Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Speaker 1: Business with Barry Ritholtz on Bloomberg Radio.
Speaker 2: On the latest Masters in Business podcast, I sit down
Speaker 2: with Jeff Chang. He's co founder and president of vest.
Speaker 2: They are a firm that specializes in defined outcome investing
Speaker 2: buffered ETFs. They try and remove the uncertainty of outcomes
Speaker 2: of your investing by using options and derivatives to come
Speaker 2: up with very very specific products. I thought our conversation
Speaker 2: was fascinating and I think you will also with no
Speaker 2: further ado, my podcast with Jeff Chang. Jeff Chang, Welcome
Speaker 2: to Bloomberg.
Speaker 3: Great to be here and thanks for having me.
Speaker 2: Well, thank you so much for coming. I'm kind of
Speaker 2: always fascinated by people who have unusual or diverse backgrounds.
Speaker 2: You in particular US Naval Academy and then an NBA
Speaker 2: from Georgetown. Is that right? What was the original career plan?
Speaker 3: So I grew up in Annapolis.
Speaker 4: The original career plan was to be, you know, be
Speaker 4: part of the Navy, and unfortunately I got medically discharged
Speaker 4: for asthma and then then decided to pursue more of
Speaker 4: a business path. And that's what kind of led me
Speaker 4: to Georgetown, and then after Georgetown, I actually right after
Speaker 4: I actually always wanted to start my own company. Right.
Speaker 4: In fact, this is kind of a funny thing. Most
Speaker 4: people don't know this. I've never actually said this when
Speaker 4: I first started. I actually started a flat screen TV
Speaker 4: company in twenty twelve, oem ing them from China. And
Speaker 4: do you remember back in the day, like flat screen
Speaker 4: TV's used to be like twenty five.
Speaker 2: Oh yeah, when they first came out, they were crazy.
Speaker 4: Yeah, So I was in DC selling those. In fact,
Speaker 4: I remember selling TVs to Reagan National Airport. So when
Speaker 4: you like, look at what terminal you are back in
Speaker 4: the early two thousands, So those were Jeff Chang TVs
Speaker 4: that were there. I think another client was six Flags.
Speaker 4: Like when you the weak, how long the week?
Speaker 3: Yeah, yeah, exactly exactly.
Speaker 4: But then, you know, as TVs became further and further down,
Speaker 4: I was like, hey, that's not.
Speaker 3: The business I wanted to be in.
Speaker 2: We'll commoditized. I don't want to be there.
Speaker 4: Yeah, all commoditized. So it taught me a lot about
Speaker 4: uh starting a business. On you know that in about
Speaker 4: life is that I realized that I needed actual hard
Speaker 4: skills that created a you know, value add And also
Speaker 4: the other component was I also realized that doing my
Speaker 4: accounting books, I didn't pay too much attention in accounting.
Speaker 4: So I actually, uh, for six months, went and studied
Speaker 4: for the CPA exam and took the CPA exam to
Speaker 4: be accounting.
Speaker 3: Which was actually a twofold kind of reason.
Speaker 4: I think one of my mentors has told me is
Speaker 4: that like, hey, there there is for the better word,
Speaker 4: there's few money and few skills. Right, you don't have
Speaker 4: that money, so make sure you build skills in which
Speaker 4: you're not always beholden to other people. And if you
Speaker 4: thought about it, that you know the two guaranteed things
Speaker 4: in life is death and taxes, right, And so in
Speaker 4: my head was I didn't want to be an undertaker,
Speaker 4: but I could take the CPA exam and sure that
Speaker 4: participate in taxes exactly exactly growth industry. So that was
Speaker 4: the reason why I took the CPA exam, was that, like, hey,
Speaker 4: I know I would never starve because you know, after
Speaker 4: the failure of my first firm, I was like, hey, uh,
Speaker 4: there's you always have to have at least a safety night.
Speaker 4: And that also informed me that when I started a
Speaker 4: new company, accounting is actually extremely important when you're starting
Speaker 4: a firm or even a start for that matter, And
Speaker 4: it actually came to pass that that has been a
Speaker 4: very very important part of my career path as well.
