Paisley Nardini, Simplify

World, which is this macro-driven approach to thinking about markets, economic data. And so I spent about four years behind a Bloomberg screen trading bonds, waking up at 3.30 in the morning, which is a, being in my early 20s, that wasn't exactly the path I was hoping for. It was really difficult to be social when everybody's grabbing dinner at 8 o'clock and you were going to bed at 8. So I decided to step out of just the fixed income trading world and into more of the client-facing sales capacity. I was at PIMCO for a couple of years working with institutional clients. That's most of my career thus far has been in front of pensions, endowments, foundations, sovereign wealth funds. And then just decided that this nice blend between client-facing and portfolio management

Was where I'm best suited. So being able to understand the strategies from how they work, from a positioning perspective, the impact of a market, and then having to articulate that and work with clients, I think at the end of the day is what's most fulfilling for me. So I've spent the last eight or nine years in this kind of multi-asset portfolio management slash strategist capacity, learning a lot. And I would say too, like at the end of the day, most investors, whether it's large institutions or small advisors, are all looking for kind of the same thing. So there's a lot of themes and commonalities, I would say, irrespective of the client base.

World. Um, I just actually signed up to take some pickleball lessons. I realize I'm like 30 years too young and maybe like four years too late to this trend, but, um, some more social elements, perhaps the sports, but I live by the beach in Orange County, California. I can't complain. Uh, spend a lot of time outside riding e-bikes, uh, going to the beach, hiking, that, that sort of thing.

Uh, but I think it's helpful just to maybe understand some of the composition of who works at simplify. We have a lot of ex PIMCO people, myself included. And so really thinking about that theme of structural alpha, the use of derivatives, um, to achieve more kind of like systematic repeatable return streams beyond just taking large bets and duration or credit risk. Um, so we have some wonderful portfolio managers who work now at simplify who, spent much of their career next to bill gross. Uh, so some of that flavor within our active fixed income lineup, uh, a lot of derivative option overlay strategies within equities. So, the buffer ETFs are obviously, um, I've seen a lot of success, so we don't have

An explicit line of buffer ETFs, but similar kind of outcome defined outcome, um, thinking about protection on the downside and perhaps capping some of the upside. For more certainty. And then also just thinking about that kind of true bread and butter alternatives, whether it's equity long, short, whether it's currency, we'll talk today about managed futures and trend following and more hedge fund driven approaches. Um, so as of today, we're about 7.1 billion in AUM. Again, we just launched about four and a half years ago. So it's pretty impressive growth. I think Morningstar named us maybe the second fastest growing ETF provider last year. Um, and so continuing to bring innovative solutions to the marketplace really across all asset classes.

That's really what we're looking to harvest is these price fluctuations and capitalizing on these trends, whether it be long or short. And I think to maybe your point on, um, the importance of long, short opportunity set in this market with heightened volatility, more disruption, um, the ability to take short positions is also very advantageous. So CTA in particular, um, is looking at futures contracts in both the commodity space. As well as interest rate futures. And I highlight that because, uh, in managed futures broadly, you can really have access to all parts of the market, equity, foreign exchange, crypto now as well. Um, we were very intentional at the launch of our strategy to provide our clients with the most capital efficient diversifier in their portfolio.

Because at the end of the day, if you're pulling away from that 60, 40, whether it be stocks or bonds or both, um, you really want to ensure that you're going to have a diversified source of risk and return. And so by excluding equity and FX, we knew we could provide our clients with a diversifier. Um, and then again, that ability to go long and short. So our contracts are all traded in North American hours so that we are providing heightened liquidity. Our market maker is easier for transaction purposes. Um, and so CTA launched in March of 2022. We just passed our three-year anniversary and I would say we far exceeded expectations, um, which I'll get into in a bit here in performance as well.

The way I would liken this is really to think about it's a counterbalance to trend. So as we know, trends, objects in motion tend to stay in motion. As that continues and the trend perhaps gets long in the tooth a bit, this second signal or model, the fundamental reversion is really going to look to amplify or dampen that trend based on macro signals. So this starts to start, a little bit bleed into that kind of macro hedge fund type strategy instead of just a pure trend strategy. And the fundamental reversion signal actually is anti-correlated to trend. So why that's beneficial is as trends shift, you have this counterbalance, again, to amplify or dampen the positioning signal.

