Unlimited Funds’ Bob Elliott on the Next Evolution of Replication

Elliott is no stranger to hedge fund investing. In fact, he’s made a career of it, including 15 years at Bridgewater Associates, the largest hedge fund worldwide. While institutional investors have long enjoyed the benefits that hedge funds bring to portfolios, high fees and entry costs made them largely inaccessible to every day investors. Unlimited Funds works to democratize hedge fund strategies through its growing ETF suite.

“What we’re building on Unlimited is a set of products that are sort of the Vanguard for the two and 20 space, starting with hedge funds and over time additional products,” Elliott explained. The firm launched its first ETF in October 2022. The Unlimited HFND Multi-Strategy Return Tracker ETF (HFND B-) offers exposure to the largest hedge fund strategies. This includes global macro, managed futures, equity long/short, and more. The fund collates these strategies into one accessible vehicle, providing investors exposure to the hedge fund industry through the affordability and tax efficiency of an ETF.

HFGM offers targeted exposure to the global macro hedge fund strategy. Global macro generally has low-to-negative correlations to the traditional 60/40 portfolio.

The strategy uses machine learning to replicate global macro hedge fund positions. By looking at a hedge fund manager’s returns over time and taking into account the market environment over the same period, the strategy determines their likely positions across several asset classes.

The firm identifies the key exposures for a hedge fund strategy and then measures the returns of those exposures to the actual returns in close to real-time. “And then what we do is we create probabilistic distributions. What are the probable portfolios that are describing the portfolios we’re seeing?” Elliott elaborated. “And one of the key insights with that is that positioning is path dependent.”

Although hedge fund managers may be more responsive to market and macro changes than indexes, it still takes time to change their positions. By linking together these daily snapshots of positions and returns, Unlimited is able to determine the most probabilistic portfolio that reflects hedge fund returns.

“I like to describe what we’re doing as a sort of third-generation ETF replication approach,” explained Elliott. The original replication models relied on Sharpe ratios, and evolved to rolling regressions. Elliott felt that both inherently have limitations and fail to fully capture hedge fund positions and the alpha potential.

The introduction of machine learning allows for the strategy to process data nearly in real-time. This keeps positions relevant and relatively accurate to current markets as opposed to looking on a long historical basis. Elliott noted that it results in “a much more agile portfolio when you can pick up on those key shifts that are the things that generate the alpha over time.”

HFGM seeks to capture mispricing within global markets. The fund takes long and short positions across equities, fixed income, currency, credit, and exchange rate markets. It seeks to capture the alpha potential of global macro hedge funds with the tax efficiency and fee savings of an ETF wrapper. Elliott explained that HFGM is “something that also allows advisors to get access to an alpha strategy that’s lower correlated, let’s say, than typical liquid alts.”

HFGM uses a proprietary, data-driven approach to identify hedge fund global macro managers’ current positions. It then replicates the positions in its portfolio, investing in long and short positions in futures contracts and a basket of ETFs. The ETF targets two times the returns of the global macro hedge fund sector. With twice the volatility of the sector, it’s a strategy that may yield outperformance.

The fund has a management fee of 1.00%.

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