Speaker 2: So it's certainly a useful set of skills. But I'm
Speaker 2: going to assume the first business didn't fail because of
Speaker 2: bad accounting. It's just a hyper competitive market with razor
Speaker 2: thin margins and as stuff as economies of scale came out,
Speaker 2: that's right, the market just dies for that.
Speaker 4: Yeah, And that really informed me is that you have
Speaker 4: to have an edge.
Speaker 3: I think.
Speaker 4: Over the thirteen years of founding this company, I noticed
Speaker 4: that there were actually key features that I noticed, even
Speaker 4: going through y Combinator, of my classmates and people that
Speaker 4: built very successful companies, they had very common characteristics for
Speaker 4: their success.
Speaker 1: Right.
Speaker 4: In fact, I had Asian parents. They optimized for intelligence,
Speaker 4: which was very u you know, you guess trade as
Speaker 4: you play the violin or the piano, and you kind
Speaker 4: of go through that.
Speaker 2: They're optimizing for Ivy League admission is what you're.
Speaker 4: Imploying exactly exactly, and or be a doctor for that matter.
Speaker 2: It's so different Jewish.
Speaker 3: Parents, Yeah, exactly so it was.
Speaker 4: And then as kind of over the years, I realized
Speaker 4: that the optimization like if you know, when I have kids,
Speaker 4: because you know, I don't have kids, always none that
Speaker 4: I know of, but if I did, I would optimize
Speaker 4: for Actually number one is grit like that, and that
Speaker 4: grit is the not giving up, like like you know,
Speaker 4: your company fails, what's the next thing? Like you know,
Speaker 4: you pick up yourself from your bootstraps and you get
Speaker 4: up and go. It's almost like the thing is like,
Speaker 4: as an example, my parents didn't let me play video games, right,
Speaker 4: but I realized video games actually if you introduce grit,
Speaker 4: like you know, if you play Call of Duty, like
Speaker 4: I was the guy that when I play Call Duty
Speaker 4: in my twenties, I would buy the the headphones that
Speaker 4: would let me hear whether or not someone's behind me,
Speaker 4: because whatever it takes to win like that type of
Speaker 4: you ever see that kid that does not want to
Speaker 4: lose that like fails but then gets up and figures
Speaker 4: out a way to win.
Speaker 3: That is grit, And I.
Speaker 2: Think resilience is more important.
Speaker 4: And then the second is I realized that nothing in
Speaker 4: this world can be done alone, that success requires you
Speaker 4: to have partnerships, friendships, and know people that can help
Speaker 4: build great things. Great things don't come by yourself, and
Speaker 4: that's what I think. Second is influence, your ability to
Speaker 4: let people see your dream and believe in your dream.
Speaker 4: Think about this, like if you're starting a company, not
Speaker 4: just selling your product requires influence. Like convincing your first investors,
Speaker 4: your first employees to quit their jobs they're high paying jobs,
Speaker 4: to make almost nothing and take equity.
Speaker 3: That's talk about like selling a dream. That's influence.
Speaker 4: Like think about you know, some of the greatest entrepreneurs
Speaker 4: out there. They you know, you probably heard like Steve
Speaker 4: Jobs is a reality distortion field.
Speaker 2: You know what that is.
Speaker 3: That's influence, right.
Speaker 4: That is one of the key things I think when
Speaker 4: when you're looking at business, influence is such a key
Speaker 4: thing of something that required to have success because, like
Speaker 4: I said, nothing in the world is done loan. This third,
Speaker 4: which comes back to my point, is creativity, the ability
Speaker 4: to spot things that other people don't see, right to
Speaker 4: basically be to see opportunity, to see things, to combine
Speaker 4: things together and have that opportunity. And then the last
Speaker 4: if you combine it is intelligence. If you do all
Speaker 4: four and I can give you examples that people are
Speaker 4: immensely successful just with grit. And by the way, it's
Speaker 4: in that order influence, uh, grit, influence creativity and last
Speaker 4: as intelligence.
