E316: How Family Offices Design Portfolios for 30-Year Outcomes

What if the easiest alpha in public markets isn’t stock picking… but taxes? In this episode, I sit down with Zach Wainwright, Founder of Twin Oak ETF Company, to break down structural alpha, ETF tax efficiency, and how high-net-worth investors can compound capital more intelligently. Zach shares lessons from his time at Wellington, TIFF, and inside a single-family office — and why long time horizons, incentive alignment, and tax awareness may be more powerful than traditional stock-picking alpha. We also dive into tail-risk hedging inside an ETF wrapper and how families can design portfolios to survive extreme drawdowns without sacrificing long-term compounding.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  So you've worked at some of the top investment firms in the world, Wellington, Tiff, at a top single family office. What are some principles that you learned that you apply to your day to day investing career?

• 0:13Speaker 01

  The starting point is have a long time horizon. Right? When you start your investing journey, everyone tells you think long term. And for someone who's 21 years old, that's never had a job before. Like, that's very hard to really put that into effect. But I think as I roll forward and I worked at Tiff and I worked with family offices, long term means a different thing. And I now have a true appreciation for what that means. Taking an investment for a quarter or four quarters, even if that could be long term in the public equity investing world, means something very different when you're investing for the next generation.

• 0:46David Weisburd?

  And why is that so important?

• 0:48Speaker 01

  It gets back to like the idea of like, are you an asset owner or just an investor? And I think you can, great investors can be both. But the idea is you deploying your capital and letting it compound and continue to drive value for you for a very long time. And when I think about my investment philosophy, it's how can you unlock the potential inside of a portfolio? And I think there's different levers you can pull, but it's really about aligning it with the time horizon that you have.

• 1:16David Weisburd?

  What were your lessons from your time at Wellington?

• 1:18Speaker 01

  It's a great place to start your investing career because you see so many different disciplines. You see growth, large cap, small cap, international. You see a lot of different tools being deployed. And I think for me, what that taught me was you have to figure out what's true to yourself. What is it that you believe that you can kind of have a repeatable, sustainable competitive edge on? And for me, I was very clearly a value investor and I was looking for high quality businesses that had something that caused price and value to diverge.

• 1:51David Weisburd?

  And you went from Wellington, you went to Tiff, almost the opposite end of the market. You went from the public markets to investing into early stage fund managers. What were your lessons at Tiff? And what is something that you learned that was very counterintuitive?

• 2:05Speaker 01

  I thought I was long term before I got there. And then when you're forced to make a commitment to something that has potentially a 15 year lockup and no path to exit, that's really being long term. And I think that brings with it a level of rigor into diligence that was pleasantly surprising.

• 2:25David Weisburd?

  And at TIF, you focused on Funds 1 through Fund 3. Why take the risk investing early in a manager's career? What's the upside?

• 2:33Speaker 01

  The statistics are, you know, Fund 1 to Fund 3 are a manager's best performing funds. And so if you miss those, you lose two different ways. One, you miss those funds, but you also miss the chance to access those managers later. Because once they're identified, it can be hard to get into.

• 2:50David Weisburd?

  By the time that the manager has been de-risked, everybody sees as the LP Alpha is no longer there. So you have to go in earlier where there's higher risk, higher return.

• 2:59Speaker 01

  And you want to align your incentives with the manager, right? So those early fund managers, the funds are typically smaller. They're not making a lot of money off of the management fee. They make their money off the carry dollars, you know, whereas a KKR is going to make a great return just from the management fee. And so you just have different incentives.

• 3:16David Weisburd?

  And if you think of Alpha as extremely scarce, you have to think upstream of that. What generates Alpha? It's typically really difficult things. It's looking for companies in the middle of nowhere. It's doing that extra work. It's working 100 hours a week and somebody that's making millions of dollars or in some cases, tens of millions of dollars a year in management fees.

• 3:38David Weisburd?

  On the incremental deal, they may not actually pursue it. They might not pursue that Alpha because it's too costly from a, from a personal standpoint.