And just to clarify as well, our trend model has a multi-horizon outlook. So we have a short-term, medium-term, and long-term trend, which is something if our listeners are immersed in the trend world, you'll hear quite a bit of that and talking about what trend timeframe works for or against these strategies at a given point in time. And the additional indicator that we rely on is called the intermarket factor. And a very easy way to understand what this is looking at is thinking about the relationship between asset classes and what that means kind of for their future potential. So if we look at just the last couple of weeks in market volatility, there's been a meaningful drawdown in equity prices. Historically, what does that mean from a bond market perspective?

It usually means that bonds see a little bit of that flight to safety trade or a little bit of a kind of risk sentiment shift. And so as equities sell off, our indicators are going to be supportive of taking long positions in bonds and vice versa. Our model has actually been quite short interest rate futures over the last two to three years because equities have continued to rip. So that third signal or indicator is really that counterbalance of what's from a macro perspective, how our asset class is behaving, and then do we amplify or dampen our signals based on that relationship? And then the fourth signal, sorry, that you mentioned is really important as it relates to our interest rate positioning, and that is the carry signal.

And the reason that this is very important is that we are funding these futures positions and underlying front end rates, treasury bill collateral. And so if the curve is inverted as it has been over the last several years, it's not advantageous to fund these positions from short term treasury bills because you're really losing out on that carry trade, the curve is inverted. And so as a result, that fourth component is very important as it relates to interest rates, and it's giving us a more holistic viewpoint on where we want to position within the interest rate curve. So again, these four signals are very much hedge fund like, and the reason being, and I haven't mentioned this yet, but simplify where we don't have in-house capabilities that we feel

Are robust, or industry leading, we'll partner with outside managers. And so Simplify, at the inception of the strategy, partnered with Altus Partners, a hedge fund based out of the UK, and they run a very similar model in-house for their hedge fund clients. They also have separate account clients as well that are relying on these four models. So if it sounds institutional hedge fund-like, it's because it absolutely is, and it did come from the hedge fund world.

Or again, we call that our inner market factor. And then we saw that again in February. So coming in like through January, we had quite a bit of like long commodity positions, just given some of the more risk-off tone we saw broadly. Hadn't trickled quite into equities yet. And then in February, we really scaled out of almost all of our commodity position, which we saw a commodity sell-off alongside equities in kind of that mid-February, late February time horizon. So the positioning in the fund adjusted pretty quickly and pretty dynamically. So over the course of two weeks, kind of pulled out of most of our long commodity positions, started to go short commodities. And at that exact same time, because of this inner market factor with the equity sell-off,

All of a sudden we were long the two-year. We were long the five-year in both Canadian and U.S. rates as well. And since we've started to see a little bit of this pullback or maybe a floor in equity prices, we've started to see some of that kind of counterbalance as well. So that inner market factor is really important because if you think about what you're doing in a trend-following strategy, you have to be able to pivot quickly. And that goes back to one of our other differentiators is we're capturing the signal and then trading on that. So meaning Altus Partners is sending us the signal at close of business London time each day, and we're trading on it at simplified by close of business New York time.

So that latency in between signal to trade is really important to capture some of these really quick movements or shifts in the market.

This isn't us just coming up with this. So it is an outside third party. So I think that helps with a bit of the checks and balances. And I would say for anyone listening that might be concerned on that embedded leverage, historically, CTA has been around 12 to maybe 13 or 14% margin to equity. So again, our cap is 25%. We are far below that. And all of the other so-called risk constraints that could be applied, we don't have constraints beyond that 25% margin to equity ratio. So what that means is we don't have sector caps, we don't have position caps. And that is very intentional as well, because like anytime you're taking active risk, it's usually a very few subset of whether you're picking individual stocks or selecting futures

Contracts that are driving that alpha. And so by having less constraints on where we can go and how much we can go, we're able to capture some of those outsized positions. And a great example of that would be in 2024, anyone that was following the cocoa market closely, which I doubt many people were. I love chocolate, so I was on it. But just given some of the weather patterns we're seeing in areas where they're growing some of these soft agricultural commodities, it's had a really meaningful impact on prices. And so cocoa was up 200 to 300% last year, and we rode the wave on that. That was one of our greatest contributors to positive performance and outsized returns last year. Another one was just being short interest rate futures.

