And welcome everyone to another Smart Money Circle episode.
I'm Adam Sarhan. With me today is Eric Metz,
who's the CIO Chief Investment Officer and Head of Spider Rock
Advisors, which is a fully owned subsidiary of Black Rock on
Black Rock's SMA platform. They have approximately $250
billion in assets under management.
Eric, thank you so much for taking the time and welcome to
the Smart Money Circle. Adam, I appreciate it.
Looking forward to it. So Eric, I always like to begin.
Can you please tell us your story and how you got to where
you are today? Yeah, listen, it's, it's, it's
been a fun journey. Maybe some left and right turns
that I could have predicted and a lot more turns that that were
unpredictable. You know, I, I began my my
career in finance or derivatives, I should say, in
academia at the University of Michigan and Graduate School
studying financial engineering and derivatives themselves.
And then I found out that academia was not necessarily for
me and wanted to trade. And so I cut my teeth in the
industry with a local proprietary trading shop, which
is now global called Chicago Trading Company.
So my first real professional job in the industry and began on
the floor of the CBOE in the Chicago Market Exchange.
So, you know, late 90s, early 2000s, believe it or not, there
were 4 predominant exchanges in the options arena, Chicago being
probably the largest. And so I wanted to, to really,
you know, learn the trade in the, in the craft from the
experts there. And then, you know, realized
that the floor was becoming more and more of a digital
technological arms race. And so wanted to come off for
and, and, and learn the upstairs market.
So think low latency prop trading hedge fund style at a
few boutique shops again in Chicago for those Chicago
trading people. Ronan Capital.
It, it was a very well known name that I was at for three or
four years and then joined, you know, with with some really good
friends and colleagues of mine, a boutique shop.
We had a multifamily office out of New York that backed us in
Bangor Capital. And then my CFA sponsor, who is
the founder of River North called me in O 8 and asked, you
know, hey, I'm managing these close and funds.
Would love to see how your expertise and and volatility.
And he knew my background because he was my CFA sponsor.
And his name is Patrick Galley. He's the CIO and CEO of River
North today called me and we kind of whiteboarded some some
of his positions and portfolios and then really got the wheels
turning about learning his business where our asset classes
could potentially be a creative to theirs.
Think about building better portfolios for institutions and
family offices alike that, you know, came with the opportunity
to join his team in 2011. And then from there, you know,
it was really interesting the time, the timing of that
transition. Asset management, wealth
management, robo advisory technology, venture capital,
automation, all were hitting the industry kind of the same time
with like this transformation and having an ear to the ground,
speaking to clients every day, thinking about where their pain
points were. The vision of Spider Rock
Advisors, what was built in partnership with what became my,
my partner in Spider Rock Advisors, George Papa, who is
the founder of Spider Rock. And the idea was, you know,
myself at River North who is a derivatives portfolio manager
and trader as a fiduciary, you know, managing hedge fund and
mutual fund, some SM as but the clients really needed to get
more customization. Think about the after tax world.
And these clients were, were domiciled in so many different
venues. Think UBS and Merrill Lynch and
Fidelity and Schwab and Pershing and Bank of New York and
Northern Trust, you name it. And so thinking through the
challenges that they foresaw, who in the industry could could
actually deliver that? And there were a few and you
know, players that had attempts, but nobody with with I'll call
it a built for purpose I to the client.
And so we set forth with Spider Rock advisors the vision to
build a hub and spoke infrastructure connecting all
the private wealth channels to a proprietary build to listen to
the needs and client demands and and asks around building
parameters and and bespoke derivative solutions.
And in doing so, we had to build a bunch of technology like a
lot. And it was a big bet.
It was very filled of dreams. Ask if if your movie buff, you
know, if you build it, they will come.
But we had the clients telling us exactly what to do.
And so you know, that was in 2015.
We, so we built kind of a lot of tack and, and, and workflow and
automation and infrastructure to really deliver a universal hub
and spoke derivative solutions platform that has a fiduciary
business model to the client and is allows, you know,
customization and, and after tax solutions.
And then we we bootstrap the whole thing.