• 3:44Speaker 01

  If a Fund 1 doesn't go well, there is not a Fund 2. And so they're going to work out the companies in their portfolio and things aren't going well. They're going to maintain a high bar when they're making, deploying new capital because their sustainability is on the line. And so that's actually phenomenal incentive alignment. And as a, as an allocator, you really need to try and assess that, right? You need to try and trade, calculate that risk return trade off for making that. And I actually think that's like a skill set that direct investors really capture well. There's no perfect investment out there. Someone finds one, I'd love, I'd love to hear about it, but there's something wrong with almost every investment that you make. And it's calculating that risk return framework and emerging managers, that's kind of the same thing.

• 4:29Speaker 01

  There's something wrong with it. It could be a short track record. It could be a small team and you have to kind of look through that. And the people who have done that really well, they get into early managers, they stay with those managers for a very long, successful career. And MIT, Yale, those endowments are kind of core to how they've invested and how they've generated a lot of their outperformance.

• 4:52David Weisburd?

  When you look at early-stage managers, you said there's something wrong with every manager. What's something good that could be wrong and what's something clearly bad that you don't want a manager to have?

• 5:01Speaker 01

  The biggest cardinal thing you can make a mistake in is investors partnering with people who are not good people. Right? That when there's an ethical concern or some reason why maybe they were fired from a prior firm because of something. And you really need to try and spend your diligence unpacking, is that just a story? Or is there something fundamentally flawed there? Because to what I said, like you're in these investments for 15-plus years. You will likely, that commitment will likely outlast your time at the place where you made that commitment. And you need to, you need to avoid those mistakes. The thing that you can best align yourself with is, is doing whatever you can to increase the alignment. So managers who make a very large kind of GP commitment to a deal, where they're the largest investor in their own deals.

• 5:46Speaker 01

  Right? They're eating their own killing, what they're killing. And so that's a phenomenal way to partner, right? Someone who's going to put 20% of the capital to work themselves and you're really there to amplify their capacity.

• 5:57David Weisburd?

  After TIF, you went inside a single-family office. So you went from a large institution, it was Wellington, to TIF, which is today roughly a $9 billion pool of capital, to a single-family office. What changed when you joined that family office and how did you view your investing mandate there? One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on stale reports from sell-side shops. But channel checks are no longer a luxury, they're becoming table stakes for the industry.

• 6:40David Weisburd?

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• 7:25David Weisburd?

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• 7:40Speaker 01

  Over the last 20 years, I feel very fortunate to have met a lot of family offices, and I'd kind of put them into two camps. Starting point is they've all already made generational wealth, and so their incentives could be very different from other investors' incentives. There's one camp that lets us be steady, let's compound and kind of continue to incrementally grow our family's balance sheet to support the future generations. And then there's others where they have a much higher, that manifests as a much higher risk tolerance. They can afford to have a 30% drawdown because they're not taking food off the table, they're not having to make layoffs, and so that can give them kind of

• 8:23Speaker 01

  a higher risk tolerance, and therefore they can make investments that are different from the investments that you and I might make personally. And so I think I put that into the kind of the structural edge that can be developed at family offices, and I think the best family offices try and develop a structural edge in how they deliver their returns.

• 8:45David Weisburd?

  What's one or two examples where family offices can create a structural advantage versus other investors in the market?

• 8:52Speaker 01

  I mean, I like to always, the one that I like is buckets, right? If you look at a lot of allocators, they have buckets, right? They have a large cap manager, they have a small cap manager, they have their US bucket, their fixed income, et cetera, et cetera. Family offices, they don't have buckets, they have a balance sheet, and so they're able to maybe go into things that don't fit into a traditional bucket. That's always been kind of my favorite place to fish as an investor is something that doesn't fit cleanly into something else because there's fewer people looking at it. And so there's more opportunity for mispricing.

• 9:22David Weisburd?

