Diversification in a Jittery Market: Exploring Strategies with Paisley Nardini

[00:00:26] Doug Heikkinen: You have such an interesting background. Can you tell us a little bit about yourself and your journey to Simplify?

[00:00:32] Paisley Nardini: Yeah. I'm, happy that you picked up on that. I would consider myself to be a bit of a chameleon.

but I'll provide a little bit of backdrop of kind of how I got into this industry for starters. So, I had the wonderful opportunity in undergrad to be a part of a, an experiential learning kind of hands-on program, as it relates to financial markets. So we were able to manage part of the endowment for the University of Minnesota, and was assigned as like a sector specialist in the consumer staples sector, where I really started to get interested in more of kind of the bottom up fundamental drivers

of stock prices and growth, which really then led me once I graduated to, taking on the CFA program. But I took a bit of a turn when I first graduated. I joined a fixed income trading desk in San Francisco. So I moved from Minnesota to California, I've been in California ever since. And spent my first couple years of my career really behind a Bloomberg screen, trading front end of the rate curve, high quality IG credit agencies, treasuries, and then just decided there probably is a little bit more to life in this industry. And so I wanted to get out in front of clients. Then spent a couple years at PIMCO at an institutional sales relationship management capacity. And I think really refined a lot of my skillset, and I think it's really important in this industry to be able to see both sides of the fence. So, not only are you managing portfolios, but then you have to actually understand what it means when you sit down with a client to articulate the performance, attribution, positioning, and to see both sides of that, I think early on in my career really helped refine the holistic picture. Which really then brings us to where I've been for the last eight or so years, is in this like total portfolio holistic solution role where I'm working with clients, working closely with the investment team, and ultimately focused on how do I provide solutions for our clients, whether it be income growth, capital preservation, diversification. And I've had that opportunity to work with a range of clients as well, from small advisors all the way up to some of the world's largest sovereign wealth funds and, public pensions. So I joined Simplify Asset Management in mid 2024. We've been on this journey of really significant growth. Was named one of the fastest growing ETF issuers and managers in the marketplace.

And we've just passed 7 billion in AUM. We have about 35, 36 now, I guess ETFs. And we're constantly focused on how do we provide new, innovative solutions to our clients. So really differentiated from the big behemoths and the ETF industry and focused on alternative sources of growth, alternative sources of income, some of the true liquid alternatives.

And we have some new exciting stuff coming down the pipeline as well.

[00:03:28] Doug Heikkinen: All right. Let's get to It, it goes without saying, markets have become incredibly jittery and uncertainty is at an all time high. How should advisors react to this, if at all, to this higher volatility?

[00:03:41] Paisley Nardini: So I don't want to give you the boilerplate response of, don't worry, this too shall pass.

We know that it will. Over time markets do tend to drift higher. But we get compensated for investing in the markets for the volatility that we take on. And it's environments like we've seen just in 2025 year to date, where we're really reminded of the importance of diversifiers in a balanced portfolio.

And so I think taking a big step back or zooming out, I think that's what advisors really need to be focusing on right now is, do you have the tools in your portfolio, do you have the asset classes that will allow you to really weather this storm? And so like really going back to the crux of that, the best way to weather uncertainty, and that's really like the term this year I think is uncertainty, you have to have additional sources of risk and return. 2023, 2024 was a one trick pony when it came to asset allocation. US, mega cap, set it and forget it. Bonds have really been a thorn in the side of portfolios over the last couple years. Interest rate volatility. We're starting to see fixed income and bonds broadly start to reenter that role of ballast in the portfolio.

But really, as it relates to reaction, I think it's less of a reaction in a market timing exercise, just given some of the volume we've seen, and more an opportunity to reevaluate how your portfolio is constructed. And that goes back to where we've been and where we're headed. I think we're in an environment now that's going to look a lot different than it has over the last five to 10 years.

Whether that's stock bond correlations causing that, a shift from what's been really this globalization theme over the last several decades to more of a deglobalization protectionism. We can talk more about that. Cash rates are higher. Uncertainty is higher. Growth is slowing. And so ultimately finding those additional sources, whether it's international markets, which have done really well this year.

It's been a while, right? Since we've seen international play out, but we're reminded as to why you have some of these line items in your portfolio, that for, again, the last couple years have been difficult to explain to clients why they're in the portfolio. So I think that's why we've seen a lot of attention and asset flow into these diversifiers. International assets, liquid alternatives, gold, defined outcome strategies, more objective based investing. I think all of this is leading us to believe the importance that, again, that one trick pony of large cap mega cap stocks in the US is maybe not the best portfolio going forward.

