Nicolas Rabener is the Founder & CEO of FactorResearch, a London based firm providing quantitative solutions for factor investing in equity markets globally. Jobs in ETFs sat down with Nicolas in advance of the upcoming Beyond Beta Europe Digital, hosted by ETF Stream on September 23rd.
… being an entrepreneur requires an immense ability to suffer disappointments and setbacks.”
Jobs in ETFs: Tell us about yourself and your professional experience. Why the passion for financial services and your path to founding FactorResearch?
Nicolas Rabener (Nicolas): Growing up I was torn between becoming a scientist like my father or working in finance, probably as a result of playing the game Monopoly too often. However, after interning at a genetics laboratory that focused on making pig organs genetically compatible for humans, I became quickly disillusioned by the slow pace of science and committed to the fast-moving world of finance.
I started working as an analyst in investment banking at Citigroup, specifically in their real estate team. After spending two years in London and one in New York advising companies on M&A, debt issues, and IPOs, I moved to the real estate investment group of GIC (Government of Singapore Investment Corporation) in the middle of the global financial crisis in 2008. Given their ability to invest across the capital structure as well as in private and public real estate, it was a highly educational experience.
However, I became quickly disappointed by the core investment process of the real estate industry. Essentially, it is all about forecasting macro variables like real GDP growth, inflation, and interest rates. It does not take long to find empirical evidence that shows that forecasting is a futile exercise and that this essentially represents a flawed and rather unscientific process.
Given this, I left GIC to create my first company, which was a hedge fund focused on real estate stocks. Our approach was purely quantitative and almost exactly the opposite of the fundamental investment approach that I learned while working at Citigroup and GIC.
Running a hedge fund and managing a company was fascinating, but we discovered that most hedge funds, including our own, are not offering much value to clients. Most provide simple exposure to systematic factors, which can be replicated at much lower fees and with higher levels of transparency. This realization ultimately led to the creation of my second company, FactorResearch.
JIE: How did you start your company and what gap did it fill?
Nicolas: The change from running a hedge fund to FactorResearch was relatively smooth as the core of the business remained quantitative research and data analysis. The primary goal of FactorResearch was to disrupt the $3 trillion hedge fund industry by launching market neutral ETFs that could be used by investors to replace expensive hedge funds.
However, as an entrepreneur, hard work and talent are not sufficient for commercial success, luck is also required. Most factors, which are the building blocks of our ETFs, have performed poorly over the last few years, which would have made marketing challenging. Some of the large asset managers lost more than 80% of their assets in related products. Therefore, we put the launch of the ETFs on hold and are waiting for a more favourable market environment.
Fortunately, we’ve been quite successful at building a global brand by running a content-driven marketing strategy, which has led to reverse enquiries for creating diverse quantitative solutions to institutional investors and financial advisors.
One of these services is evolving into our core business and basically tries to provide an answer to the simple question: How good is your investment portfolio? We noticed that most investors are still unable to answer that question well or use inefficient tools to do so, which we are about to change.
JIE: You have taken the entrepreneurship route and have been building businesses for the past decade. How much effort you need to put into entrepreneurship and what are some of the challenges that you face in your role?
Nicolas: Most people have the wrong perception about entrepreneurship as the media tends to highlight the winners like Jeff Bezos or Mark Zuckerberg. No one likes reading about the 90% of entrepreneurs that failed and lost their and their investors’ money. It’s the same as in the investment industry, there is a brutal survivorship bias.
I’ve ran ultramarathons and being an entrepreneur is like running these consecutively for years. It takes everything and requires an immense ability to suffer disappointments and setbacks. Given this, it’s best if you’re mission driven as that provides the motivation to continue.
For the avoidance of doubt, it is probably far easier to create a company and get funding today than ever before, except perhaps than during the tech bubble in 1999. However, building a business with an attractive and sustainable profit margin is the real challenge. Finance is extremely competitive and many parts of it have structurally unattractive margins, e.g. core banking. Most fintechs do not have a bright future.
JIE: What do you enjoy most in your role?
Nicolas: I used to read fantasy novels as a kid, but had to realize that unfortunately there is no magic in this world (aside from new-born babies, who are truly magical). However, building a service or product from scratch and seeing it delight clients is probably the closest thing to magic that we can achieve.
Naturally, financial markets are always changing and provide unending opportunities to learn about the world, and more importantly, about ourselves.
JIE: What is work-life balance for you and how do you achieve it?
Nicolas: The hours in my early years as an investment banker at Citigroup were 9 am to 2 am on weekdays and usually a full Sunday, which make it challenging for me to not work long hours and feel satisfied. It’s been difficult to shake off this mindset, although recently my young children have forced me to work less and focus on increasing my effectiveness.
Sports has been the one long-term companion that allowed me to keep my sanity throughout my career, specifically running and swimming. Running has become almost meditative and swimming in lakes is especially great early or late in the year when the icy water has a certain cleansing quality to it.
JIE: Tell us about some of the exciting projects you are working on right now.
Nicolas: Given our client base at FactorResearch we’ve realized that most investors still hold inefficient portfolios, which are typically too expensive, too risky for their profile, or both. This applies to institutional and retail investors and is partly derived from a lack of knowledge or illusions conjured up by industries that thrive on opaqueness, such as private equity or hedge funds. We’re working on a fintech product to address this large-scale issue, which ultimately aims to improve investor outcomes.
JIE: What do you think about newcomers entering the ETF space and what struggles might they face?
Nicolas: Launching new ETFs is difficult given the combination of high set up costs, high running expenses, and low management fees, which makes this a low margin business. There is little room for new entrants and the most viable options for building an ETF business are either converting existing mutual funds or managed accounts into ETFs (Goldman Sachs), having a large and captive distribution network (Credit Suisse), or focusing on niche or thematic strategies (Tabula or Rize).
JIE: Earlier this month you participated in a build-up webinar to Beyond Beta Europe Digital which will take place on September 23rd. Tell us about the topics you covered.
Nicolas: George Geddes from ETF Stream hosted a panel with Vitali Kalesnik from Research Affiliates and I on the topic of an eventual revival of value investing. We concluded that there is not one particular reason why buying cheap stocks has not been rewarding in recent years and that unfortunately multi-year drawdowns are to be expected. No pain, no gain. The replay is available for interested readers.
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