Speaker 2: So so I want to I want to stop you
Speaker 2: there for sex because I want to spend time going
Speaker 2: over y combinator. I want to talk about this, but
Speaker 2: before we get there, I mentioned the Naval Academy of
Speaker 2: such an unusual background, talk a little bit about what
Speaker 2: your experiences were like at places like Freddie Mack, the
Speaker 2: World Bank FBR, and pro shares. That's such a diverse
Speaker 2: set of experiences. Is what did you take away from
Speaker 2: that life experience and how did that ultimately lead you
Speaker 2: to launching your own.
Speaker 4: From Yeah, so I could tell you one of the
Speaker 4: best things about what the military teaches you is not
Speaker 4: just teamwork and looking after the people next to you
Speaker 4: and really making a commitment. But there's also another thing
Speaker 4: is work ethic. Like I could tell you that I'm
Speaker 4: a morning person. I didn't grow up a morning person,
Speaker 4: but it's like five am, I'm up. And the funny
Speaker 4: thing is my girlfriend's a night person. She's like, how
Speaker 4: are you like sprightly at five thirty? And I was like,
Speaker 4: that is actually learned behavior, right, So that was like
Speaker 4: kind of the first thing of learning grit and you know,
Speaker 4: tackling the day early on making your bed, things those
Speaker 4: small things in life. I think it had been really
Speaker 4: I say important and you know, kind of keystone in
Speaker 4: that process.
Speaker 3: The second is actually.
Speaker 4: When I first started my first job at the World Bank,
Speaker 4: after trying to start my company, I had to translate
Speaker 4: energy companies in China, and I had two problems. Number
Speaker 4: one was I didn't my Chinese wasn't good enough, and secondly,
Speaker 4: my accounting wasn't good enough. Hence the CPA came and
Speaker 4: I was like, at least I got to learn one.
Speaker 4: And then I cut over to Freddie Mac. And if
Speaker 4: you remember during the two thousand and two two thousand
Speaker 4: and three time frames when Freddy Mack went into restatement
Speaker 4: so as a certified public count and I was extremely
Speaker 4: sought after at that time. So I worked at Freddy
Speaker 4: Mack and I realized that I really wanted to I
Speaker 4: read Liar's Poker by Michael Lewis, and I realized that I, hey,
Speaker 4: I really wanted to trade mortgagees.
Speaker 2: So I started to which by the way, he said,
Speaker 2: he is horrified because he thought this was a portionary
Speaker 2: tale and all it did was encourage more people.
Speaker 4: To do totally totally reading that book really made me
Speaker 4: want to be you know what he said in the
Speaker 4: book big swinging right like everybody. It was just such
Speaker 4: a fun story. It almost painted Wall Street in a
Speaker 4: specific way, but it was just the interesting part. And
Speaker 4: by the way, it also got me into reading Foobozi
Speaker 4: about fixed income, about the mortgage market. And then I
Speaker 4: wanted to be a trader. So, you know, I studied
Speaker 4: for the CFA exam, I got my CFA charter. I
Speaker 4: didn't know that would lead me to over a decade
Speaker 4: of teaching CFA, but that was really fun to do
Speaker 4: that and kind of give back. But so trading mortgages
Speaker 4: Freddy and an FBR I got to trade during two
Speaker 4: thousand and eight. I got to have a front row
Speaker 4: seat to seeing the you know, Bear Stearns Lehman. You know,
Speaker 4: I remember trading Repo during the September eight It's the
Speaker 4: month I lost all my chest hair in one month.
Speaker 4: But it was fascinating. I mean that's what I thought
Speaker 4: finance was like. So then you know, later on I
Speaker 4: cut over to le bonds and options. Then the flash
Speaker 4: crash in twenty ten, which was, by the way, I'd
Speaker 4: never seen an entire trading desk stand up within one
Speaker 4: minute of everybody's like, what's going on? Uh So, yeah,
Speaker 4: I got to see a lot of Wall Street in
Speaker 4: my twenties and thirties. It was It was definitely a
Speaker 4: formative time of understanding, you know, kind of what what
Speaker 4: made capital markets take and understanding and also understanding the
Speaker 4: pitfalls the hubris of finance that you know, well.
Speaker 2: That has to be the big takeaway from eighth nine
Speaker 2: is that markets go up and down, and if you're leveraged, exactly,
Speaker 2: it's a problem. And if you're highly leveraged, it's usually
Speaker 2: pretty fatal.
