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Beyond Passive: Harnessing Value, Momentum, and Tail Risk

Beyond Passive: Harnessing Value, Momentum, and Tail Risk

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 Wes Gray discusses how military discipline shaped his systematic investing approach, emphasizing process-driven strategies to combat emotional decision-making. Alpha Architect prioritizes investor education and transparent, evergreen factor-based ETFs like QVAL (value) and QMOM (momentum), which target well-researched market anomalies. The firm’s niche ETFs, such as CAOS (tail risk hedging) and HIDE (managed futures), aim to diversify portfolios against fast/slow market crashes. Gray advocates simplicity in factor design to avoid overfitting, while acknowledging challenges in predicting cyclical shifts between strategies. He critiques passive investing’s inherent biases toward mega-cap growth stocks, favoring factor diversification instead. His personal portfolio combines global equities, managed futures, and tail-risk insurance to offset business-related beta exposure. Gray views market efficiency as a blend of mispricing and risk compensation, stressing cost/tax efficiency in execution. Alpha Architect’s BOXX ETF innovates cash management by leveraging derivatives for incremental yield. Finally, he urges investors to adopt disciplined processes, leveraging tools like ETF databases for due diligence.

Key topics covered in this episode:
✅ Introduction to Wes Gray and Alpha Architect, including his military background and its influence on investing approach
✅ Alpha Architect's investment philosophy, focusing on systematic, process-driven strategies and emphasis on investor education and transparency
✅ Core ETF offerings: QVAL and QMOM, discussing value and momentum factor strategies, design principles, and methodology
✅ Niche ETF products: CAOS and HIDE, covering tail risk hedging and managed futures strategies for portfolio diversification in different market conditions
✅ Factor investing approach, emphasizing simplicity in factor design and addressing challenges of timing factor rotations
✅ Critique of passive investing, highlighting concentration risks in cap-weighted indices and arguments for factor diversification
✅ Wes Gray's personal portfolio construction, balancing global equities, managed futures, and tail-risk insurance, considering business-related beta exposure
✅ Market efficiency debate, discussing the blend of mispricing and risk compensation, and the importance of cost and tax efficiency in execution
✅ Innovation in cash management: BOXX ETF, leveraging derivatives for yield enhancement and addressing challenges in the short-term fixed income space
✅ Advice for investors on the importance of disciplined processes and utilizing tools like ETF databases for due diligence

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