  I oftentimes think about it as going contrarian against certain trends in the market that deserve contrarianism. Right now, everybody needs liquidity. So being a liquidity provider is a really good business to have. In other cases, other people are very bullish on something, you know, selling into that bullishness could be very lucrative. And the reason why family offices are uniquely able to do that is because it's their money. They don't have this need to raise new funds on hot trends and gain management fees on things that are topical. They're just focused on compounding their money. And they're incentivized to take the right action where

• 10:04David Weisburd?

  capital sources with outside money are not incentivized to do.

• 10:06Speaker 01

  Being contrarian, you know, if people want to sell calls, buying those calls cheaply, if people want to buy calls, selling them those calls expensively, and just trying to take the other side of some of those flows to kind of incrementally keep adding different return streams and levers that you can pull to drive out performance over time.

• 10:24David Weisburd?

  Following the single family office, you started your own firm. Tell me about Twin Oak.

• 10:30Speaker 01

  I like to think of our kind of investment philosophy that we're trying to bear is there's three different ways in which you can create value for clients. There's security selection, which is pretty self evident. There's asset allocation. So being in the right sectors, sub asset classes, et cetera, right? Being international versus US, large cap versus small cap, you know, single stock versus kind of diversified index. And then there's structural alpha. And so I think the theme that you probably have heard from me throughout this whole interview is being long term. I think time horizon is a structural edge that we try and capture at Twin Oak. And the second is tax aware. I think tax alpha is the easiest

• 11:11Speaker 01

  way to add alpha for clients. If you can just be smarter in your implementation of something, you can drive a massive amount of value for clients over time.

• 11:21David Weisburd?

  Give me an example of tax alpha.

• 11:24Speaker 01

  If you select an investment manager that puts up two points of alpha per year for 20 years, they're a, you know, top 1% manager over time. Very hard to do both as an investor and also hard to identify that top 1% manager because 99% are not that.

• 11:44Speaker 01

  Now, if you had made that investment through a mutual fund, the average mutual fund has about 2% per year of tax drag embedded in it based on just like how mutual funds function. So congratulations, you you picked that top tier manager, but you lost all of that value due to tax drag. And so you took on a lot more risk because you had to identify that top tier manager and most likely as you did not. And so you're almost virtually guaranteed to underperform. Now, if you had made that same investment through an ETF structure instead of a mutual fund structure, you would have kept that tax alpha. So, you know, another way to think about it is you would have generated two points of tax alpha in the ETF structure relative to a mutual fund.

• 12:29Speaker 01

  And so you would have really captured that investment alpha in that strategy.

• 12:32David Weisburd?

  So explain that difference between holding a position in a mutual fund ETF. Why is there such a dramatic change in tax?

• 12:41Speaker 01

  In a mutual fund, when people come in and out, the manager has to sell securities to deliver cash to those exiting investors. At the end of the year, that capital gain that was generated from those, you know, tweaking of the portfolios or meeting inflows and outflows get distributed out to every investor. So you could get hit with kind of a phantom capital gain tax, even though you did nothing. You just you bought and held your mutual fund. Now, an ETF is set up as kind of what they call a redeemable security. So people come in and out of the security at net asset value. And so in theory, no one else entering or exiting the fund impacts you as in your investment return. So you don't feel that experience.

• 13:24Speaker 01

  So when the portfolio manager goes to sell a security, they do it through this and they can do it through this in-kind redemption process, and that can be immensely valuable from an after-tax framework.

• 13:36David Weisburd?

  You built something that I think is very interesting, which is essentially a hedge to S and P 500 in case there's a tail risk and there's some black swan event. Tell me about that.

• 13:48Speaker 01

  It started with a conversation with a family. We kept hearing from a number of families that they were worried about kind of where the market was. And so, and the volatility and the potential downside. And so we came back to them with this idea of tail hedging. And the starting point for that is buying puts on the S and P 500 costs, two to 5% per year, depending on the period of time, which is really expensive. So no one wants to pay that level of expense. But even if they were willing to pay that level of kind of underperformance in a way, the ways in which they can access it today are inferior. You'd commit to a tail risk hedge fund that's going to run that put selling strategy for you.