Speaker 3: Yeah exactly.
Speaker 4: And you know, and disasters are are always clear in hindsight, right,
Speaker 4: And you you look back and you're looking at twenty
Speaker 4: thirty percent of fault rates, you're like, what that would
Speaker 4: that would have been so clear in your mind when
Speaker 4: you started to look at some of the data, And
Speaker 4: so that was really formative. And the other component is
Speaker 4: is kind of like what Warren Buffet says, you always
Speaker 4: know who's not wearing pants when the water goes out. Yeah, exactly,
Speaker 4: and so I always i'd say think about, hey, if
Speaker 4: the tide goes out, make sure the money we manage
Speaker 4: for our clients that were we got pants on.
Speaker 2: Risk management turns out to be more than just a phrase.
Speaker 2: It's really important if you're running other people.
Speaker 4: Exactly, and it's something that you live and breathe and
Speaker 4: what I actually, you know a lot of our investment
Speaker 4: processes to try to get our clients to understand that,
Speaker 4: and you utilize kind of a lot of the tools
Speaker 4: that we build are basically pants like, you know, when
Speaker 4: the water goes out, and make sure that you have
Speaker 4: something there because of uncertainty.
Speaker 2: That's to say the very least. So let's talk a
Speaker 2: little bit about that. You come out of this experience
Speaker 2: on a desk through the financial crisis, you launch vest
Speaker 2: Than twenty twelve. What was the motivator? What led you
Speaker 2: to say, Hey, I think we could do this better.
Speaker 3: Yeah.
Speaker 4: So I had a very short stint at pro Shares
Speaker 4: where I met my co founder Kuran Suit he worked
Speaker 4: on the structuring desk at Barclays, and we talked about,
Speaker 4: you know, like hey, let's start our own firm. And
Speaker 4: then our first idea was going to be you know,
Speaker 4: buffers like downside protection that we saw in the structure
Speaker 4: note market. And by the way, this actually segued into
Speaker 4: the mortgage crisis because in two thousand and eight, the
Speaker 4: largest issue or structure notes was Lehman Brothers. Right like,
Speaker 4: you have a one hundred percent protected note, and then now
Speaker 4: you're standing in bankruptcy court. So that was a big
Speaker 4: change in the industry. I think the structure note industry
Speaker 4: went from one hundred and twenty billion to thirty billion
Speaker 4: in that timeframe from after the two thousand and eight crisis.
Speaker 2: So I'll tell you a funny story. I was a
Speaker 2: market strategist out of brokerage firm in two to three
Speaker 2: and we got pitched a downside protected SMA and I
Speaker 2: was just sitting in a conference room hearing this pitch.
Speaker 2: What are the any questions? And I didn't ask the
Speaker 2: obvious question that I thought, which was well, great, the
Speaker 2: NASA's down eighty one percent, where were you five years ago?
Speaker 2: Who needs this now? But the question I asked and
Speaker 2: got called into the Corporate Council's office for was Hey,
Speaker 2: what about counterparty risk? How do we know that you
Speaker 2: guys are going to be there? To make the trade good. Sir,
Speaker 2: Lehman Brothers has been here for one hundred and eighty
Speaker 2: nine years. It'll be here long after you're gone. I'm like, okay, No,
Speaker 2: it's an actual risk that no one was even discussing.
Speaker 2: It was just assumed. So it turned out that you know,
Speaker 2: counterparty risk is is a real thing.
Speaker 3: Oh it is. It's a very real thing.
Speaker 2: So we're going to talk little more about Vest and
Speaker 2: buffer funds in a moment, but I just want to
Speaker 2: get the timing right and talk a little bit about
Speaker 2: your experiences at y Combinator. You launch Vest with your
Speaker 2: co founder in twenty twelve, you join y Combinator in
Speaker 2: twenty fifteen. What led you to saying, Hey, let's let's
Speaker 2: see if we can hook up with the guys over
Speaker 2: at y Combinator.
Speaker 3: Yeah.
