Richard C. Kang is the blogger behind The Beta Brief (TheBetaBrief.com). He has been active in both institutional and individual asset/risk management for over twelve years with extensive experience in multi-asset-class mandates as well as strategies applying the use of passive instruments. Recently, he spoke with IndexUniverse.com assistant editor Heather Bell.

Index Universe (IU): What is The Beta Brief?

Richard Kang (Kang): The Beta Brief was meant to be sort of a transition for me in my career. I have no interest in being in the media or having a career in that space, but I exited a company in Canada focused on the use of ETFs more than anything else. Throughout my career in managing money, I've always been involved in the management of beta and beta instruments, whether it's derivatives or exchange-traded funds. I decided for basically all of 2007 to not manage money, but rather to comment on what I think is happening in the industry in terms of beta and the new products that are coming out. This, of course, comes from me as a practitioner and as such, I like to think about new ETFs from a portfolio construction point of view. What's the value of a water ETF, a nanotechnology ETF, or something even more esoteric-or even something that's very traditional and broad like the SPDRs or the QQQQs? What's its value now? Is its value just as much as when it first came out 10 years ago or not, especially when you see that there are so many competing instruments out there?

Now to be quite frank, at the beginning I really wanted to write a lot about derivatives, but when I wrote about derivatives I didn't get much action on the site. When I started to write about ETFs, suddenly The Wall Street Journal called me, so it's not that hard to understand why I put a lot of the emphasis there.

IU: Who do you consider your target audience?

Kang: I think it's whoever is interested in beta and derivatives and ETFs. The whole point of derivatives and especially ETFs is that they're tools that can be used by anyone for multiple purposes. The real advantage of an ETF is that it's the ultimate Swiss army knife. If I happen to like the corkscrew for opening up wine bottles, I'm sure I can find a dozen other people with the same pocket tool who find one particular feature that's most significant to them. So I'm not writing to any particular group. Sometimes I'll say well, this is now meant to be written for the financial advisors, like my post that was written as a follow-up to an event in Florida that was geared toward financial advisors [Inside ETFs conference]. If I write something about a new ETF for weather or something like that, I ask myself who will use it. If the answer is hedge funds, the post would really be aimed at hedge funds. So I might be specific, but I don't really care who's reading it because ETFs in general are meant for just about everybody.

IU: Is there a philosophy that underlies your approach to investment?

Kang: My background is not your traditional background in the industry. Maybe nine out of 10 people in the industry have a Bachelor of Commerce or MBA and probably studied for the CFA. They come at it from a point of view of, "It's not manager selection, it's stock selection," and an idea that, "I'm trying to beat the market because I have a great pedigree or I'm smarter than you." That's fine because that's the essence of active management, which clearly has its place in the world.

For me, I might think I'm smart, but I have to think about market efficiency. I'm not a 100% market efficiency guy and I'm not someone who believes in ETFs as the end-all, be-all for portfolios, or thinks that an individual should have a 100% ETF portfolio. What I do believe is that we're in the business of valuing risk, and thus we are basically allocating our money toward various kinds of risks.

When somebody says you should avoid hedge funds because they're more risky and you should get into bonds because they are less risky, I honestly think that's just plain wrong. If your retirement portfolio is all in your bank account or some kind of bond, somebody might say it's a low-risk portfolio. But the real risk is that you won't have enough money when you retire. Maybe you actually need emerging markets, because you're going to retire when you're 60 and you might die when you're 90. Well, one-third of your life, 30 years, that's a pretty long-term horizon. You might need some emerging markets because they're probably going to grow over the next 30 years, and somebody will say no, the emerging markets are high risk. To me the issue is not low risk versus high risk, but simply a transfer of risk. When you move from the emerging markets to your bank account, you're just transferring from the volatility of the equity market in the emerging space to some kind of credit risk, or inflation risk, or purchasing power risk, or the risk that you're just not going to have enough money during that retirement period. That's the essence of investing: understanding what the various risks are and reallocating or transferring from one kind of risk to another.

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