3 things investors can learn about risk from the U.S. Army

Major Hugh Jones is a professor of finance and economics at the United States Military Academy and has had two tours of duty in Iraq. He also has an MBA from Duke.

He spoke last year at the CARE conference (Center for Accounting Research and Education conference) about how the U.S. Army deals with high-stakes risk. The video below is his presentation at CARE (thanks to Professor Darren Roulstone for bubbling up  his speech!).

You can get slides of Major Jones’ presentation here [.pdf].

Here’s what investors can learn from how the U.S. Army deals with risk.

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Bringing affordable, institutional-grade investment strategies to everyone – with Mike Kane

hedgeable podcast

Individual investors have had to wait patiently to get access to low-cost, high-transparency investment products that employ similar strategies to what hedge funds use to make their money.

The waiting is over as firms like Hedgeable provide powerful investment management that the rest of us can afford. Minimums are low, fees are low and transparency is high.

Oh, and Hedgeable returned over 10% in 2011, a year when most stock markets were flat or down.

On this week’s episode of Tradestreaming Radio, I speak with Mike Kane, co-founder and CEO of Hedgeable about his strategy, why investors benefit from hedge fund strategies, and how he can afford to price his fees so low.

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Bringing affordable, institutional-grade investment strategies to everyone – with Mike Kane by tradestreaming

About Mike Kane

Mike is the co-founder and CEO of Hedgeable. He was previously at Spruce Private Investors and at Bridgewater Associates.

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Announcer: You’re listening to Tradestreaming Radio, with your host, Zack Miller. Expand your mind. Become a better investor with tools, tips and technology from the smartest investors on the planet.Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller, and I hope you had a great, great New Year. This is the place where investors come to learn from experts. Today’s expert is Mike Kane. He’s the founder and CEO of a new online investing platform called Hedgeable. I’ve written about it a couple times on my blog and in my newsletter, so if you guys aren’t subscribed there definitely go and sign up. I think it’s a really engaging platform.

Mike and his partner, his brother, both had pretty extensive experience at the hedge fund level, and their goal was basically to bring institutional-like strategies to retail investors, to individual investors, and do it in a very transparent and very cost-effective way, and that’s what Hedgeable’s all about. There’s a lot of information there they give away for free. A lot of their services they even give away for free.

Even their paid services, where you’re actually paying them to manage a portfolio for you, are very reasonable, and their performance in 2011 was pretty impressive. Some of the core portfolios were up about 10% in a year where the market, the S&P, was pretty much flat, and certainly global markets were down. Interesting story, and I’m glad Mike joined us. Thank you, Mike, for participating.

Again, you can find the archives of this program on my website, tradestreaming.com. Come check it out there. We’re going to be having more live events throughout the year, so definitely sign up for the e-mail. You can also find the archives on iTunes, and please let other people know that you’re finding value with this podcast, and leave a rating or a ranking.

You can always come back to the website, tradestreaming.com. We’ll have a transcript of this interview as well, so if you don’t have time to listen, or you want to read and drill down, you’ll get that as well. I appreciate your time and your energy. Thanks for listening to Tradestreaming, and we’ll be back at you next week.

All right, so, do you want to start by introducing yourself and your background?

Mike: Sure. My name’s Mike Kane. I’m the CEO and co-founder of Hedgeable. My background is mostly in the hedge fund and the high-net-worth space. Before founding Hedgeable, I worked at a company called Spruce Private Investors, based in Connecticut. They’re a $3 billion asset managing firm for wealthy families and endowments.

This year, in fact, they were named the best wealth management firm in the U.S. by a private asset management magazine, and while I was there we were nominated at least three times for invest Hedge Fund of Funds of the year. So, it’s a pretty prestigious wealth management firm on the East Coast.

Before that I worked at Bridgewater Associates, which is now the largest hedge fund. They manage about $125 billion for foreign governments and pension funds, and are mostly focused on global investments, so commodities, fixed income and bonds, things like that. I have a diverse background, both on the wealth management side dealing with individuals, and also on the institutional side.

Zack: How did you get the bug to want to break out and do your own thing?

Mike: Well, we started Hedgeable in 2009. This was at the height of the financial crisis. This was March 2009.

