This week, we speak with Andrew Beer, Founder and Managing Member of Dynamic Beta investments. The firm manages several ETFs that seek to replicate illiquid alternatives at lower costs, with full transparency and daily liquidity. Their hedge fund replication fund, iM DBi Long Short Hedge Strategy ETF (DBEH) is up 27.7% since it launched in December 2019.
He started in the hedge fund industry in 1994, when he joined Seth Klarman’s Baupost Group as one of six generalist portfolio managers working. Klarman taught him how to understand risk as a function of downside.
Beer explains why investors do not actually try to find the managers who are going to put up great numbers — which is very hard to do. Instead, they find managers who just put up great numbers — which is very easy to do. Even when they do manage to find the rare alpha generator, they still must confront “single manager risk.” He notes that mean reversion of lucky (not skillful) high performers and the risk of potential blow up are a constant risk with any one single individual manager.
DBi uses several clever technologies to reverse engineer the best of the HF industry’s allocations. What mattered most for Alpha in 2020 was the exposure to big cap growth and tech as opposed to any one specific company. The firm tracks the 40 top finds and each month analyzes their performance, using that data to reverse engineer their allocations. By replicating that asset allocation in an ETF wrapper, they manage to provide daily liquidity and transparency while still capturing all of the after fee performance (or most of the pre-fee performance).
He also explains why hedge fund fees remain so high: The people who allocate to hedge funds are allocating OPM so “they really don’t care about fees.”
A list of his favorite books are here; A transcript of our conversation is available here.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
Be sure to check out our Masters in Business next week with Ron Baron of Baron Funds. Founded in 1982, the firm is known for long-term, fundamental, active approach to growth investing, and has $49 billion in AUM. 16 of 17 Baron Funds, representing 98.3% of assets outperformed their passive benchmark since inception; the Baron Partners Fund was up +148% in 2020.
Andrew Beer’s Favorite Books
The Structure of Scientific Revolutions by Thomas S. Kuhn
Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman