READ: Spot Bitcoin, Alts, and Active: An Innovator's Perspective

In a recent video-styled interview, VettaFi’s Financial Futurist Dave Nadig sat down with Som Seif, the founder & CEO of Purpose Investments, to give investors and advisors more insight into what is going on in Canada. In addition, the pair discussed a multitude of different topics, including bitcoin and alts, to help give investors a better understanding of the Canadian market overall.

Dave Nadig: Hey, folks, Dave Nadig, financial future here at VettaFi. Here’s my conversation with Som Seif, the CEO and founder of Purpose Investments up in Toronto. We had a few topics I think you’re going to find interesting. We talk about what it was like to launch that first bitcoin spot ETF, and what that might imply for what’s going on in the U.S. horse race we’ve got going on right now.

Second, we talk about complex products, particularly things like liquid alternatives and private equity, and where those fit into the average investor portfolio. We talk about the active versus passive debate and whether that’s just a proxy for cost and efficiency. And finally, we dig into what investors need out of this crazy market. I hope you enjoy it. I know I did. Cheers.

Spot Bitcoin, Alts, and Active: An Innovator’s Perspective

Dave Nadig: So up in Canada, you guys have been I feel like a bit of a disrupter. You come to market with a bunch of products that other folks weren’t launching. And you’ve sort of continued that trend. I mean, everything from the first spot bitcoin ETF, which you guys got a lot of credit for, but you don’t need me to tell you that.

Like the yield curve stuff, and some of the more complex products and some of the simpler products, the single-ticker products that you’re getting one portfolio and one ticker. What do you think the innovation path looks like for you guys up there? Is there an attractor? Is there a thing that you’re trying to get to?

Som Seif: So I think it’s a great question. I use the word “disrupter.” I actually think of it more as, we’re happy to lead from the front on innovation and more importantly, kind of think about on behalf of our customers where they want us to solve problems. And so everything we’ve done has always come from a problem that we see in the market, that our customers are basically saying they need solutions around, and then we go and tackle that.

We own those problems. We go in and basically reverse engineer how to basically get that. I’d say the simplest and best one was our cash strategies that we built. We launched the very first, call it, ETF, that backs into a deposit account with a bank.

Dave Nadig: Right. A high yield savings account products. Exactly.

Som Seif: We launched this 10 years ago, and it’s now a $30 billion industry. We own $10 billion of that. It’s pretty amazing what we’ve done. But what was the problem? Advisors were struggling. We had a bulk trade cash, places where the relevant product versus money market and and the ETF structure is of course the most unique thing.

And then for retail, getting access to high interest rates when you were coming off the street or in your brokerage account, as you know banks play the game of giving you very low when they got you trapped in there. So this was a phenomenal problem to solve. And when we solved it, you had to go through the really big heavy lifts of working with the Treasury Department, building the infrastructure to kind of do T + 1 settlement, all the things like that.

And so what that does is it leads from the front. We launch that, now you’ve got an industry that ultimately follows suit, and you’ve helped Canadians and investors get access to really unique return streams. Same problem with bitcoin. So what was the problem with bitcoin? Aside from thesis, like I have a deep thesis on it, but aside from that, the problem is access to a unique return stream in a safe low-agency, and secure way.

And of course, what was always the problem for Canadians or any investor in the world is that if you don’t have a good safe way, you go and buy things that are offshore or you go buy things that are unregulated and you pay a big fee for that. So we solve for the linkage between how do you build a custody solution in a market that isn’t cleared through DTCC and CDS and all the rest of it, but rather, actually, if you make a wrong trade, it’s gone.

Dave Nadig: But how do you how do you navigate that spectrum between — and to put it slightly in American terms — like from like just being all “cowboy up” about it and just be like, no, we’re just going to do it. We’ll ask forgiveness later if we get something wrong. And the the other version of that — which is being very careful with your regulators and working through every line item — you obviously can’t be on either extreme, because you either never get anything done or your business goes under.

How do you navigate that line so that you’re effectively innovative?

Som Seif: So I think it’s much simpler than we make it out to be. At least in Canada, we found the regulators are open to the dialogue. And I think if you come to a common purpose, which is like it’s all about making the outcome for the benefit of the end consumer or the end customer and making their lives better, then ultimately everyone’s aligned.

And so then there’s a bunch of things that have to happen and you have to kind of overcome whether it be exemptive reliefs or you need to call it structural insights or whatever, you need to work with them. The second thing is you’ve got to have a duty of care. I think one of the challenges that the industry will face is that the ETF insurer loves the industry in many ways, but it’s one of those outsider industries that became a hey, throw anything at the wall and hope it sticks and some things will stick, some things are bad, but speed became the biggest, call it “value proposition.”

In our opinion, there’s a value to speed, but it’s also being first and all the rest of it, but it’s also a value to having a duty to care, to structure an outcome. And then second is, once you launch something, it’s really important to understand that it’s a dynamic, iterative product.

So just because you launched it in December 2021, you know, in December 2022, if you can improve it, keep improving. Right? And so that’s something that we care a lot about. It’s like a duty of care to a constant iterative approach. This is what the active industry, I think, is what you would … when you buy an active money manager, theoretically as a manager grows, they’re also learning and they’re getting better and better. When you buy a passive product, it’s like static, right?

Dave Nadig: And so maybe it gets cheaper.

Som Seif: Well, exactly. Well, it better get cheaper if it’s just going to be static right, because otherwise it’s getting commoditized. But active, the idea should be that you’re building wisdom as a money manager. And you know, if I’m a 25-year-old active money manager, when I’m 45. in 20 years, I’m going to have developed a significant of knowledge.

Dave Nadig: So you couple of threads in there I want to pull on and I’ll get back to them. But let me first get into the crypto side of things because I feel like I can’t let you go without at least asking for a little bit of courtside commentary on what’s been going on here in the United States with our race to first on the bitcoin ETF. You  had the race to first; you won it.

When you look at the back-and-forth and, for lack of a better term, “shenanigans” that’s been going on with the regulatory regulators down here, what’s your take on it? Are you just chuckling up there at our our inability to get out of our way?

Som Seif: It’s not chuckling, but I’m kind of like. it is amusing. It’s unfortunate, though, because, I think if this had been done a year ago, maybe many investors would have been saved from an FTX situation. Right. And that’s the way we think about it, which is like, how many people are you saving from being in a bad situation; the binary outcome that’s negative.

I think that’s a problem that the regulator has failed to see, which is that people are going to find a way to buy this if you don’t give them access in a regular structured way. So I think that that’s one thing. The second thing is I think, look, what’s been amazing is like even they’ve got, what, 15 players all racing and like constantly keeping up with each other to try to keep the filings so that they can be the first to market.

And it is a bit of an issue of the kingmaker problem. Right? The SEC has created this bottleneck problem of that the innovator idea, which was what, 10 years ago, somebody came — I think the Winklevoss or whatever — they came out with the original filing. That idea wasn’t enabled. So what you really created was a backlog of that innovation.

And so ultimately it is now, how does the SEC manage this problem? That’s the pipeline. My guess is, as we probably all are assuming, is they’re going to say, everyone, you’re the horse race. You now are all allowed to go at the same time. And basically, the gates are open.

Dave Nadig: On your mark, get set, go!

Som Seif: Exactly. You’re going to see who’s the most prepared all launch on the same day. And then it’s all a question of who has the biggest brand, who has the biggest distribution, and who probably charges the least. And it becomes taking an innovative idea, a really important idea, and commoditize it immediately.

Dave Nadig: Now, you went through this, right, because there was a lot of … I remember when your bitcoin product launched, there was a lot of hand-wringing among the pundits about, well, you know, it’s going to completely change everything because now we’ve got this bridge over to TradFi and there was a lot of horse racing about how much money was going to come in.

