Paul Kim, Simplify Asset Management – Embracing Convexity Through The ETF Structure | #402

Episode Summary

Executive Summary: Paul Kim, co-founder and CEO of Simplify Asset Management, explains how the firm uses ETFs as a wrapper for options, swaps, and swaptions to create convex, tax-efficient portfolio building blocks. The conversation covers Simplify’s strategy lineup, the 2020 launch decision, derivative-rule changes that enabled more sophisticated ETF structures, and how the firm aims to democratize hedging and return stacking for advisors and institutions.

Main Topics: Simplify’s business model and ETF philosophy (Priority: 5/5): Kim describes Simplify as a portfolio-construction company using ETFs to package option-based and derivative-based exposures for convenience, tax efficiency, and broader access. The firm focuses on long-volatility, downside protection, income enhancement, and strategic hedges rather than traditional benchmark replication. Derivatives rule change and why it mattered (Priority: 5/5): The discussion explains how a regulatory shift moved mutual funds/ETFs from a crude notional cap to a VAR-based framework, making long-short, tail-risk, and other derivative-heavy strategies more practical inside 40 Act vehicles and opening access to hedge-fund-like tools. Equity downside protection strategies (Priority: 5/5): Kim outlines the firm’s original S&P 500-plus-puts concept: keep beta exposure while sacrificing a small annual drag to buy deep out-of-the-money or laddered protection, aiming to blunt left-tail losses and improve investor behavior during crises. Interest-rate hedge via swaptions (Priority: 5/5): A major product discussion centers on a portfolio-level hedge against rising rates, using OTC interest-rate derivatives and swaptions inside an ETF. The strategy is positioned as a strategic convex hedge for broader portfolio duration sensitivity, not as a trading vehicle. Credit hedge through equity long-short and carry (Priority: 4/5): Kim explains how a credit hedge concept evolved from an options idea into a more practical long-quality/short-junk equity structure, with optional overlays, after realizing pure credit-market option implementation was too illiquid and expensive. Crypto access and return stacking (Priority: 4/5): The Simplify Equity Plus GBTC strategy is presented as a way to get investors off zero in bitcoin, using a modest GBTC allocation inside a traditional equity ETF wrapper to deliver a rebalanced, tax-efficient diversifier within existing advisor workflows. Purpose-driven healthcare ETF and future portfolio disruption (Priority: 4/5): Kim highlights PINK, a healthcare ETF that donates its entire expense ratio to Susan G. Komen, as an example of cause-based product design. The broader vision is to reshape portfolio construction using non-linear payoffs, hedging, and return stacking beyond the classic 60/40 model.

Key Arguments: ETFs can be used as a flexible wrapper to democratize strategies that used to require hedge-fund vehicles, large minimums, or custom overlays. The derivatives rule change was a major structural enabler because it allowed risk-based leverage and more sophisticated use of options/swaps in 40 Act funds. Investors care disproportionately about downside losses, so options are useful because they can surgically reshape return distributions and improve behavioral outcomes. Long-volatility and convex hedges are most valuable when markets dislocate, which is when traditional diversifiers like bonds may fail to protect. Interest-rate risk is a portfolio-wide problem, not just a bond problem, because growth equities and duration-sensitive assets also suffer when rates rise. Credit hedging via pure options is difficult due to illiquidity and negative carry, so using equity long-short with quality versus junk can be a more implementable proxy. Getting investors off zero in Bitcoin can be done within existing advisory infrastructure by embedding a measured crypto allocation into an ETF and rebalancing it automatically. A cause-linked ETF can align investment product design with philanthropy, though such products still face limited institutional category fit and polarized reactions.

Data Points: Number of ETFs at Simplify: 22 ETFs - Kim says the firm had launched 22 ETFs at the time of recording. Assets under management: about $1.2 billion - Simplify’s approximate AUM mentioned in the overview of the firm. Launch timing: September of last year - The first Simplify ETFs had only recently entered the market. Annual protection budget in equity strategy: 2% a year - Kim describes the original downside-protection idea as spending roughly 2% annually on insurance. Quarterly protection budget equivalent: 50 bps a quarter - He translates the 2% annual budget into a quarterly amount for buying puts. Suggested Grayscale allocation: approximately 10% - In the GBTC strategy, the fund holds about 10% in Grayscale exposure. Maximum Grayscale use allowed at launch: up to 15% - Kim says they were told they could use up to 15% of Grayscale when the product was listed. PINK expense-ratio donation: entire expense ratio - All fees from the healthcare ETF are donated to Susan G. Komen once a year. PINK AUM: just under $30 million - Kim notes the cause-based healthcare ETF is still relatively small in assets. Potential rate-hedge payoff: hundreds of percent - He says the interest-rate hedge could rise by hundreds of percent in a severe rate-up scenario. Timing of ETF trust filing: March 2020 - Simplify was launched after Kim quit his prior job during the early COVID period.

Pivotal Quotes: "we're generally trying to be long options, long convexity, long asymmetric risk" — Paul Kim: He summarizes Simplify’s core investment philosophy early in the interview. "It democratizes what was only available in hedge funds or CTAs or all these private funds that require essentially you to be very wealthy." — Paul Kim: He explains the importance of the derivatives-rule change and ETF wrapper. "Can you take hedge fund type exposures ... and put it inside of an ETF so that quote-unquote civilians could access it and really democratize that exposure." — Paul Kim: On the motivation behind the swaptions-based interest-rate hedge and broader product design.

Implications: The interview suggests ETFs are evolving from passive wrappers into tools for convex hedging, return stacking, and niche access. Advisors may increasingly use them to solve portfolio problems like inflation, rate risk, credit risk, and crypto allocation without private-fund complexity.