And that goes back to that carry signal. Many of the other trend following systematic trend managed future strategies were long interest rate futures with the expectations rates were going to fall and there was going to be a nice tailwind. So our carry signal is really important. But going back to your question, less constraints on sector contracts, notional allows us to be more dynamic.

So making sure clients understand what environments does trend following do well in. And of course, not to state the obvious, when we have trends in asset prices, whether it's in commodities, whether it's in interest rates, or for those that do trade equities, kind of like the status quo and kind of like that, I don't want to say lower volatility environment, but that's really beneficial when we see these prolonged trends where you can capture those trends. Whipsaws, as I said, is kind of where you get caught offside. So having that kind of reduced latency of signal to trade is also really important to make sure you can reposition. And then I would say even broader, a lot of why managed futures did not perform very well

In the post-GFC era was just where we were from an interest rate perspective. So underlying collateral for managed futures is often treasury bills. If treasury bills are yielding zero, that's your starting point. So these are absolute return strategies. So T-bill collateral returns and yield is your starting point. So if that's zero, you really need to shoot for the stars if you want to provide attractive absolute return. And that's why managed futures didn't get much love in that 2010 to 2019 period. So that's a really great starting point today and has been really since mid-2022 when managed futures kind of reemerged as this important source of absolute return in portfolios is you had really high starting yields.

And then any additional incremental return is just alpha or icing on the cake.

I think just pointing out again, in February, the most recent sell-off we saw, the ability then to kind of pivot and take advantage of all of a sudden asset prices are trending lower and the ability again to take short positions, capitalize on that, provide attractive absolute returns as the broader market selling off is really, really attractive. And so there's been a lot of discussion in the last couple of weeks, as there is anytime we see these market sell-offs, it's like, is the 60-40 dead? How do we build a portfolio if we can't do a 60-40 anymore? And I always say, if you say the 60-40 is dead, you're saying diversification is dead. And it's quite the opposite. From our perspective, diversification is alive and well.

And so it's like, we try to educate and help our clients understand that the 60-40 was the best set of, like, it's your best toolkit at the time when that was first constructed. We have so many other unique, innovative strategies in the marketplace today that provide low correlation to help smooth returns, reduce drawdown risk. So it's more of like that 50-30-20 that just builds a more stable kind of portfolio. And CTA strategies, managed futures, really provide that most, the best bang for your buck. If you're getting low to no correlation and attractive absolute returns, like there's not much more you can ask for in a portfolio.

Two, managed futures have delivered, meaning they have outperformed stocks. They have outperformed bonds in each of these environments by providing better downside capture within a portfolio. So they've smoothed your overall portfolio return. So I'd like to just start with that. And then the other thing I think is really important is if you look back over the last 25 years, managed futures have outperformed core bonds. And again, managed futures are not here to provide necessarily income for clients that need that. So I'm not saying we should get rid of bonds and replace it all with managed futures. But over a long, it's not just in those periods of crisis that they deliver. Like over time, because they can protect in those short periods of drawdown, they're very

Advantageous in a broader portfolio setting. And then more specifically, looking at our strategy, I think, again, the less constraints that we've had and the ability to kind of go all in on some of these markets as they're trending and take advantage of that, we've been able to produce really attractive alpha, not only relative to our peers or the index, which we have. Our three-in-one-year ratings were in the top percentile. We've actually outperformed or in line with the S&P 500 going back to the inception. I just looked at it this morning. We're essentially on top of each other when it comes to S&P 500 versus our CTA ETF.

And so to provide equity-like returns in a market environment where it's been very attractive for the S&P 500 over the last three years and to do so while being anti-correlated, going back to my earlier comment, like it kind of speaks for itself.