't need to know the third wire name unless the advisor tells them or that client reads the disclosures and disclaimers where obviously we have to be listed.
00:19:29
Speaker
All right, yeah, it's funny you were saying that because one of my favorite quarterly publications that come out, which I think is a great resource for advisors is the JP Morgan Guide to Alternatives.
Educating Advisors on Diversification
00:19:41
Speaker
And they have what is essentially one of those old school Iverson charts in that guide and they update it every quarter. And it's essentially what we've come to know where it lists, but only like hedge fund and alternative categories.
00:19:56
Speaker
and shows like how there's something different that outperforms all the time and that it gets to the same point that the traditional Levinson chart does but it doesn't using just alternative strategies and it really shows like the breadth and depth of what's out there in the alternative space and you just touched on a point that we at Bondry are super passionate about which is that advisors learn how to build portfolios of equities
00:20:22
Speaker
Uh-huh. They learn how to build fixed income portfolios. They know in both cases, you don't just buy one. They can do it in their sleep. Right. Large cap, small cap, mid cap, growth, value, fixed income, you know, investment grade, non-investment grade, government, mortgage backed. They know this, but nobody has ever bothered to teach advisors the same principles are just as relevant when you build alternative portfolios. Right.
00:20:50
Speaker
And that's something that blows up. I agree. I don't really have anything to add on that. Yeah. No, it's an ongoing problem. But I think firms like yours, which build it out and then provide that guidance and that insight to the advisor, are valuable. That's the whole
00:21:09
Speaker
That's the whole philosophy here at boundary. There's a larger educational component to what we do when we initiate and carry on discussions with advisors and RAAs. Like I said, what's your experience allocating goals over in a couple of private equity deals? No, there's a lot more. Let me tell you what it is.
00:21:35
Speaker
And so walking them through what exists, what is possible and how the various pieces can be
Evolution of the 60/40 Portfolio
00:21:46
Speaker
put together in a non-intimidating way and further to not intimidate their client as well is half the job, at least.
00:22:00
Speaker
No, totally and completely agree. But that's the next way to like, as Phil Huber likes to say, he did a podcast with Brittany Mason on our team on her podcast, The Alternative Mason. He said, you know, 60-40 is not dead, it's just evolving. And I think that, you know, this whole
00:22:19
Speaker
idea that the 6040 died in 2022 is a fallacy because there's value to the 6040. But I think if you look over time and you look at these big market downturns that happen over time, in every case, if you had a diversified bucket of alternatives, and again, that's the emphasis there is the diversified, meaning not just one alt.
00:22:43
Speaker
or whatever you define as alt and have it just be one. Yeah. Nobody uses that in the singular. It's alt, not, oh, I'm invested in alt. Yeah. Right. Exactly. Like you don't just pick the one hedged equity fund or like the one market neutral fund. If you do that, you're setting yourself up for disappointment because- Would you put all your capital for your equity allocation in Apple?
00:23:07
Speaker
Even if you wanted to take it to the next logical step, would you put all of your equity capital in just large cap growth?
00:23:17
Speaker
Right. Right. You would have times where you underperformed the market if you did that because value sometimes outperforms or small caps do better. And so you give yourself a better chance to succeed and also smooth the ride out by having those diversifying aspects. When you're building out your portfolios and you're thinking about that aspect, that diversifying aspect, like what are your core tenants for what you look for in constructing that?
Principles of Risk-Managed Portfolios
00:23:46
Speaker
uh for the individual strategies it would be larger sharp ratios above a one and sortino at least above a one and a half uh
00:24:01
Speaker
Really, we're going to stop for a sec. Can you explain to the audience, because I like to do this. Sometimes we assume people know things and they don't. Can you explain, because Sortino is not a ratio that's commonly used in traditional investments. So please explain to our audience the difference between Sharpe ratio and Sortino ratio. So Sortino is a risk adjusted metric that measures overall volatility. Sortino is just downside volatility. So it's what happens when the manager is losing money.