• 14:32Speaker 01

  But when that pays out, you need to rebalance away right away. You need to take that source of funds that was generated in March 2020 and go out and buy equities. That doesn't work in a private fund. There's not, there's, there's illiquidity, there's gates. And so by the time you get your money back to be able to redeploy it, you have to pay taxes, you have to pay fees, and you've given back a lot of the returns. And so we started by saying, can we put that inside of an ETF? So that we can do the reallocation for the end client.

• 15:02David Weisburd?

  It's an ETF way to do what hedge funds are doing, but are charging two and 20 and a half gates. How exactly do you go about doing that?

• 15:11Speaker 01

  There's probably 40 different hedges that you can do at any different time. And that hedge funds are looking at at any given time. It could be puts, something as vanilla as buying puts on the S and P, or it could be something as complex as buying forward interest rate volatility in foreign markets as a way to hedge equity exposure. So at different times, we're going to move between that camp of 40 different potential hedges and put together a balanced book to really solve the pain point of that, that product. In a severe downturn that is very sharp and unexpected, do you have a source of funds that you can redeploy? And that's kind of what we tried to create.

• 15:53Speaker 01

  And we wanted to make it as easy for investors to access as they could, single ticker in a portfolio.

• 16:00David Weisburd?

  There's no free lunch. What's the cost of having a hedge on S and P 500 portfolio versus just having that S and P 500 portfolio with no hedge?

• 16:11Speaker 01

  In the simplest terms, like buying puts is expensive, right? It can cost you 2% to 5% per year, as I mentioned, and are you willing to pay that?

• 16:22Speaker 01

  Most people, the answer to that question is no. And so they keep it on for a period of time where they under hedge. And so then the hedge doesn't deliver what they expect. We started by saying, given kind of our backgrounds at hedge funds and institutional firms, like what are the, what's the full toolkit that you can use? Can we use things that are more complicated? Can we trade things on swap? Can we use options? Can we, can we really try and blend together what is a institutional level risk hedging book that will evolve over time to capture kind of the different market opportunities that we see in the hedging market? And so that, that's, you know, that's what we did.

• 17:04Speaker 01

  We have, we have a constant allocation to something that gives us convexity in the portfolio. So something when the market tanks, it will outperform.

• 17:13David Weisburd?

  You mentioned 200 to 500 basis points for a typical put on S and P. What's the cost of doing it in, through an ETF?

• 17:22Speaker 01

  If you just take the same strategy and put it inside of an ETF, there's no difference in the cost. I think for us, what we were trying to sell for is what is the, the exact vector that we're, that we're addressing? Our clients and this fund is not designed to solve the 0 to 5% down market, which is where, you know, a lot of the hedging happens. That's very expensive. That's not what keeps families awake at night. It's waking up and seeing the market down 30%. And so it could be as simple as moving to buying cheaper puts on the S and P. And those are, you know, the drag is much less. It's harder to quantify exactly what that drag is over time because we, we move to different, different types of hedges, some of which actually can have positive expected value and positive carrying cost.

• 18:08Speaker 01

  And when you blend those together, we're trying to offset the drag as much, as much as we can, so that we can maintain an adequate level of hedging, kind of in all scenarios.

• 18:18David Weisburd?

  Said another way, you're really optimizing on the maximum drawdown. So some people might say, I would be comfortable with a 10% drawdown. Some would be with a 20%. And then I guess there's this efficient frontier of what percentage of your portfolio you're hedging away with what instruments? That's the complicated part.

• 18:37Speaker 01

  For this fund, we try and take that onto our back so you don't have to worry about it. We're trying to deliver an outcome, a solution where you get equity-like returns, but with reduced drawdowns and extreme tail environments.

• 18:50David Weisburd?

  I've always been curious about this because probably 90% of institutional investors have what is called diversifiers, which is hedges against the market. So there must be a very solid rationale to that. Has there been research on long-only exposure versus long-only with hedged products? And does long-only with hedged products, not only maybe is it a smoother ride, which is important, but does it actually outperform? And so in what cases?

