Scott emphasizes the importance of considering portfolio exposures like his rising rate hedge (RRH) exchange-traded fund (ETF) to mitigate the impact of higher rates and cushion portfolios in response to the blow-up in the long-dated guilt market.
Advocate Capital Management's framework involves implementing a multi-asset set of strategies designed to profit from rising interest rates, with the RRH ETF serving as a cost-effective proxy for being short duration and providing protection against rising rates.
Scott highlights the challenges faced by investors in the current investment landscape, such as rising correlation across asset classes, and emphasizes the importance of incorporating neutral and negatively correlated investments to reduce portfolio risk and explore alternative strategies for risk management.
Deep dives
Scott Pang's Background in Structured Notes and Risk Management
Scott Pang, founder and CIO of Advocate Capital Management, has an extensive background in structured notes and risk management. He started his career in First Boston and Lehman Brothers, where he developed expertise in creating and trading structured notes. Recognizing the lack of understanding among investors about the risks associated with these products, Scott wrote a book to educate the market. He then went on to work at BlackRock, Citigroup, and C-Core, where he focused on asset and liability risk management. In 2016, he founded Advocate Capital Management to deliver risk management solutions to investors.
The Challenge of Structured Notes and Notable Debacles
Structured notes, which include derivatives and are issued by agencies like Fannie Mae and Freddie Mac, have faced challenges in terms of understanding and managing their risks. Scott highlights the notable debacles in this market, such as Proctor & Gamble and Orange County, which he sees as failures in end users' understanding of the risks. To address this gap, Scott wrote a book on the subject, providing insight into the financial engineering behind structured notes. His aim was to educate investors and improve their understanding of the risks involved.
Insights from Scott's Time at Seacore Asset Management
During his tenure at Seacore Asset Management, Scott focused on running portfolio solutions and working with global pension plans. He shares his perspective on the blow-up in the long-dated guilt market and explains the mismatch in duration exposure between the required duration and that available in the cash guilt market. This led to challenges in managing asset liability risk. Scott emphasizes the importance of considering portfolio exposures like his rising rate hedge (RRH) exchange-traded fund (ETF) to mitigate the impact of higher rates and cushion portfolios.
Advocate Capital's Approach and the RRH ETF
Advocate Capital Management is committed to delivering risk mitigation solutions to investors. Their framework involves implementing a multi-asset set of strategies designed to profit from rising interest rates. The RRH ETF, part of their product suite, serves as a cost-effective proxy for being short duration, providing protection against rising rates. Scott emphasizes the need for investors to be mindful of their portfolio exposures and consider solutions like the RRH ETF, especially in light of his view that inflation will persist and rates will rise. The ETF's performance and risk reduction qualities have been recognized in the market.
Challenges in the Current Investment Landscape
Scott points out the challenges faced by investors in the current investment landscape, such as rising correlation across asset classes and the need for diversification. He highlights the importance of incorporating neutral and negatively correlated investments to reduce portfolio risk. Scott explains how multi-asset and multi-strategy portfolios, like the one offered by Advocate Capital Management, provide flexibility to adapt to changing market conditions and capture opportunities. He urges investors to reconsider their asset allocation assumptions and explore alternative strategies for risk management.
We next turn to Scott’s time at Secor Asset Management, running portfolio solutions and working with global pension plans on asset/liability risk. Scott shares his perspective on the recent blow-up in the long-dated Gilt market, stating that in some ways this was an accident waiting to happen given the mismatch in duration exposure required and that accessible through the cash Gilt market. The balance of our discussion is spent on Scott’s work as CIO of Advocate Capital, a firm he founded in 2016 to deliver risk mitigation solutions to investors. Part of this product suite is the RRH ETF, a vehicle designed to protect investors from rising rates through a combination of exposures that serve as cost effective proxies for being short duration. Scott shares his framework for implementing a multi-asset set of strategies that profits when interest rates rise.
With Scott’s view that inflation will prove sticky and that the terminal funds rate will be higher than currently priced by the market, investors need to be thoughtful around portfolio exposures like RRH that may cushion the blow of higher rates. I hope you enjoy this episode of the Alpha Exchange, my conversation with Scott Peng.
Please see rrhetf.com for more information on performance and disclosure data for the RRH ETF.
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