And then as we continually scaled, we realized we were
facing a distribution challenge. Now that we have clients and we
have product market fit, now we have technology, now we have all
the solutions. How do we think about
distributing this? Because we needed to raise our
awareness and our profile and make sure that financial
advisors, institutions, family offices like knew of our
capabilities. And so that was really the, the,
the inflection point was when we were starting to hit a ceiling
on our distribution, you know, a large institution pulled us
aside and said, you know, we have thousands and thousands of
financial advisors. How on earth do you get a sell
and service? And we so we, we began a process
and serendipitously, you know, BlackRock came unsolicited to us
probably through the rumor mill, heard what we were up to.
And you know, it fit very nicely with their vision of their SMA
platform. And so in 2021, they took a
stake in the business, took two seats on my board and you know,
wanted us to mature our technology stack and basically
prove out that we could scale at the level of a institutional
platform like BlackRock. So 2024, our board collectively
decided that it was time to, you know, go in house, so to speak,
and we became a vertically integrated business unit in May
of 24. So that is roughly speaking 25
years and hopefully less than 5 minutes.
Wow, I absolutely love it. So congratulations on your
success. It's absolutely fantastic.
I love the fact that they contacted you and not the other
way around. That typically means stars are
aligned up above and there's good things that come after
that. So let's talk about Spider Rock.
Please let invest. Let's let the audience know what
you do, some of your competitive advantages, your investment
style, all that fun stuff, please.
Yeah, no, I appreciate it. And, and, and thanks, you know,
on, on, on the aforementioned comments.
So I, I think there's a few things to, to really, you know,
raise awareness around. So number one, derivatives as an
asset class for, for, you know, the professional traders in
Chicago has always been kind of a staple statement.
But many financial advisors, many fiduciaries, many other
asset managers don't have the backgrounds, the infrastructure,
the technology to actually go deliver the volatility as an
asset class and as as as that's a headline statement.
What that actually means is derivatives can solve very
unique portfolio challenges to build better risk adjusted
returns that other plain vanilla instruments can't, right?
Microsoft is a linear instrument.
Microsoft pays a dividend. Microsoft if it's up 10%, the
investors up 10%, Microsoft's down 10%, they're down 10%.
What derivatives do is they shape distributions.
And so think about like at the utility, each person could have
the exact same portfolio, but their psychology of wins and
losses or gains and losses and they get their monthly statement
is very different. That's risk tolerance, right?
It's maybe not stated as bluntly.
And So what derivatives really do well and are very uniquely
positioned to do better than any other portfolio constructing
tool is to shape the outcome that investor is seeking.
So if you said to me, I would much prefer up 10, down 8 as
opposed to up 10, down 10, OK, derivatives can maybe shape
that. Well, what about up 20, down 20?
Well, I can't get you up 20, but I get you up 18 and down 12 and
now light bulbs start to go off. And so it's the upside down side
capture ratio that things gravity that people gravitate
to, it's risk adjusted profiles, it's sharp ratios, it's Sortina
ratios. And so when you think through
the truest value of what we're delivering, it's re
characterizing what a risk adjusted portfolio construction
can be now with these instruments.
But to do that, you have to have all that infrastructure and all
that technology because each investor's unique.
And So what I haven't mentioned there is that's derivatives as
an asset class, that's nonlinear payouts, that's building better
portfolios, building better sharp ratios.
But what I haven't there mentioned there is like the
efficiency of our solution set. So I am not asking for an
allocation, Adam, your portfolio is fully invested.
You're a professional investor. You look at a hedge fund, you
look at a private equity, you look at venture capital, they're
going to ask you to give them cash.
What I am asking is, right, let me see your portfolio, let me
see it. And because of that
infrastructure, I can now see exactly what you owned.
And if you hire us, we're going to run a bunch of analytics on
ways to improve that portfolio. And the way I set up that
framework is, you know, Adam, we're sitting in, you know,
pretty close to all time highs. You probably have a lot of
equity gains and the reason you probably hold some of those
still is because you haven't been able to sell them in
rebalance because you don't want to pay the tax bill.
And so the capital efficiency here is, can I actually go
deliver a better portfolio to you without forcing you to sell
something? I'm not asking for your cash.
