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Opto Sessions

Bob Elliott on using machine learning to democratise investing

Bob Elliott is the co-founder, CEO and chief investment officer of Unlimited Funds, which uses machine learning to create ETFs which apply the strategies of hedge funds, venture capital and private equity firms—at a fraction of the price. Previously, Elliott was a member of the Investment Committee at Bridgewater Associates, where he led Ray Dalio's investment research team for over 13 years. As one of a small handful of investors charged with developing the firm’s strategies, the experience allowed Elliott to acquire a systematic understanding of markets.

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Lessons from a crisis

Elliott’s time at Bridgewater coincided with the global financial crisis of 2008 to 2009, one of the most challenging times for investors in the past 20 years. As one of the lead developers of Bridgewater’s strategy, Elliott was responsible for advising the US Federal Reserve and Treasury in terms of assessing the damage and determining a way forward.

In 2007 and 2008, one of the big questions had been whether investors were looking at a recession down the line.

Elliott’s job at Bridgewater was to help others differentiate whether this was a typical business cycle, which could be addressed with monetary stimulation such as interest rate cuts, or whether it was what it actually turned out to be, namely “a deleveraging environment”.

In particular, US households had borrowed more than their incomes could afford, which in turn brought down borrowing and spending. That led to a forced liquidation of assets and a “deflationary spiral of very quickly and abruptly paying down debt”.

There was a real need to reinflate the economy, Elliott says, both by bringing interest rates down to zero and by printing money or devaluing the dollar relative to gold, as the US Federal Reserve did in the 1930s.

The Unlimited dream

After Bridgewater, Elliott joined venture capital firm Circle Up as general manager and head of venture capital.

All in all, he had a 20-year career between the hedge fund and the venture capital spaces. During those years, he says, “I increasingly recognised how those businesses are set up to be great for the manager, and not that great for the investor.”

While the funds generate high returns, they also charge high fees, negating much of the advantage of having a fund manager. Crucially, this also precludes their use by retail investors.

Elliott wanted to bring retail investors the advantage observed in the world of ‘two and twenty’, the name of the classic fee structure whereby investors pay fund managers 2% of the amount they have allocated in the fund each year, plus 20% of the fund's gains beyond a predetermined benchmark.

His idea was to use technology to “replicate the strategies” of high-performing fund managers, but in a more cost-effective way.

The first product that Unlimited Funds brought to investors was the Unlimited HFND Multi-Strategy Return Tracker ETF [HFND]. Launched on 10 October 2022, with a 95 basis point management fee, the idea of the ETF was to develop “a technology that looks over the shoulders of the [fund] managers and sees what they're doing. In particular, it sees their returns in close to real time [and] understands what type of exposures they may have”.

That information allows Unlimited to use modern machine learning techniques to establish which portfolio best describes the returns that hedge funds have been generating in the most recent period. The firm then translates that information into long and short positions on securities. In a nutshell, this is the principle which underlies the Unlimited HFND Multi-Strategy Return Tracker ETF.

The “awesome” democratising power of HFND

Unlimited Funds launched its ETF just four months ago. In that time the fund has gathered $70m in assets, making HFND the fastest-growing independent ETF launch of 2022.

Many of the assets have come from financial advisors, who became attracted to the fund after having already developed an interest in joining a hedge fund.

“They look at the ETF and they say, ‘Well, it's diversified, its liquid and [relatively] tax-advantaged – and there's no paperwork, and it's low cost’.”

But the most exciting thing is when retail investors come and buy 10 or 20 shares, or whatever they can afford, because without Unlimited “there's no way they would get access to sophisticated asset management strategies like this”.

“If 200 bucks is what you've got to allocate as part of your securities portfolio, that's awesome.”

The HFND ETF is up 1.5% year-to-date, and 3.3% since launching on 10 October of last year.

“a technology that looks over the shoulders of the [fund] managers and sees what they're doing. In particular, it sees their returns in close to real time [and] understands what type of exposures they may have”.

For more ways to listen:

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

 

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