How Game Theory Can Reshape Portfolios

January 18, 2017

Steve Cucchiaro is a legend in the ETF industry. As the founder of Windward/Windhaven, which he sold to Charles Schwab, Cucchiaro pioneered the concept of an ETF strategist—an institutional-quality asset manager that would provide high-quality ETF portfolios to other advisors.

After leaving Windhaven in 2014, Cucchiaro took some time off to “head into the lab” (in his words) and think about how to reinvent portfolio management for the modern age. The result is recently launched 3EDGE Asset Management, which uses game theory to interpret and react to today’s turbulent world.

Cucchiaro, who is delivering the closing keynote address at the forthcoming Inside ETFs conference, taking place Jan. 22-25 in Hollywood, Florida, recently sat down with Inside ETFs CEO Matt Hougan to discuss what he’s working on.

Inside ETFs: What is 3EDGE Asset Management, and how did it come about?

Steve Cucchiaro: During my time off, I had a chance to reflect on the changes taking place in the world, particularly the unprecedented monetary stimulus that’s come into the markets.

That’s affected the markets in ways we’ve never seen before. It’s unprecedented, and there’s no historical analogy. So that got me thinking about ways to understand and model portfolios that don’t just rely on the past, as there’s no past to rely on in this case.

We found that the best approach to understanding this new world was to apply multiplayer game theory to better understand how some of these new players like central banks and fiscal policy stimulus would interact with the markets.

Then we use those insights to build portfolios using ETFs, to take advantage of the fact that while stock picking is a very efficient process, asset classes continue to be inefficient, with regular mispricings.


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