Zack: Great timing, huh?

Mike: Yeah, great timing. The S&P was cut in about 50% of what it was in 2007. Retirement investors had lost trillions of dollars at that point, and in March 2009 it looked like there was really no bottom to the market. Some people expected the market to go down another few thousand points, and we just found it unacceptable how somebody with an IRA or 401(k) just see half of their money get wiped out. That’s why we started Hedgeable.

There was a huge need in the market for a new disruptive service that offers more transparency, more risk management, and just an overall higher quality product to people who normally wouldn’t be able to access a really high quality product. These are IRA investors with $25,000, $50,000, middle class Americans who were really shut out from most of the financial services space, because most of the advisors out there really target more of the high-end worth.

Most advisors have a minimum of at least $250,000. Even if you looked at national firms, such as Schwab or Vanguard, most of those firms even have minimums in the few hundred thousand, even the million dollar range. So we felt there was a huge need in the market for a really high quality, sophisticated service that focused on risk management that was offered to people who had less money in their account.

Zack: You mentioned a lot in that statement, so can we drill down a little bit on what you describe as disruption that you feel you’re doing with Hedgeable? You mentioned two things: one was the transparency that you bring, and the other was a better way to hedge than a long-only account. Can you talk about the transparency that you’re embedding into the platform and why that matters to people, why that should matter to people?

Mike: Sure. Well, we think it’s vitally important. The whole advisory business, we feel, is broken. Traditionally, even when I was worked at Spruce, you have a quarterly or maybe a monthly call with a client, they get a quarterly or monthly statement, and that’s really about the end of their knowledge about what’s going on in their account. We find that to be unacceptable.

Zack: Do people really want to know, though? I know that sounds like a crazy question, but in just some of the experience I’ve had there is a whole subsection of clients out there that really could care less what you’re doing.

Mike: Right, well when I say that they care what we’re doing, what I mean by that is that on the Hedgeable platform, for instance, all of our clients get access to an online platform, and on that online platform they can login at any time of the day, see exactly what their balance is in their account, and what’s held in their account. We have an ethos performance analytics and reporting. There’s one-click access to support on there as well, and a lot of other technology features.

What I mean by transparency is giving clients the ability to do it. Not everybody’s going to want to login every day, and that’s perfectly fine and reasonable, but having that extra layer there where people know that their money’s safe and secure, and there’s an extra layer of transparency, we feel, really helps in the investment management space, where clients were really concerned in the past.

Zack: Okay, and what are you doing on the risk management side that may be different than what clients of other brokerages, or advisors I should say, have access to?

Mike: Sure. Well, I think that the best way to answer that is to really look at the whole product offering. We feel that we have the most disruptive service that has ever been put out in the investment management space. And why I say that is . . .

Zack: That’s a pretty bold statement.

Mike: Yes, it’s a bold statement, but we think it’s accurate. We wouldn’t start the company if we felt we couldn’t do that. We actually have three programs that we offer to retail investors. The first is actually a free program. It’s entirely free, and we give the same level of investment management that you get at nearly every advisor around the country who charge at least 1% on most cases.

It’s a customized ETF and mutual fund portfolio that we build based on the client’s profile, and it’s based on [inaudible 8:32], which is an industry standard, and then we balance that when customers get out of line with their level of risk. So that service is absolutely free, and they get access to our entire platform. We have a $5 thousand minimum on that service, which is unheard of in asset management these days. That’s kind of our core product.

Zack: When you say it’s free, the customer is custodying the assets with you, or you’re the custodian? It’s not just an informational product, the free version?

Mike: Right. We manage all the money, so when you become a Hedgeable client, we have an online sign up, just like you would sign up for an online banking account or a TD Ameritrade account, and we have the money as a custodian, FOLIO.fin is our broker- dealer/custodian, so we’re just the RA piece. We don’t custody any of the money entirely. So when I say it’s free, we don’t charge a management fee.

Zack: Management fee. Got it, okay.

Mike: So on top of that we have two paid products, which cost less than 1% on a wrap fee basis, our Retirement Plus Program, and our High Net Worth Program. In our Retirement Plus Program, it’s geared toward retirement investors that want a really highly risk- managed account, so this is where the risk management comes in. We built over 300 algorithms and over 100 pieces of technology to help manage money, and a lot of that is based on the risk management side.