• 19:17Speaker 01

  My favorite statistic is if, over a 30-year period, you avoid the 10 worst-performing days in the market, or 10 worst-performing weeks in the market, you 3X the performance of the market or something like that. Problem with that is the 10 best-performing days in the market usually follow the 10 worst-performing days, right? There's two really bad days and then there's a recovery. So if you also miss the 10 best-performing days, you are underperforming the market by half. And so those are the problems that I have with like a buffer fund, for instance, right? Like, they're really just protecting you against the drawdown, but if the market's down and then back up, you might not capture that recovery period.

• 20:01Speaker 01

  And that will also cost you in the end. And so to the conversation we were having about the ways to access tail hedging that currently exist, doing that in a private fund where you can't rebalance away is a problem. In our fund, on those bad days, we're immediately looking to go out and buy more equity exposure because we need to capture those recovery periods because that's how you sustain your outperformance over time. It's one thing to avoid the downturn, which I think is a feat in and of itself, but then it's can you, in those moments, deploy into that pain?

• 20:36David Weisburd?

  And your philosophy is you design with a family office in mind and then you provide that to other family offices.

• 20:43Speaker 01

  Exactly. So we like to think of ourselves as like client-driven innovators in the product space. Someone comes to us with a problem, we solve that problem, and then we can make those strategies accessible to everyone. And so the tickers that we create are available, anyone can go buy them. But we know that it solves a single family's problem or a multi-family office's problem. And while every family might have a different need, eventually they start to rhyme. And so what worked for David's family will also work for John's family over here.

• 21:13David Weisburd?

  You're in a unique vantage point where not only were you at these institutional investors in the single-family office, but you have single-family offices coming to you and helping you solve specific problems. What's your view on the optimal way to build a public portfolio for the long term?

• 21:31Speaker 01

  The stat I always like to come back to when I sit down with them is if you bought the S and P 500 30 years ago and just let it compounded and removed all tax friction and fee friction from that access, you 25 extra money. Do you want to 25x your money over time? Because very few people actually achieved that level of outperformance over the last 30 years. Because fees were introduced, taxes were introduced, suboptimal decision-making were introduced. And so for us, they're coming to us, and I think what they're really seeking is an ability to compound tax-deferred for a long period of time. And that's a mentality that is not pervasive in the investment ecosystem.

• 22:11David Weisburd?

  It's a very private markets type of approach to the public markets.

• 22:16Speaker 01

  Exactly. And we're trying to match our clients and our investment strategies to deliver the outcomes that they're wanting. And are we aligned on the incentives for that?

• 22:26David Weisburd?

  So starting this business a couple of years ago, what's been the most surprising thing?

• 22:31Speaker 01

  I've become really obsessed with ETFs. Created a firm building ETF products, right? And you'd think, oh, my God, this is so, people must know this. And I still think people ask me what inning we are in the ETF evolution. And I say like the third inning. There are so much more to do in the ETF ecosystem, both from an awareness standpoint and also a product development standpoint. And that's where we're really trying to push kind of the envelope. I made a family office, you know, almost every week that has at least a few hundred million dollars into ETFs. And they didn't know that they were more tax efficient. They just bought them because they were easy and cheap. And so you're taking that knowledge and then saying, oh, but it could be applied to so many more different things.

• 23:13Speaker 01

  And on the other side, you know, we meet a lot of hedge fund managers that are looking to grow in the family office channel. And can we help them ETF their strategy? Because they want to get access into that strategy. And I think that's really where we can sit at this intersection where we're helping institutions access the ETF market with sophisticated partners.

• 23:34David Weisburd?

  There's a couple of confluence of factors going on here. One is the high net worth, the family office world is gaining in prominence. So before all the products were done for the institutional, the non taxable investor, just because they were just dramatically larger. And now with the rise of retail and the intergenerational transfer of capital and all these factors, the taxable investor himself or herself is just becoming more prominent. The problem that still persists within that, a lot of the large managers of that capital are not really incentivized for them to perform on tax efficient manner over 10, 15 years. Yes, you could say in theory, they get another 2% per year compounded over 20 years.

• 24:19David Weisburd?