Now, everybody’s doing the same thing about this launch. And obviously, the hype around this potential approval or conversion is part of what’s behind this run we’ve seen in bitcoin back over the to the $40,000 line, which is  absolutely a bull market. It’s hard to say anything bad about bitcoin when it’s crashing through $40,000.

How much of this do you think is real? Do you feel like this, like simply flipping the switch on this type of product in the United States as a specific jurisdiction, one of the last jurisdictions to jump on board, does it make that much of a difference? Do you think this hype will? Is this a fadable rally?

Som Seif: Look, this is the question on what’s the short-term impact, call it between now and Q1, January, when these things launch is going to be a question of like, do you sell the news or whatever? But I think that the foundations of what this means is actually quite meaningful. What does it mean in terms of supply and demand principles? The opening up of a unique asset category to the broad asset owners, whether it be institutional or retail, in a really interesting way.

So I fundamentally do think this is going to be a critical thing. And just the simple fact that, like you’re going to now have 14, 15 new managers going out there and talking about why crypto is a relevant asset or not and how it fits into the construction of a portfolio. that will have an impact on the demand side.

And we know that in the case of bitcoin specifically, this is a supply problem. You have a limited supply challenge. I actually think we’re in a really interesting period of fundamental secular growth in the space. I think if I step back, I’ve had a thesis on the space for a while. And I would just say that what people forget about is, there are sort of two components to crypto.

One is you’ve got the sort of like the foundational kind of people building their thesis, why they like the asset, that sort of demand. And then you’ve got the sentiment trade, right? People coming and going, and we’ve seen that in many different periods. But if you actually take away the sentiment movement and you just look at the foundational number of people who are opening wallets and buying the asset or like the asset, it is slowly sloping, continuuously like that, I think we’re gonna continue to see that.

And I think that the sentiment trade will come and go, but the foundations of why this asset is real and is not going away, I think this is what frustrates me a little bit. You know, seven years ago, bitcoin could have just gone to zero, right? Today, I just don’t believe that bitcoin will ever go to zero.

And there are too many foundational principles of why this asset is now a real experiment.

Dave Nadig: I agree with your point that having a New York Stock Exchange tradable version of bitcoin does increase the pool of people who think about it as a portfolio asset. Did you have that experience in Canada when all of a sudden you had a product on the street where institutional managers in Canada all of a sudden started to think, oh gosh, I guess my pie chart needs a slice?

Som Seif: One hundred percent. So we’ve seen not only retail now get access to something in a really great, simple, safe, secure way. Again, they could have gone different ways to do it. Opening up an offshore account or some other exchange account, but they did it in a really safe and low-agency way. But then on top of that, we’ve also seen significant institutional engagement over different types of sentiments and different types of foundational views.

One of the other things is you’re starting to build the infrastructure of foundations around the futures trade, the options trade. All the things that hedge fund managers and PMs, active and fundamental investors all like to be able to start to use an asset. And what the principle of that is, what’s their thesis? Are they short-term in nature or are they long-term in nature?

And what you’re seeing is foundational, fundamental investors actually start to use these products because now it’s easy, it’s simple. You don’t have to go and open up a separate crypto custody account with a Gemini or Coinbase. You don’t have to go and buy, just use the futures. You can now just like any other security, buy an ETF. It’s easy to trade, it’s right in your saving accounts, it’s custodied. Well, all those things make a fundamental difference. And returns, when it’s up over 100% in the year, everyone’s going to say, why am I missing out on that in a year where people are in cash at 5%?

Dave Nadig: Right. I want to hit on a couple other things you mentioned briefly, active versus passive. We have seen this incredible resurgence of active management. I mean, would not have had it on my bingo card for 2023 if you’d asked me any number of years ago. In the U.S., it’s been a real flood. In Canada, you guys got there a little bit early, so give us a little insight into that experience of living in a world where both of those products are viable and accepted by investors. Because in the U.S., historically we kind of encamped: You either bought into the active management thesis or you were like, forget that; I’m a Vanguard guy, I’m never touching that.

