Bob Elliott wants to offer ETFs that replicate the return streams of hedge funds and other alternatives to both pensions and individuals who can’t justify paying 2 and 20.
Bob Elliott is a co-founder of Unlimited, which wants to bring sophisticated hedge fund strategies to individual investors who haven’t had access to strategies that could help protect their savings from market swings or a prolonged downturn. But any asset manager that wants to offer alternative investments like hedge funds to individuals needs to deal with the cost problem: how to turn the traditional 2 and 20, meaning a 2 percent management fee plus a 20 percent incentive fee, into something reasonable.
In today’s episode, Elliott breaks down the technology that he uses to translate publicly available information on industry hedge fund returns into a general picture of positions that Unlimited can then deliver in an ETF.
But more importantly, Elliott talks about this type of innovation’s potential effect on the hedge fund industry and alternative investments in general. While he doesn’t think it’s going to happen tomorrow, Elliott does think the transparency and lower costs of replication could seriously challenge at least mediocre managers and either push them out entirely or force them to improve. As he says, individual should benefit if Unlimited can not only reprice the cost of access to hedge funds, but can out-compete marginal managers. Then the start-up's machine learning technology will be replicating a pool of higher returns.
And replicating the returns of private equity, private credit, and venture capital is even easier than hedge funds, Elliott argues. There are plenty of lookalikes of these companies in public markets, where investors can buy and sell at will and costs are a tiny fraction of the 6 to 8 percent charged by managers. But the big sticking point may be institutional investors who have become accustomed to having their holdings in private companies priced only quarterly and the return profile fiction that creates.
Listen as Elliott also discusses critics of democratization, the positive effect of transparency on portfolio construction, and the long lack of innovation in the investment industry.
