Simon Lack10 March 2017

Interview With Simon Lack: Masters in Business (Audio)

1Frameworks

14Insights

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Frameworks in this episode

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Hedge Fund Capacity Test

Test industry capacity before trusting manager returns or broad diversification

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 3

Myth Buster24:34

Non-Traded REIT Stability Is Often Just Missing Prices

Lack condemns non-traded REITs for large upfront fees, illiquidity, and layered conflicts. He rejects the claim that their low measured volatility benefits investors, arguing that prices appear stable simply because the securities do not trade and therefore are not continuously marked.

Upfront fees can leave only 85 cents of each dollar invested
Illiquidity prevents investors from exiting
Unchanged prices do not prove low economic risk
Additional acquisition, management, sale, and incentive fees compound conflicts

“You put in a hundred dollars, you've got eighty five dollars on day One's working for you.”
Simon Lack · 24:59

“they have less volatility because the prices don't move because they're not traded.”
Simon Lack · 25:19

#non-traded reits#illiquidity#fees#volatility

Myth Buster29:15

An Annuity Is a Costly Wrapper Around a Portfolio

Lack argues that many annuities obscure fees, restrict exits, and make relative performance difficult to see. He explains that issuers invest in ordinary stocks and bonds to produce the promised return, then deduct fees through the wrapper, though he acknowledges that annuities have proper uses in some circumstances.

Annuity fees can be difficult to observe
Exit charges reduce flexibility
The underlying return still comes from stocks and bonds
Placing an annuity inside an already tax-deferred account can duplicate tax benefits

“annuity is generally a terrible because once you're in, you can't get out, and you can't see what the fees are.”
Simon Lack · 29:19

“annuity is just a wrapper around whatever portfolio you wanted to be exactly.”
Simon Lack · 29:44

#annuities#retirement#fees#tax deferral

Myth Buster1:00:53

An Index Return Is Better Than the Average Investor's Return

Lack challenges the idea that accepting an average market return is an unambitious goal. Because the average investor incurs trading costs and other frictions, simply capturing the index return can place an investor above the realized average.

Average market exposure is not the same as average investor performance
Trading costs create a gap between market and investor returns
Low-cost index funds preserve more of the market return
The desire to avoid being average can encourage harmful activity

“I just want to get the average return because average seem client you know who wants to be averaged.”
Simon Lack · 1:00:57

“if you just get the index return. Obviously you're doing better than the average because the average includes people who are always trading and spending…”
Simon Lack · 1:01:06

#index funds#investor returns#costs#passive investing

Hot Take· 1

Hot Take17:36

Put Fiduciary Status on the Business Card

Lack supports allowing both fiduciary and transaction-based financial advice, but only with unmistakable disclosure. He argues that legal fine print is insufficient and proposes placing an advisor's non-fiduciary status directly on the business card so clients understand whose interests the advisor represents.

Many investors mistakenly assume every advisor is a fiduciary
Some clients deliberately prefer transaction-based compensation
Both business models can coexist when the distinction is clear
Disclosure should be prominent rather than buried in documents

“if you're not a fiducier, that your business card says I'm not a fiduciary.”
Simon Lack · 17:45

“Disclosure means it's on your business card.”
Simon Lack · 19:06

#fiduciary#financial advice#disclosure#conflicts

Explainer· 6

Explainer04:23

Low Rates Quietly Transfer Wealth From Savers to Borrowers

Lack says low interest rates were the practical response to an economy carrying too much debt. The consequence, whether stated explicitly or not, was a real transfer of wealth from savers to borrowers and inadequate prospective returns for bond investors.

Interest rates influence both investment returns and consumer borrowing
Low rates ease the burden created by excessive debt
Savers bear part of the cost through suppressed returns
Lack expects rates to remain lower than lenders would prefer

“We've borrowed too much money and we're just going to keep rates really low and transfer real wealth from savers to borrows.”
Simon Lack · 05:20

“the return on bonds is just inadequate to justify putting money into them.”
Simon Lack · 05:55

#interest rates#bonds#savers#monetary policy

Explainer14:26

Pension Accounting Can Reward Unrealistic Return Assumptions

Lack explains that public pension plans use expected portfolio returns when valuing liabilities. Adding an asset with a high assumed return can therefore make the funding position appear better immediately, even if the asset later performs poorly, creating a structural bias toward hedge funds.

Expected returns influence the reported present value of pension obligations
Higher assumptions can reduce the apparent funding gap
Removing hedge funds can make a pension look worse on paper
Taxpayers ultimately bear the cost when assumptions fail

“Pension plans used the expected return on their investment portfolio, which is a made up number.”
Simon Lack · 14:37

“You put in an asset with a high expected return, it makes your funny position look better regardless of how those assets do.”
Simon Lack · 16:31

#pensions#accounting#expected returns#hedge funds

Explainer21:38

A Fund's Tax Structure Can Consume a Third of Its Return

Lack uses energy-infrastructure funds to show why investors must evaluate the wrapper around an asset, not only the asset itself. He says tens of billions of dollars sat in mutual funds and ETFs taxed as corporations, leaving investors with only about two-thirds of the underlying return while many remained unaware of the tax drag.

