Petra Bakosova

Hi, Brad. Thanks for having me. So before we get started, why don't you tell everybody just a little bit about your background and how you got into your current role today over at Hall? Sure. Sounds good.

So my name is Petra Bakasova, and right now I serve as the CEO of Hall Tactical Asset Allocation, who is the advisor to the HTUS ETF. And funny enough, last week I actually celebrated my 10-year work anniversary with Hall. So I've been there for a long time. So if you're doing the math about my tenure and the length of the fund life, you will know that I've been there since before the fund has launched. And so if we take a step back about how I ended up at Hall, before Hall, I worked for two different trading prop trading firms in Chicago. My background was in applied math.

And then 10 years later, I'm still working on this fund. No, that's great. You and I have similar backgrounds. I did the high-frequency thing for a little bit. I don't think I've ever been so stressed out in my life because everything moves so fast, and you're constantly keeping an eye on everything. But before we kind of get into all of the stuff and all the things you do at Hall, I always like to ask people, any hobbies outside of work? What do you like to do when you're not working?

I am a huge triathlon nut, so I could spend the next two and a half hours talking about triathlon.

So please don't let me go there. I think I could do the running and biking parts. The swimming part is not for me.

Okay, that's kind of where I am. I do not have a swim background, but I'd like to think I'm getting better, or at least that's what I tell myself.

No, that's great. So let's talk about Hall as a whole. I know that there's a really unique and interesting background to the firm. So what all do you do for clients? How do you help clients? And kind of secondly, can you talk about the firm's founding?

Okay, yeah. So maybe let's start with a little bit of our story. And I think the story will explain a lot about our investment philosophy, and it will sort of explain a lot about why the fund looks the way it looks and how we go about running it. So if we go, we're named Hall Tactical Asset Allocation after our founder, Blair Hall, who most of your listeners would probably know as a, market wizard, one of the most famous options traders of all time. But what they may not know is that before he was a famous options trader, he was a blackjack player. So his, he describes it as his first investment experience was in casinos, counting cards at blackjack tables.

Well, first of all, I like Mr. Hall already. It sounds like a fun way to kind of get started. Um, I, I love blackjack, but I'm not a card counter. So they, they still let me in the casinos. Um, the other thing too, I really, um, I really get interested in tactical funds. I think the, the science and the mathematics behind trying to build models is really cool. So, the fund, which we're going to talk about at length, length today, HTUS has a really impressive track record. And I want to say, say that publicly, because when I looked up the fund, a lot of these long, short tactical funds don't have impressive track records. And so you guys have done a wonderful job.

Makes your approach unique? Um, absolutely. Uh, so I think, what we do and we're open about it, um, there has been a stigma with market timing and we're openly admitting to market timing, uh, or tactical asset allocation, if you will. Um, so basically, um, but before we do that, we start with the understanding that it is good to have a U S equity exposure. So I think this is like a pretty well accepted fact, if you will, in the investment industry. And we agree with that. So basically we collect about 40 or so different publicly available indicators. Um, and then we combine these indicators into different models and evaluate what we're thinking the market's going to do.

So I saw, um, when I was kind of mauling around your website, I saw, um, the sediment indicator on your website. So does, is that sediment indicator direct correlation of the S&P exposure that you want to hold or how does that kind of play into the investment process? Yes. Yeah.

So what we publish on the website, this is the sentiment meter. That is basically our recommended exposure to the S&P 500. So that we'll update once a day. Once we update all of our signals, uh, with, most recent market data.

Yeah. So are your signals. So let's go backwards a little bit. So you're taking, um, many different indicators. You're combining them into a single signal, or are you looking, are you combining maybe tranches of them and have multiple signals? So like, is it a multifaceted decision-making tree or do you basically have one signal that spits out that says, okay, this is the exposure we want to take? Uh, sure.

So we can start, sort of start at the top. So if we're 93% long today, that number came out of an ensemble of four different models. So we do have four different models under the hood right now. And sometimes, we develop new models and weight them differently. Sometimes we merge two models into one. Uh, but basically what goes into the models, I've said 40 or so indicators. And broadly speaking, you can categorize them into four categories. So we would have macro indicators. These would be things like inflation, unemployment. We would have fundamental indicators. So for the S&P 500 universe, we aggregate earnings, we aggregate dividend yields or total yields when we add up dividends and buybacks, or indicators like book to price.

Yeah, no, that makes a ton of sense. So, uh, just staying on this for a little bit longer are, so I would assume each four, each of those four models have, a weight given to them based on what you guys want to accomplish. And so do you ever change those weights or have you kind of gone back in history and figured out like the robustness of each signal and what you're trying to accomplish over the long-term? Or is that something that, you're continually optimizing or looking at tweaking?

So this is an evolving process. And weighting these models is like every portfolio manager could tell you. That's kind of one of the bigger challenges because, even though some of these indicators may have 50 years of history, some of these indicators may have five. And some of these models may have, a 20-year back test. But even the back test, like you always take every back test with a grain of salt. So like then we have traded history. So, giving the constraints of the data and giving the constraints and the belief we have in the data, it's kind of a blended process. So we will calculate the optimal weights, doing some kind of a market with portfolio optimization.

Okay, great. So that was going to be one of my questions. Let's talk about that. So it sounds like almost everything you do is completely computer-driven. However, at the end of the day, there is an investment committee that says we are willing or not willing to maybe change the weighting of our models.

Yeah. And I think that's, I would say like in the perfect world, eventually we will gather more and more data points and we will have more and more like true out-sample results. And the decisions of the investment committee will deviate less and less from what the model recommends. And I wouldn't say like we deviate a lot. This is more, I would say it's more of like operational risk level in terms of, okay, so are we suspecting that like one of the data sources might be bad? Are we suspecting that, one of the signals might be deteriorating? So we try not to, put in our opinions.