Canada seems to be a little more nuanced there. How do you position your own products when they’re sort of self-competing and also versus an industry that has played into the passive drumbeat?

Som Seif: So first and foremost, I’ve always, look, passive, get bucketed into, correlated with low fees, you know, transparent, all these things like that. And active gets into the high fees.

Dave Nadig: Right.

Som Seif: And I actually think that really what you should be focusing on is not like passive and active because I think that that’s a silly debate anymore, we’ve kind of talked about it. But it’s how much of assets are going into what we call low-fee exposures, call it traditional long-only, and how much is going into high-fee products.

And I think what you continue to see, no matter what is that low-fee products in all categories are capturing more share, even in more non-index-based low-fee products. So active or like quasi-active, or whatever it be. And so when we talk about active is having a resurgence, where is it having a resurgence? Fixed income. You know why? It is a troubling and difficult place to be a fixed income investor when the volatility of the 10-year is moving like it has been.

Dave Nadig: It’s been crazy: inverted, not inverted, inverted, not inverted.

Som Seif: You need active guidance. And active money management has shown alpha versus just buying a passive beta. OK. So that makes sense. Second is structured active. So it’s not like, if I buy a covered call product, which is where you’re seeing a lot of the active demand go into, you could argue it’s active. It is, but it’s really ultimately a passive portfolio with an overlay of active derivatives and structures, which by the way, is wonderful.

And then you’ve got sort of call it quants or a rules-based or sort of semi-active. And I think that’s where you’ve seen it. What you’re not seeing is 1% long-only U.S. equity funds raising a lot of money because that business is dead. And if it is alive, it is only in a very specific small area where you’ve got a manager who’s able to articulate an alpha. Even that is being challenged.

And so I just think that when we talk about active is very structured in a unique way and it will come and go  based on what is the sentiment of those asset categories from time to time. But I think long-only traditional developed market equities, it’s going to be a very difficult place for people to get fees in the 1%, 80 basis point, 70 basis point range for active money management.

Dave Nadig: I think that makes total sense. And do you think that some of that, you know, for lack of a better term, the hot hand managers, the folks that do shoot the lights out five years in a row, it seems like those folks aren’t touching the public markets structured like ETFs and mutual funds. They’re pretty much sticking to private equity for their reasons.

Often they need that flexibility or they need that liquidity that allows them to make investments they otherwise wouldn’t make. Do you think that there is a bridge between the private equity and public equity markets that folks like yourself are going to have to play in?

Som Seif: Yeah, I mean, I think there’s two components. One is I think when you start thinking about the benefits of private assets. I mean, no question the active money management is always hope-based. It’s a storytelling game, right? And sometimes it works and sometimes it doesn’t. Because that’s just the evidence of it.

But it is based on, we as humans love stories. We love the idea of how somebody is going to help me do better. And so, you know, all of those are there in the markets and active strategies. In the private. It’s really easy to tell that story because it’s like I’ve got a compelling value proposition. I’ve got a proven track record and you should pay me a lot of fees for that.

And so what I think you’re going to see over time is, one, the clarity of that distribution, the beta-fication of it, and then two is the real managers, the ones who are consistently able to provide a illiquidity premium with, you know, value will get paid and structurally get lots of it, as it should, as you would see in any market.

But you will see some commoditization in the space. And I think there’s an opportunity for all of us to participate in bringing access, which is a big problem still, helping allocation of portfolios increase into privates … through access to the best managers and good strategies. And then on top of that is blending. How do you bring publics and privates together, right, into portfolios that make better use for retail investors?

Dave Nadig: Is this is this a place retail investors should be? Let me put a little straw man here for you. You guys are big in the alternative space. I mean, almost depends on how you want to define it. You guys are playing somewhere in the alternative space, from leveraged single-stock stuff to the yield shares products are taking stocks and turning them into income vehicles, really cool stuff, I think inarguably more complex than SPY .