[00:06:24] Doug Heikkinen: I'm sure you're hearing from clients. What are they telling you are their biggest pain points or concerns they have and what type of solutions are resonating with them?

[00:06:35] Paisley Nardini: Yeah. Going back to the prior comment, I would say, and maybe I'm biased just because of the clients I'm speaking with and the products that Simplify offers, but I think really how do you narrow that uncertainty band, again, going back to that term.

Most investors are really unsure where we're going to land, whether it's next month, third quarter, fourth quarter, or even a year from now. There's a lot of uncertainty is the growth backdrop, where rates are going to be monetary policy, the implications of tariffs. And so, how do we narrow those potential range of outcomes in our portfolio?

And so that's why I think the focus on more defined outcomes, the use of derivatives to help protect on the downside. Obviously buffer strategies have become really, really, an important tool in a lot of advisor portfolios and rightfully so. It reduces that uncertainty range of outcomes as it relates to your equity solution.

So I think that's a big opportunity in the marketplace. Downside protection, broadly, some of the kind of liquid diversifiers in the market, whether it be, long short strategies, thinking about currency strategies, thinking about managed futures. All of these have the potential to help smooth overall portfolio returns.

I think income is another topic. I mean, income is one of those objectives in an advisor portfolio that has always been, and will likely always be a key focus for a lot of clients as they move from accumulation to decumulation phase. But I think there's now this greater scope of ways to achieve income besides just clipping a coupon on bonds or getting your dividends from your equities. Just through the use of kind of the derivative based products, the ability to produce diversified sources of income. So that's a very meaningful growing part of the market as well. And so I think all of these combined is this shift away from just broad passive equity beta, and core bonds in the passive space to more active solutions.

And again, I think we've been so focused on achieving outsized returns after we've had two solid years back to back of really attractive equity returns. And I think advisors are starting to focus on active management for, again, that downside risk. So active management historically maybe meant like how do you produce 2% to 3% alpha over the benchmark?

Now active risk starts to sound a little bit more like, how do you protect when we see these bouts of volatility, when the S&P is down 5%, 10%, 15%? Are your strategies weathering that full drawdown? And I think part of that too is coming out of 2022. We started to see this shift from passive to active.

And again, passive will be here for quite some time. I'm not saying that's being removed from the portfolio, but I think advisors are starting to trim some of this just broad beta in the portfolio to replace it with more of those active outcome oriented solutions.

[00:09:42] Doug Heikkinen: Are there any investment opportunities that exist that may be being overlooked?

And follow up to that is what can advisors be thinking about in the next few years? With that in mind?

[00:09:54] Paisley Nardini: I think there's a really big opportunity for advisors to diversify beyond stocks and bonds. So if we take this back a little bit, the 60/40 portfolio, and I'm not here to debate whether the 60/40 is dead or it's alive.

I think that conversation comes up every couple years. but I truly believe in a 60/40, because I think it's really the foundation of diversification in a portfolio. When you start combining different asset classes together, you're diversifying. And so to say the 60/40 is dead would be to say that all diversification is dead.

So I think the shift has been more how do you move from a 60/40, given where we are in the market, given the new solutions that advisors have at their fingertips. And so this isn't, my terminology, I think this is broadly used, but 60/40 is now shifting to a 50-30-20. And so that 20% allocation really is part of the market that I think a lot of advisors have not yet adopted.

And so another way to think about this is institutional allocators, whether it's sovereign wealth funds, public pensions, endowment, foundations, have had a very different asset allocation relative to advisor portfolios. And I think advisors are starting to look at institutional investors and saying, wow, like through the proliferation of product availability, whether it's in a mutual fund wrapper, probably more likely in an ETF wrapper in the last few years, we now have these tools or asset classes at our fingertips that we can start to build a more institutional, objective based portfolio. And so that, again, that 20% allocation, that's really the alternative sleeve and I know alternative is a broad term. I think within that sleeve, I think what's been overlooked in a lot of advisor portfolios, just based on the many that I see on a weekly basis, is this sleeve to liquid alternatives. So if we backtrack a couple years, kind of 2016, 2017, we started to see interval funds come to the marketplace to provide private market exposure in advisor portfolios. And we've seen consistent adoption and growing use of that in the portfolio. But what I think a lot of advisors might not see firsthand if they haven't yet allocated to this space, is interval funds have a lot of operational administrative complexity.

