I noticed a “Explain Like I’m Five” (ELI5) Reddit community with 19.5 million members.
This prompted me to pen down my explanation of a multi-strategy investment approach to an imaginary 5 year old.
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The adult, technical version of ACM’s multi-strategy approach:
By diversifying capital across 30 distinct ETFs in 33 trading models that are subsets of six classes of investment strategy, the AQM fund aims for 25 percent CAGR with low drawdown in various market conditions.
I get it. Outside of the hedge fund niche, this is total mumbo jumbo to most people. Try this instead:
A fancy restaurant offers a three-course meal: Appetizers, mains, and desserts.
Each course offers a variety of dishes. Say salad and soup for appetizers; fish and steak for mains; and ice cream and lemon cake for desserts. In this three-course meal, the chef offers 33 different dishes made with 30 different ingredients. Each of the 30 ingredients may be used in more than one dish. For instance, salt and pepper are used in several dishes.
Source: ACM Research
Furthermore, the nature of this dining environment is such that each dish cannot/need not be the best-in-class. Hence, what is more important to the chef is that the dishes complement each other and, taken as a whole, the entire three-course meal is exceptional.
ACM’s multi-strategy investment approach is analogous to experiencing a three-course meal.
30 ETFs (ingredients) are used, in varying degrees, across 33 different trading models (dishes). These trading models are designed by the Portfolio Manager and are subsets of time-tested investment strategies (courses).
Source: ACM Research
Each trading model brings a different, complementary flavour to the portfolio. And because there is no single, silver-bullet trading model to beat the market, the goal is to have a basket of complementary trading models that, taken as a whole, delivers outperformance.
In technical speak, each trading model has uncorrelated return-to-risk and drawdown profile. Hence, taken as a whole, trading models that offer upside participation are different from the ones performing downside protection.
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A final observation: The use of ETFs often confuse investors. ETFs are simple and low-cost instruments, where is the alpha?
- Leveraged and inverse ETFs are used. Most investors are only familiar with plain-vanilla ETFs. See this post for further details.
- Knowing when to sell. One of the distinguishing traits of a professional money manager compared to most retail investors is knowing when to sell. Specifically, in the case of ACM, having a systematic approach to selling and buying.
- Investment philosophy and strategy construction. Using the same or similar instruments, a professional money manager vs a retail investor will construct very different portfolios.
Since I started us on a food analogy, see this entertaining video “$500 vs $16 Steak Dinner: Pro Chef & Home Cook Swap Ingredients.”
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For the most parts, I think my explanation would only fly with a 5 year old who has a keen interest in discussing advanced investment approaches. To that 5 year old, I hope this explanation of a multi-strategy fund inspires more than it confounds.