Speaker 4: So that's the thing in finance is there's not too
Speaker 4: much innovation, right because there's a lot of regulation and
Speaker 4: so on and so forth. And so even at our company,
Speaker 4: we we always even our identity today is still you know,
Speaker 4: Silicon Valley meets Wall Street, Right. I always think that, like,
Speaker 4: in my mind, if you know, someone in Silicon Valley
Speaker 4: were to come into our business, they could end up
Speaker 4: in jail, right or if Wall Street ends up in
Speaker 4: Silicon Valley, you know, yeah you might be you know,
Speaker 4: just end up in a dish because you know you'll
Speaker 4: run over for sure.
Speaker 3: Yeah, exactly.
Speaker 4: Because at the end of the day, is you know,
Speaker 4: we went four years with no income. Wow, right, like
Speaker 4: lived off our Wall Street bonuses me and my co
Speaker 4: founder Cronzu, Like we didn't get paid for you know,
Speaker 4: four plus years.
Speaker 3: To found this company.
Speaker 4: Like that's how much you have to the grit and
Speaker 4: the belief in something and that culture really really I
Speaker 4: think comes out of kind of startup kind of the
Speaker 4: Silicon Valley area y Combinator at the time.
Speaker 2: Run by Paul Graham is it.
Speaker 4: Paul Graham at that was the first year Paul Graham
Speaker 4: U stepped down and Sam Ollman when I showed Upcha
Speaker 4: was president of y Combinator. So twenty fifteen, twenty fifteen, yeah,
Speaker 4: Sam was president y Combinator. For the folks out there
Speaker 4: that don't know so why see, uh you know, similar
Speaker 4: to like a college application. You you thought an online
Speaker 4: college application, you actually don't need a company they help
Speaker 4: you form the firm and uh, you know, the companies
Speaker 4: that have come out of that program. You know, Airbnb, Reddit,
Speaker 4: coin based store dash open Ai was funded by YC Research,
Speaker 4: So all of that, all of those firms came out
Speaker 4: of y C. So in fact, I think I read
Speaker 4: a book called The launch Pad which talks about y
Speaker 4: C the companies that they're I mean, the first class
Speaker 4: of YC included Sam Altman, Justin Kahn who found a Twitch,
Speaker 4: and Alexis O'Hannon who founded Reddit. And I think there
Speaker 4: was like, correct, my maybe nine companies. I mean, that's
Speaker 4: an all star cast if you ask me for a class.
Speaker 4: And so it was definitely someplace that we wanted to
Speaker 4: be around. There weren't a lot of finance firms. In fact,
Speaker 4: this is the largest asset manager to merge out of
Speaker 4: y C. Uh So it was definitely something to try
Speaker 4: something different and really and get into the Silicon valley
Speaker 4: and really pushed the innovation, uh within within finance.
Speaker 2: I don't know if this is still the case, but
Speaker 2: a couple of years ago the standard deal was something
Speaker 2: like half a million dollars for seven percent of the company,
Speaker 2: plus a three month program of building, iterating, pitching, et cetera.
Speaker 2: Is that more or less sound right?
Speaker 3: That's right, that's the deal today. Our deal was probably
Speaker 3: close to one fifth of that.
Speaker 2: Oh really yeah, well ten years ago, a lot of
Speaker 2: each over the last second.
Speaker 4: And they have done a great job. I think they
Speaker 4: have maintained their I think the stat was since two
Speaker 4: thy twelve, twenty percent of the super Unicorns were funded.
Speaker 3: By Y Combinator.
Speaker 2: Wow, that's me.
Speaker 4: And then like second place is like three percent and
Speaker 4: plus or something like that.
Speaker 2: And this is like a full on boot camp where
Speaker 2: it's three months and they are really taking you through
Speaker 2: the process. Here's how you build a startup, here's how
Speaker 2: you iterate. When you first joined Y see, did you
Speaker 2: have any idea what the final product a vest was
Speaker 2: going to be or did that experience clarify what you
Speaker 2: want to do.
Speaker 3: There were certain.
Speaker 4: We went in with the idea of buffers and downside protection.
Speaker 4: There were certain pivots as far as like, hey, what's
Speaker 4: the best delivery vehicle to start with?
Speaker 2: Meaning an ETF asposed to an.