I'm asking for a lens into your portfolio and ways to improve
it. And so if I see that I'm like,
Adam, you've been so fortuitous to own Tesla, NVIDIA, Microsoft,
if taxes are zero, what would you do?
And you'd be like, I actually not at this phase in my life,
would not want that much risk. And I actually would like this
muni bond portfolio, but I can't do anything about it.
Well, insert spider rock advisors.
I see your account wherever it sits.
You hire us as a fiduciary. I'm aligned with you.
These are not trades. These are perpetual systematic
solutions. Once I understand your
objectives to go into your account wherever you're
domiciled and re optimize your portfolio with an after tax
mindset, but try to get you that up 18 down 12.
You used to just own Microsoft. Now you own Microsoft pay off
profiles that are different and catered to you.
So that's like the the the lens of our solutions.
If I tell people we, we are a derivative solutions platform
and what that means is I can curate any solution, but I'd
rather hear your objectives and I will optimize to those because
I got an alphabet suit behind me and acronyms and I can go
through all the product lineups. And that could be fun over
Saturday if you wanted to be bored for a full day.
But it's the goal that you're providing me.
I can deliver better than any other instrument.
That's the asset class. That's options as an asset class
Spider Rocket Advisors as the fiduciary to that is going to
then run that as a core sleeve of your portfolio for a window
of time. If if you're thinking you know
in a finite period, but most clients start with one and
become power users of our of our of our solution kit.
Yeah, it makes perfect sense and I love how you explained it.
Thank you for that. So do you look at derivatives as
an asset class as well? Almost exclusively.
So I will ingest portfolios regardless of what they have
equities, fixed income, ETF, single securities, mutual funds.
And I'll say, hey Adam, this is this is the ball of wax that
that I now have a lens into let's all agree as to what your
objectives are and how we could improve them.
And so the one that's super obvious and the most
conventional is concentrated stock, right?
I have hundreds and hundreds of clients that come to me because
their clients, financial advisors speaking, my clients
have somebody who has worked at Caterpillar for 25 years, makes
sense. And they've amassed a pretty
nice nest egg, $7,000,000. But 4 million is in one stock
Caterpillar. And they're like this family
cannot afford for that asset to have some issue, you know, a
rise in which it, you know, goes down 50%, like it would be like
lifestyle changing. So what do we need to do?
We need to protect that asset. But the problem is if you sell
it and go diversify, you have to pay taxes, right?
And our solution set will then say, OK, with advisor and
family, how do we think about building you a stronger, more
durable portfolio for the next 5 years, 10 years, but really
mitigate the risk of that single security.
And, you know, that's what options do best.
And then as you walk through that, the financial advisors,
what about an exchange fund? That's a great thought.
What does an exchange fund do? That Caterpillar family can put
their $4 million into exchange fund and get them get a ratable
exposure of all other folks that are in similar positions.
And then the downside, however, is they're locked up for seven
years. And so if you need liquidity or
you need transparency, let alone the fees, there's some tax
ramifications. In 2018, this example existed.
Apple was the family in the, you know, the use case here.
And the financial advisor said, you know, hey, team Spider rock,
I just don't want any more Apple exposure.
I want a diversified for portfolio, but I need it.
I need to be able to get liquidity when I need to.
And so we built a solution. Again, everything we do is built
for purpose to a client objective that we call exchange
fund replication. So it's probably one of our
more, I'll call it innovative solutions solving the exact
problem of I don't want this security Apple in this case,
Caterpillar in the other. But instead I want a diversified
portfolio, but I don't want to sell it today and I need to
maintain complete flexibility customization through time.
I like my shares, I like my dividend.
So we get to keep the shares in the account.
And then at the end of six months, two years, three years,
unlike seven years, you know, we're re optimizing this through
time. And so it's it's been a huge
success in solving for that exact client use case.
But hopefully that brings to life like how we engage with
folks. It's tell me, tell me what your
problem statement is. And if I can improve it better
than other conventional measures, then I'll bring stuff
to the table for you. I absolutely love it.
Let's talk about risk management, Eric.