They also really don't have a lot of liquidity. I know there's the quarterly gates and such, but if you're really thinking about having a liquid, transparent way to diversify from equity beta in the portfolio, liquid alts are really the best of both worlds. So daily transparency, if it's in an ETF vehicle, the ability to have this in a portfolio so if we do see meaningful market drawdowns, let's say equity markets are down, S&P is down 20% by the time we get through this market volatility, you're probably going to want to redeploy capital into equity to take advantage of those attractive valuations. And if you're locked up in private markets, you don't really have that luxury from your alternative sleeve.

So being in liquid alternatives allows you to quickly, in a single day, redeploy capital. I also think there's a really strong diversification property as well. If you're going to pull away from your equity beta in the portfolio, or even fixed income allocation you're doing so to diversify away from those asset classes, which again, stocks and bonds are still the bedrock of most portfolios as they should be.

So if you're going to pull away from those asset classes and allocate to private markets such as private credit and private equity, many of us I think now agree that those are really just smooth volatility versions of equity and credit. So it's a higher correlation even though you're not seeing it a realizing it on a day-to-day basis.

And so if you're going to pull away from equity beta, get a true diversifier, get something that truly has low correlation. And so that's where we start to see, again, like strategies such as currencies, dynamic strategies that can go long or short, whether it be in the equity space or the commodity space. Managed futures, if you want to talk about kind of bang for your buck from a diversification perspective and ability to produce attractive absolute returns, managed futures have done so historically. And so we're starting to see advisors adopt this liquid alt space of the portfolio. But I think it is overlooked because in the post GFC era, liquid alts didn't really deliver as expected.

I think there was a lot of investors that piled in 2010, 2011, 13, et cetera, at just the right time when equity markets started to take off and rates were at zero. And so again, rates at zero. That's ultimately for a lot of these absolute return, liquid alternative strategies, cash rates are your baseline from a return perspective.

So if your cash rate is zero, it's a pretty big hurdle to get through to start to produce attractive absolute returns at the strategy level. So we have higher cash rates, we have more dislocations in markets, which again makes that long short capability really attractive. and there's just so much uncertainty.

So that's where I think in summary, I would say. Liquid alternatives are probably one of the more overlooked parts of the portfolio for most advisors.

[00:15:03] Doug Heikkinen: So what strategies are gaining support and how can investors think about allocating those strategies within a broader portfolio?

[00:15:11] Paisley Nardini: Yeah, so some of the, like I said, most obvious examples. Long short equities, long short commodities, currencies, again, the ability to go long short. I think it's interesting, especially for commodity strategies that might have a neutral bias to the dollar. Most currency strategies on the market today have a dollar bias, whether that's long or short. So if you can neutralize kinda that dollar bias, then really focus on kind of dislocations globally on currencies, whether it's EM or DM, that's a really attractive source of differentiated risk and return. Managed futures again, long short commodities, long short equities, long short, currencies. All of these are really attractive opportunities.

And then again, taking a step back more in the defined outcome space and less in maybe just the pure liquid alternative diversifier, the use of derivatives. So the rule passed in roughly 2020, that really provided additional transparency and regulation around the use of derivatives in ETF vehicles.

And so with this kind of new rollout in guidance for the strategies, we've seen a huge rush to active ETFs that utilize derivatives. As I mentioned earlier, the ability of derivatives to help narrow the outcomes through putting in kind of floors and downside protection, oftentimes this might mean capping upside.

I've actually had a lot of conversations over the last couple weeks. A lot of people are questioning why advisors are attracted to these more defined outcome type solutions if it means capping upside. And I would say that, the way I think about it is a lot of advisors might have their clients shift into cash if they're nervous about markets.

They're unsure whether equity markets are going to see a major correction. And so if you can shift into more of a defined outcome, provide yourself greater flexibility for upside return, even though you might be capping kind of, if equity markets are up 20%, maybe you're only up 5% or 10%. But I think the behavioral decision to move into some of these defined outcomes is what allows advisors as well as their clients to sleep at night.

And I think that's very important, even if it does mean leaving some return on the table. So I think that's why we've seen a pretty meaningful adoption in more that defined outcome space as it relates to the use of derivatives in some of these ETF vehicles.

[00:17:47] Doug Heikkinen: You mentioned diversification earlier, and that's been the enemy of the portfolio for so long. What's changed that and is causing markets to reward diversification for the first time in a while.

[00:17:59] Paisley Nardini: First and foremost, I would say I think it's refreshing to see some of the breadth return into markets. I think it's been really difficult and most advisors that are listening to this have likely experienced this firsthand.

Although we've had two calendar years in a row of really attractive equity returns coming outta 2022, your clients are still finding that one line item, those two line items, three line items in the portfolio where markets weren't up 20%, they weren't up 25%. And so right now, those same line items that you've been having to explain for the last two years are now the reason why your clients are feeling better about having diversifiers in the portfolio.