00:24:31
Speaker
and what that looks like versus the annual volatility and risk-free rate. And so we're looking at generally for individual managers, if they were to have a downside surprise, like a negative 3% month,
00:24:49
Speaker
we're going to be on the horn with them immediately and they're going to be flags on the plate. What happened? Is this style drift? Did you have turnover operationally? Is the same PM in control? Was he drunk? What was the rationale that caused this? But on the upside, if a manager has a positive 3% month, they'll still be getting the calls from us to explain why because it is operating outside of the
00:25:12
Speaker
the risk return profile that we have created for this particular manager and what our expectations are. But nobody's going to be upset at a positive 3% month. So while we want to know why, we're not hovering over the big red button to jettison them.
Concerns with Outperforming Expectations
00:25:31
Speaker
Well, it's interesting because having done manager research for the vast majority of my career, there's this misconception that bad performance leads to people getting fired. But I've actually fired more
00:25:43
Speaker
for outperforming by doing it outside of their mandate than performing. We're expecting you to be up eight to 10% a year. Why were you up 20? Yeah, we had a value manager we fired back in the day at one of my previous firms because they completely started investing like growth managers. And growth was in favor, so they were killing it. But they became growth managers, and they no longer served their purpose in the portfolio. So we had to pay for them. And I think there's just a giant misconception that
00:26:13
Speaker
Poor performance is the only thing that gets people fired or the only thing that gets people questions. And I would just want to put out there to the world that anyone who's actually good at their job doing manager research is just as concerned when they outperform well beyond what is expected than when they underperform by well beyond what is expected. You know, that is just as concerning and anybody worth their salt notices that.
00:26:38
Speaker
Very much so. But let's think about it. So we talked about Sortino. Just for reference, we've thrown some numbers out there. With Sharpe ratio, you are looking at it comparatively to the market. And the market Sharpe ratio can differ because of the nature of the inputs. But when you look at, say, information ratio, the market will never have an information ratio because it's excess. So with Sortino ratio, is it like Sharpe ratio?
00:27:04
Speaker
Or is the market always at one, and so Sortino ratio will be based on
Maintaining Low Portfolio Correlation
00:27:08
Speaker
one? Or is it the market can be anything, and so it's just looking at it in terms of what the market's doing? The market could be at anything, I think. Most recently, when I looked at over the pet from January of 2016 through July, I mean, it was under one, way under. I need to pull it up and look at the specific number.
00:27:33
Speaker
having a higher sortino ratio and sharp is a function of the risk adjusted returns that this manager is providing to the overall portfolio. Equally important is the correlation of their return streams to three benchmarks, the S&P, the Bloomberg AG, and before the 60-40
00:27:57
Speaker
60% stocks, 40% both. And each of the individual managers that we have selected to go into the third wire portfolio are uncorrelated to each of those three and then collectively they are uncorrelated as well. So one or two managers cannot bring down the ship. It would need to be a catastrophic. All seven managers have four out of four engines on fire and given the
00:28:22
Speaker
the variety of markets that are being traded in both discretionary, black box, relative value, well, I'm sure, what have you, if all seven are down, the world has much bigger problems. Then what's my portfolio doing?
00:28:40
Speaker
No,
Managing Correlation in Alternative Investments
00:28:41
Speaker
I agree. And it's, you know, just for the sake of our audience, I don't know about you, but when I'm looking at those things, there are two different correlation numbers I'm looking at. When I'm looking at like to the benchmark, I'm looking at that traditional correlation number. So, you know, one, zero, negative one is kind of the scale. When I'm looking at them versus each other, it's going to be excess return correlation because
00:29:06
Speaker
It's hard to do it because you have to pick your baseline of correlation, right? So when you do it to a benchmark, you just pick the benchmark. When you do it against each other, that means you have to choose one of the funds to be the focus of correlation. But if you do it as excess return, you're still using the market and that's still your baseline. So that's how I do it. I'm not sure if you do it the same way, but there are two different correlation numbers that you look at when you look at correlation to the market versus correlation to each other.
00:29:33
Speaker
I'm looking at it as I've got seven across the x-axis, seven on the y. Obviously, there's a one running down horizontally because it's same manager to same manager. And I'm looking for anything that's got basically over a 0.5, 0.6. And if I end up finding that, then I go find a different manager that I can plug in and continue moving forward.
00:29:59
Speaker
This is sort of a highlight of the active management that we do within the liquid portfolios. When the portfolio is launched or initially constructed, there may be that optimal low correlation between each of the individual strategies. But if over time, two or more do become more statistically significantly correlated, one of them is coming out.