Yeah, no, I love it. And I think quant works best when you have a little bit of oversight instead of just like letting it run wild. So thanks for sharing all that with me. It's super interesting. So let's talk specifically about HTUS. we've talked about the investment process behind it, but like at a high level, what is the fund really trying to accomplish or deliver to investors? Yes.

So basically our investment premise and sort of our goal is we say we aim to outperform the S&P 500 without exceeding the volatility of the S&P 500. And that's where we see ourselves in clients' portfolio. So almost everybody who has any kind of investment portfolio in the US will have exposure to the S&P 500. And basically what we're saying is, yes, it's good to have the exposure to S&P 500. And we also think you can do a little bit better. So maybe, take away a little piece of your S&P 500 exposure and give it to the HTUS. And you will have a very similar experience, hopefully a somewhat more enjoyable experience with our fund in your portfolio.

So you kind of talking about the process, you answered a lot of my questions. But like given HTUS, we know like reading and you had said can take long and short positions. So when can you talk about the portfolio mechanics of when you are getting short and there is volatility? Like what is the fund investing in? So I don't want to make an assumption there. Are you options, futures? Like how are you setting up your short positions? Yes.

So generally speaking, we will only hold a very few different assets. So we will have cash or cash instruments. So things like money market funds or T-bills. Then we will have the SPY ETF to give us S&P 500 exposure or E-mini futures that also gives us S&P 500 exposure. And then blended with our like core market timing strategies, we also have two options strategies. Which will invest in SPX options. And those will be anywhere from zero DTE to about a one month expiration.

So is your short exposure, are you ever taking long term short exposure or meaning like you're taking a cycle bet? Or is the fund going to be short in like very little windows?

So one of the components that goes into the ensemble is a six month equity risk premium model. So in theory, the six month equity risk premium could have a bearish view on what happens over the next six months. So we could be on average under invested for as long as that model is giving us a short exposure.

So if you're sitting down with an advisor and you're trying to get exposure to HTUS and how are you positioning it? Like what is like how are you explaining it to an advisor? Because it seems complicated, but it really isn't at the end of the day. Meaning everything you do back here is complicated, but the strategy, the deployment of the strategy is quite, quite easy to understand. So how are you kind of explaining it to advisors if you're sitting down with one? And where are you advising that they kind of put this exposure and how much? And I know that varies, but just general.

Yes. Yeah. Generally speaking, again, we're going to the advisors and basically the three use cases was actually seen from advisors for HTUS. One was, people are just looking for different alternatives to the, large cap core ETFs. People are asking, okay, is there something other than SPY I could be buying? And some advisors might be interested in offering this as an alternative. The second option is a lot of clients are interested in these quantitative strategies. There is a segment of clients who are interested in, it's in terms of like the research under the hood.

So I should have asked this earlier. Is this strategy only available through the ETF? Or do you have SMAs? Do you guys offer – do you sell research? Do you – did you have a hedge fund at one point or do you still have one? We never had a hedge fund.

We sort of have a SMA program. We opened the SMA program to potential large clients. But our number one focus is the ETF. Got it.

So with the ETF, it's one thing to have phenomenal returns, an awesome story. Like what is your strategy kind of going forward in terms of continuing to grow the fund, marketing, distribution? what are your strategies or how are you thinking about that?

So there's a few different strategies. So one of the strategies is just telling the story. As we both know, market timing has had some stigma against it in the previous years. And we're sort of telling the stories like, okay, there's a difference between what people did in the 70s and what we're doing now. Like in the 70s, people thought you could just beat the market with one indicator. And we're saying you can't. We're saying like this is why we have 40s and we call them micro alphas because we think, okay, they give you signals. But individually, each of these signals is very weak. So that's why we need all these sophisticated modeling techniques to actually extract the information in some kind of a robust way.

So continuing to talk about like that development, have you guys started down the AI path yet? Are you considering the AI path yet? Where are you in that lifecycle?

So we've always been sort of on the AI path, depending on how you define AI. I think I've had some conversations with a few folks at this conference. And it's really interesting because depending on who you ask, like you can get really extreme. Some people will say, okay, AI is just large language models and everything short of that is not AI. And some people will take it to the extreme and say like an Excel macro is AI. So, I'm sort of laughing because, it's about everybody's definition. But, we have been in sort of the machine learning realm pretty much since inception of the fund. We have always gone past, simple regression approaches.

Yeah, it's funny. It kind of goes back to, the point you made earlier where, any given signal, there's no perfect signal, right? And there's people out there in the AI space right now who are starting to see, this wave of AI funds starting to be launched. And, some of them are just sentiment only, right? They're only looking at social sentiment and they're making bets. And some of them are, fractal and pattern recognition only. And that's only what they're looking at. So I think your approach is really interesting. I really, I've said it once and I'll say it again. the people who listen to the show go back and take a look at the track record because it is very impressive.

Absolutely. So I would say come talk to us. And we have two websites. We have the fund website, www.halltacticalfunds.com or the advisory website, halltactical.com. We do have a somewhat active Twitter page. We've been blogging a lot this year. So we probably put out a blog about once a week. So if you want to understand a little more about, like, what's going on inside our heads, that's a good place. And then reach out. So, you'll find our contact info. Give us a call. Come see us. We're in Chicago. We're always happy to talk. We will never get bored of talking about the strategy. So we would love to talk to our listeners.

Well, Petra, thank you so much for spending some time with me today. Wonderful. Thank you, Brad.