So again, I think it's healthy. I think the extremely narrow concentrated leaders in the marketplace is unsustainable long term. And so we had two great years of that. We're starting to see that unwind. A lot of what we've seen thus far in 2025 has been what I consider to be more of a rotation trade.

Now that we have a little bit more clarity around tariffs, we're starting to shift from, is this a rotation trade? More into what does this mean for growth longer term? And I think that relates back to the question of what's causing diversification to become relevant again. I think bigger picture, this deglobalization trend, this protectionism movement, I view it as like the Trump 1.0 term was really the appetizer of this deglobalization.

And I think we just got served the main course. So what that means going forward for various sectors, for various markets, what that means for US versus international, all of that I think is, of course TBD. There still remains uncertainty, even though we now have clarity on maybe some specific initial tariff levels, but we know a big part of these tariffs are a negotiation tool.

I think much of the administration has been very explicit that overarching the goal is to reduce the long end, long end part of the curve, the yields, but also reduce the trade deficit. And so many of these. Tariffs are likely to be sticky, but I think we're going to see a lot of bumps and a lot of new information to digest in the coming weeks.

So again, Trump went 1.0 was the appetizer. Trump 2.0 is the main course. And so what that means then for some of these dislocations, I think we'll continue to see various pockets of the market kind of be leaders and laggards in the coming months here. I would also say what this means for pressure on the US dollar.

So because of that's why we've seen this bid for international assets, as the expectations for rate cuts in the US. If we do see this start to snowball further into full-blown recession risks, I think we'll of course have to watch the hard data in the coming months. I think the soft data is flashing red, meaning the consumer sentiment surveys, optimism surveys from businesses.

But we've yet to see the hard data explicitly reflect recessionary risks. What that might mean for the dollar as rates are pricing and lower yields going forward. Again, that could be a bid for kind of more of the diversifier assets. Then also too, just earnings. We're going to start to see first quarter earnings trickle in the next couple weeks, and we're likely going to see some pretty negative sentiment from a lot of businesses here in the US.

A lot of businesses have been in a wait and hold mode. We knew tariffs were going to be coming. We didn't know what scope or what level. And so a lot of businesses have been on hold from a hiring perspective. There was some front loading from imports just to get ahead of tariffs. But ultimately earnings expectations, we started to see decline.

They were mid-teens, now they're in the high single digits. So if we start to see earnings expectations scale back further, that's again, when we're going to start to see this maybe reflected in some of the hard data. So we're definitely in a wait and see mode. But for that reason, I don't expect us to revert to the 2023 or 2024 trade anytime soon.

I think we're looking at a backdrop of the importance of diversifiers in a portfolio, ultimately just to weather the uncertainty that we're experiencing today.

[00:22:18] Doug Heikkinen: Last Question. How do you see Simplify helping people, supporting advisors through this main course.

[00:22:26] Paisley Nardini: Yeah, so going back to what we feel is a really big opportunity in today's marketplace is to diversify your portfolio.

We have been focused, since we incepted back in 2020, on providing our clients unique sources, diversified sources of risk and return. So we consider ourselves to be an alternative ETF provider, and that can also mean alternative ways to achieve core exposures in the portfolio. So whether it be core bonds, whether it be hedging your equity risk and having more of the convexity play across asset classes, at the expense of maybe just taking duration or credit calls.

All of these are just differentiated ways to get exposure to the market with more clarity or more affinity around those specific outcomes. So as it relates to how Simplify supports our clients: unique products, innovative products, as well as a lot of education. So this can be a very overwhelming part of the market, especially for advisors that haven't historically used alternatives, aren't familiar with the use of derivatives.

And so if you visit our website, you'll see quite a bit of educational material, whether it's deep dive videos on our funds, whether it's just asset class level information as to how to think about derivatives. And really our unique approaches to taking, long short positions, dynamic positions within our portfolio.

So we really think education is the foundation to see this continued adoption of advisors using alternatives in their portfolio, and we're happy to help our clients get there.

[00:24:03] Doug Heikkinen: Paisley, really, excellent stuff. Thank you so much for joining us.

[00:24:07] Paisley Nardini: Thanks for having me. Really enjoyed the time.

[00:24:10] Doug Heikkinen: To learn more about Simplify and all their strategies, please visit Simplify.us.

Please follow us for timely updates on X, LinkedIn, Facebook, all @Advisorpedia. For everyone at Advisorpedia, our producer Tory Miller, and the Power Advice Podcast team. This is Doug Heikkinen.