Product structure can matter as much as security selection
Corporate taxation can reduce the return passed to fund investors
Investors often overlook tax treatment in a prospectus
Research should cover fees, taxes, and organizational design

“investors are paying, they're investing in funds where only two thirds of the return goes back to them”
Simon Lack · 22:26

“the vast majority don't even realize that they're subject of this tax”
Simon Lack · 22:33

#fund structure#tax drag#mlps#organizational alpha

Explainer28:19

Structured Notes Repackage Options With Hard-to-See Fees

Lack describes structured notes as bank-issued exposure to an asset class with barriers or downside protection, typically hedged using options. Because an investor can usually reproduce the exposure with options, he argues that the note mainly adds counterparty risk and several points of opaque fees.

Structured notes combine asset exposure with barriers or protection
Issuing banks hedge their risk with options
Investors retain counterparty risk to the issuer
Equivalent exposure is usually available more cheaply elsewhere

“you can always create the same exposure yourself with options if you want to counter party risk.”
Simon Lack · 28:44

“almost anything you can do with a structured note you could do more cheaply elsewhere.”
Simon Lack · 28:58

#structured notes#options#counterparty risk#fees

Explainer32:16

Why Leveraged ETFs Can Decay Even When Prices Recover

Lack says two- and three-times leveraged ETFs are structurally damaged by negative compounding. A gain and an equal percentage loss do not cancel because the loss applies to a larger base, and daily leverage magnifies that path dependency over time.

Equal percentage gains and losses are not symmetrical in dollars
Volatility creates compounding drag
Leverage magnifies the decay
Long holding periods can diverge sharply from an investor's intended exposure

“there's no way that anybody achieves their investment objectives with with two or three times levered e t s.”
Simon Lack · 32:26

“it's because of the negative effect of compounding.”
Simon Lack · 32:42

#leveraged etfs#compounding#volatility#risk

Explainer1:16:12

MLP General Partners Capture the Economics of Asset Growth

Lack compares publicly investable MLP general partners with privately held hedge fund managers. As pipelines and other infrastructure assets grow, the general partner can collect more fees, letting investors participate in the economics of the management business rather than only the underlying partnership assets.

MLPs own pipelines and other energy infrastructure
The general partner has preferential economics
Infrastructure expansion grows the underlying asset base
More assets can produce more fee income for the general partner

“you can actually buy the MLP general partners and that's what we do.”
Simon Lack · 1:16:56

“more assets, it's more fees. And it's the same thing with MLP general partners.”
Simon Lack · 1:17:24

#mlps#general partners#energy infrastructure#fee income

Story· 2

Story48:42

The Better Hedge Fund Trade Was Owning the Manager

Lack recounts how JP Morgan seeded emerging hedge funds by contributing capital in exchange for an economic interest in the general partner. The funds' investment performance was only mediocre, but asset growth and a share of management fees produced stronger returns for the seed investor.

JP Morgan supplied early capital and institutional credibility
The seed investor received an ownership interest in the manager
Growing assets increased the fee stream
Business economics mattered more than the funds' investment returns

“the business of hedge funds was going to be so much better than being a client of hedge funds.”
Simon Lack · 49:09

“the hedge returns ourselves are kind of mediocre, but they were good enough to raise assets, and it was sharing in the fees that drove…”
Simon Lack · 49:57

#hedge fund seeding#general partners#fee economics#ownership

Story1:05:44

How American Shale Innovation Withstood OPEC's Price War

Lack argues that OPEC tried to crush higher-cost American shale producers by keeping oil prices low. Instead, producers introduced new technology and productivity improvements, lowered break-even costs, and emerged with the flexibility to respond quickly to changing prices.

OPEC maintained production to pressure American shale
Shale producers reduced costs through innovation and productivity
Short development cycles improved their ability to respond
Lack describes America as the new swing producer

“OPEC took on the American energy sector and they lost.”
Simon Lack · 1:05:48

“They innovated, they found new technologies, productivity enhancements, They've had all kinds of ways to bring down their break even”
Simon Lack · 1:06:09

#shale#opec#energy#innovation

Takeaway· 2

Takeaway58:22

A Long-Term Plan Removes the Need to Predict Tomorrow

Asked how the next generation should prepare to steward inherited wealth, Lack recommends adopting a much longer time horizon. He says the purpose of investing is future consumption after inflation and taxes, while transaction costs, taxes, and repeated market timing destroy wealth over time.

Investing should preserve future purchasing power after inflation and taxes
Short holding periods increase friction
Media attention encourages unnecessary short-term forecasts
A durable plan should not depend on predicting the next day or month

“the whole point of investing is to give yourself the ability to consume more in the future.”
Simon Lack · 58:54

“have a long term investment plan that doesn't rely on having to figure out where the market is going tomorrow or even next month, and…”
Simon Lack · 59:27

#long-term investing#market timing#transaction costs#wealth

Takeaway1:40:03

Build a Finance Career Around Demonstrable Client Value

Lack advises young people entering finance to develop a career strategy early, choose the right goals, and stay focused. He adds an ethical and commercial test: the work should be demonstrably good for clients and create clear value, because that makes the career more meaningful and sustainable.

Develop a career strategy while options are broad
Choose goals deliberately
Stay focused on achieving those goals
Prefer work with a clear and sustainable client benefit

“Have a strategy, stay focused. The people who are successful pick the right goals and they stay focused on achieving those goals.”
Simon Lack · 1:40:26

“Make sure that whatever you're doing there's a there's a clear value add for the client, and it's and it's got some meaning for the…”
Simon Lack · 1:40:40

#career strategy#finance careers#client value#focus