Talk Your Book: Diversify Your Diversifiers

Episode Summary

Executive Summary: Paul Kim discussed Simplify’s mission to package institutional-grade alternatives into ETFs for advisors, emphasizing interest-rate hedges, managed futures, tail-risk tools, and income strategies. The conversation focused on how rising rates, higher T-bill yields, and greater derivatives access have created new portfolio-building opportunities beyond traditional 60/40 allocations.

Main Topics: Simplify’s ETF mission and market niche (Priority: 5/5): Kim framed Simplify as a young ETF firm focused on alternatives, income, and diversification—bringing hedge-fund-like tools into accessible ETF wrappers for advisors and institutions. Interest-rate hedge strategy (PFIX) and rate regime shifts (Priority: 5/5): The discussion centered on PFIX, a derivative-based ETF designed to hedge rising rates. The hosts and Kim explored how it benefited from 2022’s rate spike and how similar structures can be used to position for falling rates. Managed futures as portfolio diversifier (Priority: 4/5): Kim described CTA as a pure futures strategy built to diversify 60/40 portfolios, with long/short exposure across commodities and rates rather than equities. Tail-risk and volatility-selling strategies (Priority: 4/5): The conversation covered CYA and S-Vol, including how Simplify seeks to monetize volatility premia while limiting blow-up risk through sizing, spreads, and partial allocations. Income strategies in a higher-yield world (Priority: 4/5): With T-bills and Treasuries now yielding meaningfully more, Kim explained how Simplify uses cash-rich structures plus selective option selling to generate income in products like BUCK and HIGH. Advisor education, model portfolios, and implementation (Priority: 3/5): Kim explained that Simplify supports advisors with analytics, backtests, and portfolio modeling to help determine sizing, positioning, and client communication for complex alternative exposures. Market structure and the VIX in the zero-DTE era (Priority: 3/5): The hosts asked whether the VIX is ‘broken’; Kim argued that realized volatility remains subdued and zero-day options may actually compress volatility more often than not.

Key Arguments: ETFs can now deliver exposures that previously required hedge funds, ISDAs, or institutional infrastructure, making alternatives more accessible to RIAs and large managers. Higher Treasury and T-bill yields create a major opportunity because investors are no longer forced into an equity-only mindset and can earn yield while diversifying. PFIX worked because it used swaption-based exposure to benefit from rising rates and higher rate volatility, not just directional rate moves. Managed futures can provide positive expected returns while diversifying equity risk, making them a more practical alternative than pure tail-risk hedges for many portfolios. Tail-risk strategies are only useful if investors rebalance and tolerate short-term bleed; sizing and discipline are essential. Simplify’s approach to short-vol and income strategies emphasizes defined-risk spreads and partial exposure rather than all-in short volatility. Higher cash yields improve the economics of option-selling strategies because idle collateral is no longer a near-zero-return drag. The VIX reflects implied volatility, but the market’s actual realized volatility has been relatively calm; zero-DTE trading has not fundamentally broken the system and may often suppress volatility. Portfolio construction should focus on diversifying diversifiers—using multiple non-correlated tools rather than betting on one hedge to work in every regime.

Data Points: Simplify assets under management: over $1.3 billion - Batnick noted the firm’s AUM as of 4/14, highlighting rapid growth for a company launched during the pandemic. Firm age: a little less than 3 years old - Kim described Simplify as a very young ETF shop that started during the pandemic. PFIX performance last year: up almost 100% / about 90%+ - Hosts referenced PFIX’s outsized gains driven by rising rates and volatility in 2022. PFIX size: about a quarter billion dollars - Assets in the interest-rate hedge ETF were described as substantial for a niche strategy. TUA leverage: 5X - Kim said TUA is roughly 5x exposure to the two-year Treasury future. TYA leverage: 3X - Kim said TYA is roughly 3x exposure to the 10-year Treasury future. CYA ticker/strategy: tail-risk strategy - The hosts discussed Simplify’s tail-risk ETF and the challenge of paying insurance-like costs for convexity. S-Vol distribution yield: high teens - Kim said S-Vol has historically delivered a high-teens distribution yield. HIGH yield: mid-nines - Kim stated the HIGH strategy had a distribution yield in the mid-9% range. BUCK yield: 4% to 5% - Kim said BUCK has offered roughly a 4%–5% yield with low duration. VIX level referenced: 17 - Batnick cited the VIX being around 17 as an example of a relatively calm volatility environment. Managed futures allocation guidance: 10% to 20% - Kim suggested a modest allocation could meaningfully improve risk-adjusted returns in a portfolio. S-Vol exposure vs XIV: about one-quarter the size - Kim contrasted S-Vol’s smaller, hedged structure with the fully short XIV product that blew up. VIX option selling frequency: 80% to 90%+ profitable periods - Kim explained that option premia tend to exceed realized volatility most of the time, making selling insurance profitable in most periods.

Pivotal Quotes: "Diversification is still the only free lunch in all of finance and diversifying your diversifiers is a good concept." — Paul Kim: Kim summed up Simplify’s portfolio philosophy when discussing how advisors can combine multiple alternative strategies. "It's an ETF for that." — Paul Kim: He compared Simplify’s product-development approach to the early iPhone era, emphasizing the breadth of ETF tools now available. "You’re essentially trying to buy insurance and you’re hoping that cost of insurance is lower than the realized gains down the road." — Paul Kim: He described the core logic behind tail-risk strategies and volatility hedging.

Implications: For advisors, the message is that alternatives can be implemented more easily and more cheaply inside ETFs, but they require disciplined sizing, rebalancing, and education. For the industry, higher rates and derivatives access are expanding the toolkit for portfolio construction beyond 60/40.