It’s all adding layers of intelligence hopefully and wisdom but certainly complexity. Is there a point at which that is detrimental to the average individual investor because there’s so much going on already? Maybe you the average investor don’t need access to ats and privates and everything else. How do you wrestle with that? Because you’re serving both masters here.

Som Seif: So absolutely. First off, the thing that is the gating item there is that you’ve got to have an understanding of why I branded the company purpose for a reason. Every single thing that you have in your portfolio has to have a purpose or a role. Otherwise, what’s the point? If it’s not, then just go buy beta. Right?

And so anything that you layer over and above the core should be something that’s going to add either some risk-adjusted return or a return profile that you were as an individual or as an institution looking to add to your portfolio construction. Whether it’s a liquid alternative structure like derivatives-based or outcome-oriented strategies or if it’s private assets, I think there’s a really important principal question: What am I getting from this and why do I need it?

But a foundational portfolio does have a blend of traditional beta as the core blend,.some active long-only traditional is the core. That’s that’s where you should build 67% of my portfolio from. And then you kind of layer in and build a more resilient portfolio through real building these pieces. I think the one question on privates I would say is we all know. I think retail could take more illiquidity risk than it does and unfortunately defaults to only liquid assets as a predominance.

And I think that there is an opportunity for advisors to do more to help investors bucket where they can take illiquidity risk and where they can’t and understand how to incorporate that into their portfolio more deeply.

Dave Nadig: Is that something you guys are working on or is that something that you feel like there’s a horizon where you can say, I see that in a year or two years, five years, we’re going to be bucketing up private firms and, you know, using a different kind of structure; like, where’s the development going to be there?

Som Seif: I think that first and foremost, I think, yes, we are working on launching a private asset platform that gives access to private equity, private credit, and private real estate. I think that is going to be more and more of a component. And the big thing there is quality, right? Getting quality strategies and making it work within the context of retail.

So what does illiquidity look like? Most retail can’t do subscription-based investments with drawdowns and a 10-year, 12-year life lines; like that doesn’t work for retail. However, evergreen structures that give access to really high-quality managers, those types of things fit the retail segment. Secondaries, things like that fit the retail segment well, because they can work within their time frame of what the liquidity and the return profile of a private asset looks like.

I think this is an area where I think the industry can improve more meaningfully, and give access. Because we know that right now, I think the average portfolio of retail, like 1% in privates. I think that probably could be 10%. And so there’s a really important opportunity to develop. It doesn’t even need to do 50% like you see some of the major endowments and big pension plans to be, but it could be much higher than it is right now by a magnitude to give access to better return streams and take advantage of that illiquidity premium.

Dave Nadig: But isn’t there some dynamic tension there between public and private? Because I mean, you know, we’ve certainly seen the rise of public investing, and a significant increase in rise in private investing and public equity has become quite common. Long/short funds, whatever that is. And they’ve always been there. It’s not like those are new inventions, but they’re on the rise. Certainly in the wealth market, right? In the top 10% of the wealth market.

One hundred percent; I see it every day. Doesn’t that imply something about the public markets that we’re doing wrong? If it’s so much more attractive for companies to stay or go back to being private for so long. So you can take a very small company, you get access to public equity if you want to now, with pretty easy check-the-box filings. If we’re not doing that, doesn’t that mean that we’ve broken something?

Som Seif: I think that the public markets have you know, they serve a really important purpose. They provide liquidity to employees and provide access to, you know, the capital markets broadly. It gives unique returns. One of the things I think we should not take for granted is some of the best returns that we’ve seen in the last 20 years have come from some of the big public companies.

So if you’ve been an Apple investor or an Amazon investor, 99% of their total return as a company came in the public markets. Those are amazing fact points for retail and then for institutional investors. So there are good opportunities in the public space when the company fits the public environment well. But at the same time, there are lots of companies, unfortunately, that don’t fit in the public sphere as well.