00:30:24
Speaker
Or at least, and we'll find somebody else to put in so that we can maintain the single manager risk mitigation along with one or two managers can't upset the apple party. Yeah, I think my reasoning for why I do it my way is because it goes back to my days where I was comparing managers that were essentially the same style. Right.
00:30:49
Speaker
So I'd be looking at like a whole bunch of value managers and have to pick and put putting together a value fund of funds. And so you have to find value managers who aren't correlated that much to themselves in the value space, which is has to be done on an excess return basis. So I just take that to the next step with the alt space, but to your point, you can do it the other way. The key is you just, you know, you're looking at the matrix. I often look at it over time because
00:31:15
Speaker
Sometimes, and this is actually in the JP Morgan guide to alt, sometimes there are alt strategies that may perform in line with the market and have correlation close to one until a stress event. And then the correlation changes. And sometimes that can be important information. Right. Well, we've arranged the pieces for the third wire liquid portfolios to replicate the annualized returns that are expected going forward so that they will be the same or a handful of bits higher.
Designing Portfolios for Market Volatility
00:31:45
Speaker
but with given a 20% allocation to the corresponding third wire fund, it reduces overall volatility at 20%. So you look at historically all allocations and studies on it and they act as a drag because they don't perform until the equity and or fixed income market start having a down draft and then they start performing. Whereas these have been designed to
00:32:11
Speaker
still provide returns, not act as a drag on the overall portfolio, but when there is a volatility spike in the equity or fixed income market and or fixed income market that X not dictating what Y does continues to be a thing, but they actually perform better.
00:32:32
Speaker
Yeah, no, and I agree, but that gets back to that single allocation argument that we were making earlier. If you pick your alt and your diversifying alt and your one alt you decide to allocate to is Managed Futures and you're in a straight bull market, you're going to have to explain Managed Futures a million times to your client when they look at their statement. That is the one thing that's negative.
00:32:55
Speaker
But to your point- Which is also why there's a two to 5% token allocation and they don't put anything more heavy at it because it's going to act as a drag on the overall portfolio and they're going to be answering a lot of questions. Yeah. So the goal is of course to put uncorrelated things together and then they are going to work differently at different
Advocating Diversified Alt Allocations
00:33:12
Speaker
times. And to your point, they can actually provide value.
00:33:15
Speaker
Um, you know, overall goal that you have and that we have a boundary in is that if you put 20% of our portfolios into your 60, 40, right? Your 60, 40 will perform in line with all 60, 40s until the moment you need it not to. And then you all perform.
00:33:33
Speaker
And if we do our jobs right, that will be the outcome. But it really does come from the construction of the portfolio and picking the right underlying assets and stacking them correctly. So that's the key. And I think that, for me, is the message I want to make sure advisors get from this is that it's all about diversification of your alts just as much as it's diversification of your equities or diversification of your fixed income.
00:34:00
Speaker
And the overarching goal is that goals-based financial planning that advisors are practicing to get their clients to those end goals on a smoother ride and hopefully in a shorter amount of time.
00:34:11
Speaker
Exactly. Cause I say this all the time. You will never get fired if your client was able to retire and not run on money or pay for their kids school or whatever. They don't care that maybe you didn't, you know, the market returned 10 and you returned nine and a half. They're not going to care as long as you reach the goal, but I'll tell you what you will get fired for is if there's a massive market downturn a month before they're set to send their kids to school.
00:34:37
Speaker
And now they're not able to. That'll get you fired every day. So when you can smooth that right out, that is the key to ensuring that your client will be able to meet their final goals for whatever you're helping them manage their money for. Completely agree. Don't lose money and make sure I can actually achieve whatever goal I am saving this money for. Yeah, which goes back to the managed risk and the returns will show up.
00:35:03
Speaker
Exactly.
Simplifying the Investment Process
00:35:04
Speaker
So tell me a little bit about, you know, how you work with advisors. I know you have this super slick portal that advisors can use and sort of working within their risk parameters. So tell me a little bit about how that works because I think, so I think one of the biggest hurdles to advisors more frequently allocating to alternatives within their client portfolios is the
00:35:31
Speaker
intimidating investment process and the visualization of 90 page subdocs and round trip FedEx labels of yesteryear. Some still operate that way, but now the archaic method is manually populating PDFs and then sending emails back and forth, which can still result in a lot of human error. So we have created investment process efficiencies where
00:36:01
Speaker
getting into one of the third wire portfolios, whether it's on the liquid side, illiquid side, any of them takes about double the time that it takes to execute a mutual fund trade. Okay.
