Lead-Lag Live

Why Buy and Hold Is Failing: Building Portfolios for Volatility, Regime Shifts, and the Next Market Cycle

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Greg Babij, Co-Founder and Chief Investment Officer at Sundial, to explore why traditional buy-and-hold strategies may struggle in a market defined by faster cycles, rising volatility, and structural change.

From the rise of zero-day options to the importance of tactical exposure, tail hedging, and trend following, Babij explains how portfolios can be designed to survive growth, recession, inflation, and deflation without relying on predictions.

In this episode:
– Why buy and hold may no longer deliver the same results
– How zero-day options are changing market behavior
– The difference between prediction and probability-based investing
– Why tactical and non-correlated strategies matter more now
– How to construct portfolios that adapt across market regimes

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SPEAKER_01:

We do build complete portfolios for our member families. And when building complete portfolios beyond our equity strategies, we like to look at the world through our two lenses. And the first is there's only four macroeconomic regimes: growth, recession, inflation, and deflation. And we want to have some investments for each. And the second lens is all investments either fall under a stability-seeking type of investment or an instability-seeking type of investment. And some people call those short volatility and long volatility. And we recognize we need to have both types of those investments in portfolios.

SPEAKER_00:

Alright, well, it's the holidays, and I'm officially going to be spoiling one of you. I'm giving away this duffel bag packed with a bunch of our signature Few Crew branded merch that has all the inside jokey slang that you only get if you actually get it. So what's inside? Well, a men's What Up Butches hoodie, an exquisite hoodie for her, and a few other things to take you from, I think I get it, to Few Crew certified. Now, if you want in, here's the deal. You have to follow at Lead Leg Report on X. Follow me, Mela underscore Schaefer on X. Subscribe to Lead Leg Media on YouTube, and like and share this video. You do that and boom, you're entered. No gimmicks, no funnels, and no nonsense. One winner gets the whole package. The rest of you stay f until next year. Happy holidays from the Few Crew. I'm your host, Melanie Schaefer. Welcome to Lead Lag Live. Now, markets are sitting near all-time highs, even as the Fed has begun cutting rates, and investors are trying to look past 2025 and into what policy growth and inflation could look like into 2026. There's a lot of confidence on the surface, but also plenty of uncertainty underneath when it comes to regime shifts and risk management. My guest today is Greg Bobby, co-founder and chief investment officer at Sundial. Greg runs a multifamily office with a very deliberate adaptive approach to portfolio construction. Greg, it's great to have you here with me. Thanks for hosting me, Melanie. So let's start with the big picture. Given where rates are today, the Fed's recent cuts, and what markets are pricing into 2026, how are you thinking about the current market environment given equity prices and valuations?

SPEAKER_01:

Well, Melanie, we like to rely on the sundial framework when assessing the market environment. Concepts like portfolio management's a probability game, not a prediction game, so we don't try to make predictions. And valuations are not a good timing tool, but they do matter over the longer term. So getting more granular, there's a popular regression going around of the S P 500 valuations and the subsequent 10-year returns that have happened historically. And it would imply that the returns over the next 10 years might be something around plus or minus 2% on an annualized basis. What that tells us is the probability of the 10% annual returns every year in the S P 500 is a lot lower. Additionally, the market microstructure has changed. The options market has now become a bigger market than the equity market. And 60% of the options volume is what's called zero data expre options. So that tells us we better expect bigger shifts and swifter moves in the markets. So that means we should have more tactical strategies, more non-correlated strategies, and we should be less excited to simply buy and hold the S P 500, expecting a repeat of the past three years.

SPEAKER_00:

Yeah, so great from that macro backdrop, I want to move into how Sundial actually expresses those views. Uh, you two run core equity, you run, sorry, two core equity strategies internally. First your single name equity momentum strategy. Walk us through what that is and what you're looking for when you allocate capital there.

SPEAKER_01:

Yes, so we do run a few different tactical equity strategies. And they're all designed to be a complement to passive equity exposure. And when thinking about total equity exposure, we like to think about it as you would drive a car. In good conditions, you'll drive it faster and you'll feel completely safe. And in more treacherous conditions, you slow down and you drive it more cautiously. So if that's how we drive to keep ourselves safe, why would we want to drive our portfolio at full speed at all times? Doesn't make a lot of sense to us. Defense is much more important than offense when it comes to portfolio management. And avoiding those big losers and drawdowns is more important than trying to optimize for the winners. So our equity momentum strategy is simply a concentrated portfolio of the strongest stocks. We're looking for stocks that are in uptrends, have positive price momentum, and have strong earnings momentum. It's a long-only portfolio, but it does dial up the exposure in good conditions, and it does dial down the exposure in more treacherous conditions. It is a fully rules-based portfolio management process, which makes it repeatable in our opinion. Howard Marx actually said it the best when he said all portfolio managers only do two things. They try to identify and buy the best securities and they and avoid or short the worst securities. And they also try to figure out when to put their foot on the gas and when to put on their foot on the brake. And that's what our strategy does.