How do you handle risk and what are some mistakes you see people
make with respect to risk management?
That, that may be the best question I've gotten all week.
Listen, I, I think when you are a professional investor, you
have to start with the risk management.
A lot of folks in the retail world start with the reward.
And that's the if, if I was to say one statement, professional
investors manage risk, retail investors seek reward.
And that's just behavioral finance, right?
And So what we are paid to do is start with analyzing the risk.
And when I tell clients each day risk adjusted returns are what
you want, you just don't think about it like that.
And I give various metaphors to explain the value of risk
adjusted returns. And one that is is very layman
centric is every single person that's been on an airplane has
always heard the pilot come on and say, you know what, there's
some turbulence ahead. We're going to go north and
deviate on our route, 100 miles. It's going to cost us 7 minutes,
but we're going to land in San Francisco 7 minutes later.
But there will be no turbulence. There's not a single person on
that plane. That's like, no, no, no,
actually I want to get there 7 minutes faster, go straight
through the eye of the storm. Not a single person.
But in finance and professional money management, they actually
want that. And because they, the, the
allure of the reward forgets the premise of wanting risk adjusted
returns. And so we spent countless hours
re underwriting what that means for our work.
And so go back to that Microsoft example that we began to chat
around. I don't like up 10 down 10.
I don't like up 20 down 20. I like up 18, down 12.
OK. But what are you giving up?
Everybody just said I went up 18, down 12, that's better than
up 20, down 20. Everybody just agreed to that.
But what they conveniently forget is when it goes up 30, I
might only be up 20. So what's what are the
symmetries that you're seeking that's risk adjusted returns by
the way. And what is the cost to build
better symmetries? Sometimes it's foregone upside.
And so how we think about everything in in Spider Rock
Advisors for all of our work, whether it's an institution tax
exempt, whether it's a billionaire family office, or
whether it's the full nest egg of a $3,000,000 family that just
entered retirement and everything in between.
The idea of building better portfolios has to start with
risk adjusted returns. And because I don't have a
crystal ball and Adam, I know you know this, I don't know
where the S&P is going to go, nor do you.
I don't know where Apple's going to go, let alone, you know,
ever, especially in a short window of time.
But I can control the risk. I actually can manufacture a
risk protocol and the reward where stocks go, what volatility
does like that? That's left to forces that are
greater than than anybody, right.
And so that's that's the principled framework to building
better risk adjusted portfolios. OK, I absolutely love it.
So I always joke around at half joking, but say, you know, most
people look at the calculator and they start punching in
numbers. The seek reward.
I love what you said about professionals manage risk and
individuals seek reward. Nobody goes to that calculus.
I'm gonna buy a million shares of XYZ's and they go up a dollar
and make a million bucks, you know, blah, blah, blah.
That's what people are just looking at that side of it, but
they completely dismiss the risk side of it.
Most people, at least. And 100%.
I'd love that. OK, Thank you so much, Eric for
explaining that and breaking that down the way you did.
Now let's with the conversation, some timeless advice, which is
my favorite part of the show. So you like the risk question.
But wait, there's more. There's a lot more good
questions coming your way still at least.
So here we go. What is some timeless lessons
you've learned along the way that you'd like to share with
the audience? You can go business, life,
relationships, anywhere you want to go.
Oh, listen, that's a very thoughtful question.
I will. I will segue into that on the
heels of our last one. So I'll stay on the investing
theme here. One of my first risk managers in
the business said your sizing needs to be built in a position
with how much you're willing to lose, not how much you want to
make. And so if you can reframe
portfolio construction from that, from that bench line
benchmark statement, it will completely re engineer how you
build better portfolios, right? And so I think how that segues
into maybe a broader initiative, you know, timeless advice.
We sit in 2026 roughly speaking at all time highs.
I don't think there's ever been a moment in my 25 year
professional career in which the dispersion or difference between
historical returns and future estimated returns have been at a
wider point in history. What does that mean?
Capital markets have been very, very fortuitous in compounding.
Depending upon your index, 12:14 maybe in the NASDAQ, depending
upon your window of time, 18% compounded.