  They'll manage another 1.5x, but most people are not really thinking that long term. And most people honestly don't care as much. They're focused on, you know, selling products. And we have another trend now with the fee only, the multi-family office, the, the RIAs that are now much more aligned with, with the client as well. So there's this general focus on the taxable investment within the taxable investors. There's a general focus on being more. Client facing and, and kind of lowering that principal agent problem that does experience.

• 24:51Speaker 01

  We try and partner with a lot of those firms, right? Like, we want to partner with those multifamily offices that think like us. And we want to partner with the, you know, the hedge fund manager that maybe is his own largest client and he's realizing that, oh, maybe I should care about taxes now. And so I think there is a change happening. But taxware investing has been around for a long time. You know, I, I got interested in investing when I was 12 years old. No good reason whatsoever, just kind of a cool idea. And I spent a lot of time with, I was fortunate to spend a lot of time with family offices. And one in particular gave me this piece of advice and this, you know, 20 plus years ago.

• 25:29Speaker 01

  A superior knowledge of the tax code is one of the most competitive edges you can have as an investor. Taxware investing, I think, is having a moment and I think it will continue to have a moment because at the end of the day, what matters to you as a, as an individual, whether you're retail, family office, multifamily office is how much do you keep?

• 25:46Speaker 01

  And can we help you keep more in your pocket?

• 25:50David Weisburd?

  If you look at alpha as extremely fleeting, in most markets, somebody is buying and somebody is selling. So it's very difficult, if not impossible, to sustain alpha over long periods of time as information starts to become less asymmetric. In tax, you're essentially selling against government treasury that updates its, its policies sometimes once a decade. So it's much easier to sustain alpha in that perspective versus when you're buying and selling.

• 26:22Speaker 01

  It's an interesting framework to think about it. You know, I, I always like to think about it as

• 26:30Speaker 01

  this is tax deferral, it's not tax elimination, right? We're not getting rid of your tax obligation. You still owe the taxes. But can we remove the frictions along the way that get in your way of kind of deferring and compounding for long periods of time?

• 26:44David Weisburd?

  If you could go back 15 years ago, when you were just starting your career, what would be one piece of advice that you would give a younger version of yourself that would have either helped you accelerate your career or helped you avoid costly mistakes?

• 26:57Speaker 01

  I got told this when I was younger in my career, so I'm, I'm borrowing it from somebody else, but I think it, it really holds true. Collect the most diverse set of experiences you can as an investor. Because when you see the same problem everyone else has seen, you'll see a different answer.

• 27:13Speaker 01

  And it's that simple. In this conversation, you know, I've talked about derivatives, public markets, private markets, venture, real estate. I've looked at all of these different things as well as from different client perspectives, right? Whether I was working at a family office or an institutional allocator. And when I see a problem, I bring all of those experiences to bear on solving that problem. And that's how we think we can create something really differentiated and special, which is our structural edge.

• 27:37David Weisburd?

  Every investor wants a differentiated strategy, or they want alpha, which oftentimes is a different way of doing things. But when they see it, their first gut instinct is, well, that's different. That's not the pattern that I've seen the previous 10 times, not realizing that that difference is the source of alpha.

• 27:57Speaker 01

  Exactly. Right. And, you know, I also, I get told a lot of, if that was true, Goldman would be here at my door pitching me on it. I'm like, well, eventually they'll get to it. You know, we saw it first and we kind of, this is what we do every single day, all day long. Whereas even if Goldman gets into this business, it's a fraction of what somebody does in their day. And so eventually this will be really commonplace. I think if you had me on 10 years from now, which I hope you do, we'll be talking about kind of, oh, there's 100 new firms that are doing taxware investing because that's, that's the way it's going.

• 28:31David Weisburd?

  Well, Zach, thanks so much for jumping on the podcast. Appreciate everything that you're doing and looking forward to continuing the conversation soon.

• 28:38Speaker 01

  Thank you so much for having me. It's been, it's been a true pleasure. Thank you.

• 28:41David Weisburd?

  That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable, or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.