SPEAKER_00:

Yeah, and Greg, so this the second is your US index performance or outperformance strategy. How does that differ from a single name approach? And how how do you decide when to uh dial risk up or take it down?

SPEAKER_01:

Yeah, so we do also run an outperformance strategy on the equity indices, and we'll run it on either the SP 500 or the NASDAQ 100. It's available in both forms for clients. And the core holdings are index ETFs. But it generates the outperformance primarily by truncating the large drawdowns and very occasionally using modest leverage on the upside. So it'll again decrease exposure based on market conditions when they're more unfavorable. And the way we are assessing when to increase or decrease exposure is just by simply looking at the health of the market. Much like when you would go to the doctor and he would take your blood pressure and listen to your heart and uh take a different vital signs, he will find out how healthy you are. So we do the same sort of thing on the equity markets. Breath is a good example. Advances versus declines, highs versus lows. We try to understand the market internals and if it's a more dangerous or more constructive market.

SPEAKER_00:

Greg, those strategies also they sit inside a broader framework that you use at Sundial, and you call it the two lenses. Can you start with the first lens and talk about how growth, recession, inflation, and deflation factor into how you build these portfolios?

SPEAKER_01:

Sundial at its core is a multifamily office. So we do build complete portfolios for our member families. And when building complete portfolios beyond our equity strategies, we like to look at the world through our two lenses. And the first is there's only four macroeconomic regimes: growth, recession, inflation, and deflation. And we want to have some investments for each. And the second lens is all investments either fall under a stability-seeking type of investment or an instability-seeking type of investment. And some people call those short volatility and long volatility. And we recognize we need to have both types of those investments in portfolios. What this means is we have a heavy use of alternatives. Often they are non-correlated to stocks. We're big believers in niche strategies. Uh we choose niche strategies because alpha decays into beta as a fund size tends to grow. And um ideally want to have a portfolio of non-correlated revenue streams, publics, privates, and asymmetric risk reward.

SPEAKER_00:

And then the second lens is one that I think really differentiates your your process and stability seeking versus instability seeking assets. How does thinking in terms of convexivity uh change how you size risk across a portfolio?

SPEAKER_01:

Of course. Stability-seeking investments are things that we're all very familiar with. Stocks, bonds, commercial real estate, private equity, venture art. They all tend to move together, particularly in a crisis, down. Instability assets tend to be more like strategies of tail hedging or systematic trend following. As they say, offense wins games, defense wins championships. So we're looking to pair them together as an elegant combination. That way we don't need to predict the markets. And in environments like 2020, which is the COVID crash, the tail hedges do really well and we can rebalance into our other investments. And in environments like 2022, where it's just a slow bleed lower in the equity markets, the systematic trend following does really well. And again, we can then rebalance out of that and into some of our other investments.

SPEAKER_00:

Yeah. So from what I understand as well, that framework also has shaped how Sundial evolved its equity bucket over time, balancing passive, always long exposure with more tactical strategies. How did that evolution come about and what problem uh is it solving?

SPEAKER_01:

Sure, great question. Uh and it came about simply because we found a lot of families were uncomfortable with simply having a lot of long equity exposure in all times, all conditions. And uh they were constantly seeking to either dial up or dial down risk on their own, but not actually having a framework on it. So we decided instead, why don't we see if we could put together a framework or a series of frameworks that allow us to do that more in a systematic fashion, meaning we don't have to have high stress as we're doing it.

SPEAKER_00:

You also allocate heavily into emerging managers and run some strategies internally while outsourcing others. What determines whether a strategy belongs in-house versus with an external manager?

SPEAKER_01:

We will run internally any strategies if we can't find them elsewhere, and we have the expertise in-house. Otherwise, we're happy to allocate externally to other managers. And we have very many great managers in our portfolios. Additionally, I've been a portfolio manager for more than three decades, and that allows us to do deep due diligence on these external managers, and we end up generating a pretty good relationship with them.

SPEAKER_00:

Yeah, and just Greg, before we wrap up, for anyone watching who wants to learn more about Sundial, read your research or connect with you directly. Where's the best place for them to go?

SPEAKER_01:

Of course. They can find us at www.sundialwealth.com. We also have a Substack available. And on that website, you'll not only find information about the multifamily office and our equity strategies, but we do have two other businesses as well. We have a private equity business where we buy decade-old B2B economically resilient companies that are too small for the traditional private equity. And we also have a commercial real estate business where we buy existing value add properties or we develop commercial real estate. For example, we're now currently developing a series of luxury garage properties. These are condo communities. It's not about storage, it's about a lifestyle where people go there, socialize with peers, attend events.

SPEAKER_00:

Fantastic. Well, Greg, I really appreciate the conversation and thanks to everyone who's been watching. Be sure to like, follow, and subscribe for more episodes of Lead Live Live.

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Michael A. Gayed, CFA

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