There's not a single consultant institution, Wall Street bank
that is looking in the next 10 years with anything north of,
I'm going to call it 7 is probably the most bullish
estimate I've seen. So if I have a 14% historical
tailwind and I have a 7% forward-looking estimate, what
does that mean in the world of compliance for financial
professionals, past performance is not indicative of future
results. And I laugh and I see you
chuckling because how on earth you are going to build the most
durable portfolio looking forward given where we sit today
without the asset class of derivatives, right.
I, I don't know how you'll do it, especially if you think
about the after tax components. And yes, that's a biased
self-serving statement from the work that we do.
But it's math like if I am compounding historically at 15%
and I'm forward-looking at 7 and a half.
Oh, by the way, volatilities not going down, it's going up,
right? I know we just announced a new
Fed chair. We, we know policy is data
dependent, but the front of the curve is also likely going down.
Like you, you have these structural forces that are in
play where equity markets probably pulled returns forward
into 2025 and and beyond. 22/20/22 is the only real blip
which you know, that was the interest rate saga that now
allows us to have actually real yield in, in, in nominal terms.
Listen, I, I think the, the, the advice I would, I would want to
you know, maybe shed here is like prudent investing needs to
take that into consideration. And so somebody who is over
their skis and risk, whether knowingly or unknowingly, this
is not a bear market call by any means.
This is just prudent portfolio construction and fiduciary risk
management. So that's, that's, that's one
like theme that I'm seeing coming from clients, seeing
industry research, some of which comes, you know, from, from
BlackRock that I kind of coupled together that that it would want
to make sure that that's, you know, I'm on the record at least
acknowledging that that's the factual backdrop that would
that, that we face. So that's like one on the on the
finance side and, and on the investment management side, I've
been very fortunate to work with really great people and team.
And so I think through just where we operate today and like
having an amazing team is the only critical, I'll call it a
component or key variable. When I see successful businesses
or I see successful teams, it's like the the team, the team, the
team. Like there, there is true, true
value and surrounding yourself with individuals that are like
minded in some dimensions, but also in, you know, force debate,
force critical thinking, force of difference of opinion to get
the best out of what it is your mission statement would be.
And so I, I can't, you know, in, in all of our work for clients,
it's, it's not even remotely possible without the amazing
team that we have. Yeah, I love that.
OK, I could ask you a lot more questions than that.
I'm going to keep moving forward because I have more questions
for you. The flip side of the timeless
lessons would be timeless mistakes.
What are some timeless mistakes either you've made, you've seen
other people make, and how do you learn from them so you don't
keep repeating them? Oh wow, Everybody has mistakes.
I have many, many, many patience in keeping the objective of the
business model. The objective of a client
requires patience. And so I've been a victim of
this. I've seen other folks be a
victim of this. Patience is required in in any
startup. Patience is required in any
business model. Patience is required in any
portfolio. And the reason why I'm, I'm
convicted in this and I'm, I'm, I've learned from this mistake
countless times. But when you are seeking instant
gratification, it forces you to make decisions differently when
you have patience or time on your side to be thoughtful about
your approach to give markets time to recover in some
instances. So the parallels in life and the
parallels in business and the parallels in portfolios, I think
all require patience hasn't really come natural to me.
I've had to like impose self-discipline.
So I think that, you know, when when you are convicted in, in
the direction you're going, it has to be met with patients in
order to, to deliver. Otherwise you'll get frustrated
because what you see is the vision is not coming fast
enough. So you have to be very
disciplined and grounded in in having patients to allow time to
be, you know, your friend. Yeah, OK.
I love that. And I've experienced similar
things on my end with the team and patience and the reward, not
the risk and so on and so forth. So I love what you're sharing
here. Thank you.
Next question for you. Let's talk about leadership.
So you mentioned teams important is to have good leaders.
You're a leader. How do you, what have you
learned about leadership? What makes a great leader?
Any lessons about leadership that you'd like to share with
the audience, please? You know, listen, I think it's
a, it's a great question. Leadership styles vary.
There's no one leadership style that always is the best
leadership style. And so if I was to be self
reflective here, changing your leadership style or being
dynamic in your leadership style is a skill that I've had to try
to, to work on. It changes by market conditions
and needs to change by personnel.