In our Retirement Plus Program, we actually provide clients with risk- managed, target-based retirement portfolios. These are similar to the target-based portfolios that are in the 401(k) space through Vanguard and [inaudible 10:26] that most people are familiar with. They’re diversified portfolios and ETFs, but rather than passively investing and managing those portfolios, for example, say you went into Vanguard, where you open to yourself up to huge amounts of losses, we actual dynamically manage those portfolios.

For instance, this summer when the market lost about 20% in a short period of time, most of our clients in the targeting portfolios would have either been up about 1%, depending on which target date they were in, or down 1% or 2%. So that’s the level of percentage that we’re doing in those portfolios, and that’s really the value-added that clients come to us expecting, and why we charge for that particular program.

Zack: Can you give us a little bit of color on how you’re doing that? You go to cashing those points, or are you actually shorting the market?

Mike: Right. We don’t offer any shorting for retail clients. On the high end net worth side, we have a long-short global macro strategy, which I can go into more detail later, but on the retirement side, those are dynamically managed, so we use dynamic asset allocation.

It sounds like it’s complicated, but it’s actually quite simple in practice. The actual mechanics of it are complicated, but really what we’re doing, for example, is let’s say you invested in U.S. equities, emerging market equities, bonds and gold in a portfolio. So say it’s the basic diversified portfolio, and let’s say U.S. equities are going down over the summer time, we will gradually sell out of that asset class and put it into cash, or fixed-income if fixed-income is looking to be positive. It’s a basic risk management that doesn’t use any leverage, doesn’t use any shorting, and it’s very sound as well

Zack: Okay. You talked about two of the products. Do you want to talk about the High Net Worth product?

Mike: Sure. The High Net Worth Retirement product is our most sophisticated offering. It’s really tailored to people who can access a hedge fund or a high net worth advisor. We have only a $500,000 minimum on that product. We have over 20 allocations that we offer that clients can pick from, so we have all of our risk- managed strategies, we have some fixed-income portfolios, we have global equity, U.S. equity, stock stream portfolios.

And then we have about eight different alternative types of strategies that we offer. We have global back row and long/short, multi-strategy hedge, an equity hedge, a low volatility allocation. Really what we’re trying to do is show our clients that if you have the $500,000 to $2 million or $3 million, you can’t access a hedge fund, but we’re going to give you the same level of investment management you would get at a hedge fund for less than 1%.

All those clients pay 75 to 95 basis points all in, so that includes all the costs, and they get access to our platform. And they’re actually able to change their allocation at any time going forward, so on our platform, we give them the ability, let’s say they’re in the global equity portfolio which holds emerging markets, and international stocks, etc., and they want to be in something more U.S. based or something more diversified. They actually can click a button and we’ll do all the trading for them live. So it’s kind of an extra feature that we provide that isn’t available at most advisors.

Zack: Can you talk a little bit about what you’re seeing in terms of investor behavior, like some of the newer platforms? I’ll give you an example, and it’s not fair because it’s really a different animal, but say like a company like Betterment. I’m not sure if you’re familiar with them, but basically they just took out the entire idea generation, the technicalities of investing, and they just provide sort of a very easy, knob- turning interfacing, “I want this much risk over this much time, ” and beyond that they take care of everything sort of behind the curtain.

I’m thinking specifically about the High Net Worth product, and since you have tons of options available for them, do they reach out to you to ask for help in terms of choosing those? I’m just curious: is more better? I’m just curious to hear what you’re seeing.

Mike: Sure. That’s a very good question. I definitely think it’s good to give people with more money more options because they tend to be more sophisticated. On our Retirement Plus Program, which has a $50,000 minimum, we only have ten options, and really most of our clients have diversified target-date portfolios, and we have tools available on the site before they sign up that we profile them and they can answer questions, and we recommend different allocations for them, so it’s not totally self-directed.