You know, small-cap, mid-cap, you know, micro-cap, all those things are very difficult. They go through sentiment shifts, they go to liquidity challenges. And they can trade at massive premiums and massive discounts to their intrinsic value. And it’s really hard for companies in those spaces to kind of as a shareholder, as a management team, to kind of be navigating the kind of unique environment or the sentiment of my shareholders from time to time.

Second is companies that have different types of growth profiles where the market has an expectation of them. You know, it’s really hard to have to balance short-term investments with long-term investments when you are trying to meet quarterly earnings. So there are really unique benefits within a private space for some of those companies. Of course, if you’re a company that is able to like Amazon, we all know one of the things that they did really well was they trained their shareholders from the time you went public explaining this is what you need to be as a shareholder and be patient and allow me to make the right long-term investors.

Investors went along with them. There were periods during that when Bezos was probably very frustrated, but he was able to take the right type of sentiment and tell that story. I think that the disjoint between short-term- mindedness and long-term-mindedness investments is really a big balance that public companies face. Some companies do it really well and some companies really struggle. And I think that’s where the private markets become really important.

And so what I’d say is that for retail and institutional investors, there is a value to the public markets. Like I said, being an Apple owner has been one of the greatest returns you have got in any space. At the same time, there are also alpha and unique returns that you can get from the structuring of being private. The patience of being private and, the opportunities that come from being away from the short-term mindedness of what the public markets provide to management teams.

Dave Nadig: I love it. I think I agree. I think I agree. I think there is, it feels like getting that balance just right is something we’re always going to be teasing on. And I think you’re probably right. Maybe the swing a little bit more towards private makes sense given the current environment.

Som Seif: I will say that looking at all of these, the thing that we’ve learned in the last 30 years is that your frictions matter. So in private equity, if you’re not great at it, you can find great alpha. But if you’re taking all those alphas away with high fees, the net return for investors isn’t going to be great.

So what really matters is how much return the illiquidity benefit you get versus the fees you pay for that. And if you’re comparing a 9 basis point SPY, for I think it’s starting to.

Dave Nadig: Versus 2 and 20.

Som Seif: There’s a lot of alpha that’s got to be generated in that other structure bersus that 9 basis points. So I always think about it in the context of like how do you think through the trade-offs? But if you get a great quality manager at the right price, you’re willing to pay for that. And there is alpha there.

Dave Nadig: Yup.

Som Seif: You know, the average may not.

Dave Nadig: You seem like a pretty passionate guy. What are you passionate about? Like outside the business that you built, which is incredible. Like what? What gets you out of bed in the morning?

Som Seif: Well, two things. One is my family. I am extra like I’ve got four beautiful kids and a beautiful wife. And I’m extremely passionate about what I do to make these kids very successful, and most importantly, good humans. I think the second thing is, you know, I’m an immigrant to Canada. You know, my parents gave me the greatest gift of anything which is moving to Canada. You know it changed my probability and trajectory.

And I give back very meaningfully. I’ve been a big believer in you know, supporting society, supporting my community and really making a difference. And whether that’s through my business ventures and also through my social activities, those are really important. And then third is just, you know, I care deeply about our end consumer. I care about making this industry better.

What drives me as an individual from my first business to this has always been a simple thing. I love solving problems that end in the outcome being better for the consumer. It doesn’t start with just owning it like you know. Financial services is one of those unique areas where there’s no kind of winner-take-all-all.

What I care about is, I want to lead from the front. And then I assume lots of copycats. I use that cash example. I’m OK with the fact that we innovated something, and now many players are doing that and copying that because what does that mean? More and more Canadians have access to really great products, and that is how you innovate in this industry.

So it’s an awesome feeling when you can do things and you’re proud of the impact that you make. That makes me passionate and drives me every morning.

Dave Nadig: Great. Thanks for joining us.

Som Seif: Thanks for having me.

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