00:36:13
Speaker
It's like we've made it super easy and none of the PDFs, no physical paper. So I just want to rephrase that because I don't like the word double the time because that's what people are going to leave with. Mutual fund trades take approximately a minute. You put in a ticker and you press buy. In your case, you might take three to five minutes. But for context, in the traditional sense, whenever you invest in alts, that could be days.
00:36:42
Speaker
We built our portfolio with our integration with one of our technology partners to do what you do, but for a broader scale. But you already have that built, and it makes it really easy for advisors to. Right. Depending on who the advisor is, I'd say three to four minutes to pull up the client account, put in the ticker, put in the dollar amount, check the dollar amount again, maybe check the third time, then hit buy to make sure you accurately enter the info.
00:37:10
Speaker
getting into a third-wire portfolio from accredited investor qualification through executed subdoc six to eight minutes. So previously it was a couple weeks by way of overnighting maybe three or four days. We've turned the process that used to take weeks into minutes. And that is the key because you know advisors
00:37:35
Speaker
As intimidating as alts are, even the advisors who are comfortable with alts are intimidated by the process. And then there's the tracking aspect of it. Am I going to get a PDF or physical paper statements that I then have to manually enter these individual NABs per client?
00:37:54
Speaker
No, everything is automatically reported directly from fund admin to whatever custodian you use Schwab, Fidelity, Pershing, whoever. Or you can have it delivered as well or separately to whatever performance aggregator you're using, Orion, Black Diamond, Adipar, Temerac, something custom built in-house, whatever you have, we can report to it without human hands touching it and fear of
00:38:25
Speaker
manual entry, human error, everything is automated.
Partnership with Bonrin and Closing Remarks
00:38:29
Speaker
And that is why ThirdWire is such a good partner to Bonrin. You share our philosophical belief on how we build alt portfolios. You share our philosophical belief with we need to make the process easier and make it so that the advisor is not trying to manage paperwork and signatures and having to hire entire teams just to do the operational side. So this is why ThirdWire has been and continues to be and will continue to be
00:38:58
Speaker
We hope a great partner for us. We're excited to have you on board. We're excited to bring advisors on board and introduce them to what you're doing. So I will include in the show notes ways to contact Dan if you're interested in learning more about what ThirdWire is doing. And of course, if you're an advisor that's interested in alternatives, you can also reach out to Bonrion and you can also gain access to
00:39:24
Speaker
what Third Wire is doing through our platform as well and see our due diligence in our work as well as Dan's for his product. So thank you very much, Dan. We really appreciate you being on the show. And like I said, don't forget to follow us on Twitter.
00:39:42
Speaker
Instagram, YouTube, and LinkedIn. I will include all the same information for Dan in the show notes. Until next time, everyone, thank you so much for coming and hope you have a wonderful day.
00:40:00
Speaker
The opinions expressed on the what-you-all standards give us are the general and foundational purposes only and are not intended to provide specific advice or recommendations for any individual or any specific security. This is only intended to provide education about the financial industry,
00:40:17
Speaker
To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed joining this podcast is my guarantee of success. The guests featured on this program are participants on Bonin Capital Management's platform. As such, Bonin may receive payment for their participation as a platform partner. Any indices referenced for comparison are unmanaged and cannot be invested into directly.
00:40:41
Speaker
As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from licensed investment professionals. Investments are not FBI entry insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives, risks, charges, and expenses. This and other import information is contained in the front prospectus and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
00:41:11
Speaker
statements attributed to an individual represent the opinions of that individual as of the date of the published podcast, and do not necessarily reflect the attendance of Bondian Capital Management or its affiliates. This information is intended to provide educational value, highlight issues, and should not be considered advice, an endorsement, or a recommendation. All Bondian Capital trademarks mentioned are owned by Bondian Capital Management, an affiliated company, or its funds. All other company and product management mentioned are the property of their respective companies.