On the high net worth side, we’re careful not to offer 200 options. I think some other services had problems with that in the past, so I try to offer things that available in every asset class. If you think about our product like a 401(k) platform, if you had a 401(k) you would have maybe 20 or 30 options such as U.S. equity, international, fixed income, so that’s really what we’re trying to do there; offer something that has a diversified offering where the clients can plug in If they want a diversified portfolio then we can give them that. If they want something more along separate accounts side, that’s available as well.

Zack: Is there a lot of interaction, or is this a much more automated platform? The reason I’m asking, and it’s just sort of an addendum to the previous question, is because one of the companies I advise is Covestor, and like you they have a lot of different options, and they launched something basically called Covestor Wealth that once you hit a certain number of account size you’re sort of assigned to really the chief investment officer internally who will come and sort of do a rudimentary asset allocation and help you make those decisions that you may not feel comfortable with.

They just found that even though everything was automated and people could do it on their own, just from a behavioral point of view they were still reaching out to ask for that person’s advice or their opinion. Are you seeing sort of, given the way you’ve structured the site and structured the service, are you doing a good job of sort of hand-holding people automatically through that process?

Mike: Yeah, well we actually offer a free consultation as well, which I didn’t mention, so we have a lot of layers in the funnel to catch people who want more service and want more advice, and we’ll continue to add more tools to really help people. We find that it really depends on the end user. Some people don’t want to talk to somebody and they prefer to do it on their own, and we give them all the information there to do it.

But some people need to talk to somebody, which is fine, and we’re happy to do that. We don’t charge for that. Then on an ongoing basis, like I said, we have live support and live chat and things like that. If they have a question we’re here to help them, so we don’t like to make clients feel like they’re out on an island and they’re all on their own, because we’re here to help.

Zack: Oh, I certainly wasn’t intimating that, I was just curious in terms of what you were seeing, in terms of investor behavior.

Mike: Yeah, like I said, it really depends, I mean as you know, the market’s just so diverse. Yesterday we had a guy with $1.1 million sign up, and when we spoke to him he wanted more help, and was asking, “What’s best for me?” He gave us all of his attributes, he’s a Rollover IRA investor, etc., and his age.

Then we have other clients that we never speak to, they just come right on the site, sign up, gives us their money, and that’s it. I think that’s what’s unique about our platform. We have the ability to service people who are a little more self-directed than another more traditional advisor might be able to.

Zack: In terms of going after share of wallet, do you envision that this is the type of service that somebody’s going to bring the majority of their assets over, or are you just handling just a piece of their overall portfolio?

Mike: That’s a great question. We actually made the company with the division of handling everybody’s entire portfolio. We found that to be a problem with other services that were started, that they’re more of separate accounts deals. Put 10% of your portfolio here. When you do that, you don’t really get the customer attention that you would if you’re offering kind of diverse asset management, like Merrill Lynch or someone like that would.

I would say for the majority of our clients we manage either the entirety of their assets, so if they have a Roth IRA, a rollover and then a joint account, we probably manage all of them, or if they are on more of the retirement side we usually manage, if they have an IRA, the entire IRA. It’s usually turning over their entire assets. So it’s unique with us, and that’s why we view ourselves more as an asset management firm than a separate account manager.

Zack: Very interesting. I hope I’m not asking too personal of a question, but what’s it like starting a company with your brother?

Mike: It’s definitely fun at times and challenging at times. We’ve started other things together. We’ve always lived together; we’ve always worked together. So it’s definitely interesting, but it’s good because, for your viewers who don’t know, my brother is the CTO and co-founder of Hedgeable, so he’s more on the tech side. He handles all of the really good technology that we built, all the long-term planning on that side, so we compliment ourselves well. I’m on the investing and business side, and he’s on the technology side, so we found that it works well, and we’re able to work fast because we know each other’s strengths and weaknesses.

Zack: Whenever I’d envision working with my brother, I always thought it could be like either heaven or hell, depending on the day, but that’s awesome that you guys did that.

One question I ask all participants on this show is if there are resources you can recommend that you use, or your firm uses, in terms of doing research. It doesn’t even have to be a recommendation, things you go back to that you find valuable that you could bubble up for people. I know my audience is always interested in just learning about new tools and new sites or new information. Are there things that you find yourself, either in your personal practice or through your business, of information that you keep going back to the well for?