It needs to change by business unit.
If you think technology versus operations versus investments
versus sales and marketing. And I think leadership also
needs to have humility and and a humbleness to it.
And I've been very fortunate to, to have had mentors and leaders
above me and witnessing what's worked for them, how they manage
me and my team. And you know, I'll call it using
a golf metaphor, basketball, right?
I like this leadership style here for this.
I like this leadership over here for that.
And, and like I said, you know, the, the team needs to be able
to respond to, to various styles of leadership, you know, given
the task and the objectives at hand, which change through time
and also given competitive forces in market conditions.
So I, I think, you know, leadership, there's so many
good, you know, I'll call it high profile leaders that have
certain styles. And if you were, you know, and
I've read a few few books on, on, on this exact topic only
from, from my own edification and, and learning.
But being able to change your leadership style when necessary
I think is a mission critical key factor in in successful
leadership. Yeah, I love that.
The evolution, right? Yeah, no, it's real.
Yeah, I love that. OK, next question for you.
I've learned successful people overcome adversity, handle
adversity different than most. They overcome obstacles.
How do you handle adversity and what are some obstacles you had
to overcome along the way? Oh, there were a lot of
obstacles in the journey of Spider Rock Advisors.
Lots. I would go back to that patience
dialogue as, as a means to overcome some of obstacles.
It's not, it's not there tomorrow, but like if I wait a
year and I keep doing what I'm doing and keep my head down and
grind like time will alleviate some some, some of the
obstacles. I think the, the, the biggest
challenge with respect to this business and obstacles is we
were somewhat too early, which again required patience, but we
were thinking through some of the technology that we needed to
build and the way we wanted to deliver, you know, our, our, our
value proposition and the marketplace was, wasn't ready.
And So what does that mean? Clients weren't able to adopt it
at scale or the custodian or the back office technology teams
weren't equipped to ingest an API or a data feed.
And so as opposed to getting frustrated and, and, and
throwing your hands in the air, which we probably did at many,
many times in a boardroom, but the idea of thinking about how
to put yourself in the other side of the table and try to
propose solutions around the problem.
So becoming a perpetual problem solver was, was a skill set and,
and a business dynamic that we needed to adjust to through
time. And listen, I think the biggest
obstacle, which, which we all face, because nobody knew what
the hell was going on, it was COVID.
And so when you're, when you're in these business momentum,
business building modes, and then you get thrown not even a
curveball, but a haymaker such as COVID.
It's like, how do you improvise? How do you take the vision of
where you were going and adjust the vision accordingly?
And, and, and by the way, you're, you're managing your
family and your team and in the business and clients.
Like there was that, that, that obstacle can't be understated,
but everybody faced it. And so there was a lot of
empathy and sympathy. And so, you know, I think the
holistic approach there, you know, there were, there were a
lot of success stories through COVID.
There were a lot of, you know, sad stories through COVID.
We, we had both, but we came out on the good side of that.
And and you know, that was it was a life learning lesson for
sure in terms of, you know, overcoming obstacles.
I love it. OK, final question for you
today, Eric. What is the best piece of advice
you'd like to give the audience or your 30 year old self?
Oh, my 30 year old self needed a lot of advice.
Listen, I think at the end of the day, the, the advice that I,
I would like to, you know, have my team have and, and have
somebody that I was to mentor. Chasing success is not, it's not
a thing. Chasing passion is a thing.
And if you derive energy from your passion and you do it well,
success will come. And so it's reverse engineering
career paths based upon what motivates you, what you want to
learn about, what you derive energy from, and where you find
passion. If you chase success, it won't
necessarily work, but I have a lot of confidence in the other
path providing a utility of happiness and success.
And whatever you measure success in, in a much more higher
probabilistic world if if you chase the passion as opposed to
the outcome. I fully agree.
OK, Eric, this has been athlete fantastic.
Thank you so much for coming on the show.
We'll have links to your website and everything else in the show
notes. And Congrats on your success.
This has been athlete fantastic. Thanks so much, Adam.
It's great being here.