Mike: It’s interesting you ask that, because we actually don’t use any outside tools. We built everything internally, so we have an entire proprietary analytical site. We’re able to pull up the analytics on any security, any fund throughout the world, and hundreds of analytics at a time.

We do all of our own research and we have all of our own technology here, but I think what I find most useful is more on the new side. So sites like Seeking Alpha I find very useful, just to see what people are thinking and people are talking about. There’s such a diverse range of investors that are on there. So sites like that, Seeking Alpha and Motley Fool. I’m probably not the best person to talk to about tools and things like that because frankly we just don’t use them because we make everything internally.

Zack: It’s interesting, so a site like Seeking Alpha, which is really news and opinion, you’re not really doing any stock picking. I mean, you’re not crunching individual stocks, are you, in part of any of the strategies?

Mike: Yeah, we have a Benjamin-Graham-style screen that we do for one of the value strategies, so that’s kind of rigorously based on different . . .

Zack: That’s a quantitative strategy though, right?

Mike: Everything’s quantitative. We have two fundamental strategies. We have global macro and a long/short strategy that are similar to how Paulson or Bridgewater would manage a hedge fund, but we’re doing it on a much scaled-down basis, with each yes. So it’s important to note that everything we do is ETF or stock based, and we probably have an equal number of ETF vs. stock strategies available to clients.

Zack: One last question and we can end the interview on this, and it may not be one question you have an answer for but, obviously you’re super, super competitive on your fees, so for you as a business, it’s just an issue of scale, but what’s your plan for going out and scaling. You’re a small firm and growing. How do you compete against some of the big guys? How do you do the marketing?

Mike: Yeah, that’s a good question. We view it strategically. It’s impossible to grow an asset management firm from scratch, so we know that, and so we’re really excited, we’re close to closing I would say, at least, a half dozen to a dozen partnership deals with other firms and start-ups throughout the web that will get us major distribution and bring us some new clients.

We’re also looking at M&A with other asset management firms and things like that. What’s also unique about our company, which we didn’t even touch on, is we’re the only online firm that actually takes institutional money as well, so we have the ability right now, as we have a lot of clients on the sub- advisory side. So if you’re an asset managing firm or a mutual fund company or an advisor, you actually can license out all of the allocations and strategies that we manage.

Zack: Those are licensing deals? Those are data deals?

Mike: They have been historically, now we actually manage the money, so if you’re on Schwab or on our custodian we can actually manage that for you, and we charge you a really small fee for that, based on AUM. And then we also can take in institutional money, as well at our custodian, and 401(k) money if you’re a small business or a medium-sized business that wants to set up a 401(k) plan. There’s definitely the ability there to vastly scale the business quickly by getting larger chunks of assets.

Zack: Are you worried about, when you go institutional, sort of this piggybacking, or snooping, where somebody just opens an account with a nominal amount of money in there, and because of your transparency, they just sort of piggyback off your ideas so that they can execute them elsewhere? Is that an issue at all in the business?

Mike: Yeah, it’s a huge issue in the . . .

Zack: It’s like “how do you protect your IP”, right?

Mike: Yeah, it’s a huge issue. Unfortunately, I think everybody has that problem. I was talking to my dad about this a few months ago. He works at Wells Fargo. He’s just a local financial planner at a local branch office in Pennsylvania, and I said, “Well, how do you protect against it?” and he said, “You know, I have the same problem. My clients skip statements, they know exactly what I’m buying for them, and why can’t they go and tell their brother, ‘This is what I hold. Don’t pay Jeff. Do this on your own and you could do it for free.'”

I think it’s a problem throughout the industry. There’s not much you can do about it on the institutional side. We have minimums, so on the sub-advisory we usually enforce a minimum of between $10 million and $20 million, and if an advisor wants to open up an account for a client, or accounts for clients or multiple clients, on our retail part of the platform we usually have at least $1 million minimum for that. There’s really not much you can do other than have minimums and say, “If you want to be unethical, at least we’ll make money out of it.” That’s really all you can do.

Zack: Good answer. Hey Mike, thanks so much for joining us today. This was a great conversation. Good luck to you and Hedgeable.

Mike: Thanks Zack. I appreciate it.

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