Speaker 4: S exactly exactly, But that was the foundational If you
Speaker 4: even look at our application and our pitch, it was
Speaker 4: exactly talking about the need for downside protection, the need
Speaker 4: to you know, fix liquidity and credit risk and other
Speaker 4: types of instruments. Those were kind of the foundational problems
Speaker 4: because YC always says that, like, make something that people want,
Speaker 4: and then don't just come up with the ideas. Start
Speaker 4: with the problem solving your solving, and the problem needs
Speaker 4: to be painful enough.
Speaker 3: And so anybody out there that's ever thinking about starting.
Speaker 4: A startup, always start with the problem first and make
Speaker 4: sure the problem is painful enough for your customer that
Speaker 4: that becomes you know, how you solve it can change
Speaker 4: little bit, but the problem always existed, and we thought
Speaker 4: that that was a noble problem to and.
Speaker 3: Painful enough problem to seek.
Speaker 2: That's a very customer focused approach to building a business.
Speaker 2: I don't know if Wall Street necessarily thinks in those terms.
Speaker 2: There tends to be an attitude of this is how
Speaker 2: it's been, it's been successful. Why do you think you're
Speaker 2: smarter than everybody else, smarter than the market. Like that's
Speaker 2: a sort of pushback you've gotten and that you tend
Speaker 2: to get when you roll out a different approach. How
Speaker 2: has the experience been marrying the Wall Street ethos where
Speaker 2: failure is abhorrent and the Silicon Valley mindset, which is
Speaker 2: hey failure just gets you to the solution. It's just
Speaker 2: one more step.
Speaker 4: And that's where kind of the ethos of our Silicon
Speaker 4: Valley meets Wall Street is that we live in both worlds.
Speaker 4: Like our background me and Kuran's are Wall Street backgrounds.
Speaker 4: That there is no move fast and break things mentality
Speaker 4: on our Wall Street ethos, right, it is measure four
Speaker 4: times cut once. This is people's livelihoods, their their wealth.
Speaker 4: So that part we did not adopt, not like break
Speaker 4: things type mentality that is not hard to.
Speaker 2: Do that when you're highly regulated.
Speaker 4: Its exactly exactly second is that we also realized you
Speaker 4: can't do this alone. It's not like we're starting an
Speaker 4: Airbnb where we can just kind of do x, y
Speaker 4: and z. We needed partnerships. We needed like coming back
Speaker 4: to the point of influence, like we needed people that
Speaker 4: really could help us with innovation. Hence we actually only
Speaker 4: have two investors. One is Seeble Global Markets Chicago Board
Speaker 4: Option Exchange, the largest option exchange in the world, and
Speaker 4: First Trust, one of the largest ETF providers here in
Speaker 4: the United States that has been intricate in the ability
Speaker 4: to shape and the industry.
Speaker 3: Just like even with the exchange.
Speaker 2: Wait let me roll you back. You said you only
Speaker 2: had two investors. Now today, now today, all right, So
Speaker 2: let's before we get there, let's let's talk about the
Speaker 2: post y combin interor experience. So they give you barely
Speaker 2: six figures for a small chunk of the company. They
Speaker 2: they take you through a boot camp that teaches you
Speaker 2: all these different things from focus on problem sovereign to
Speaker 2: iteration to pitching. Investors who were the early investors invest so.
Speaker 4: We had our lead coming out of y Comedy was
Speaker 4: first Round Capital people an't familiar.
Speaker 2: That's a great name if you're doing venture invests exactly.
Speaker 4: They were one of the first investors in a small
Speaker 4: company called.
Speaker 2: Uber that worked out them.
Speaker 3: Yeah, they got a lot of big wins there.
Speaker 4: And after that, you know, we had kind of a
Speaker 4: party round of a lot of different like Angels and
Speaker 4: other smaller vcs. But after that, that's when Cibo came
Speaker 4: in and wanted a bigger stake of the firm. But
Speaker 4: the whole y C experience was very much like the
Speaker 4: show Silicon Valley, right.
Speaker 2: Which I which I just loved so great.
Speaker 4: And to the point where like when we got to YC,
Speaker 4: we rented a hacker house by the way. House that
Speaker 4: we rented was called Hacker House and it was a
Speaker 4: one story building with like three bedrooms, not enough bedrooms
Speaker 4: for all of us that we're working there. I think
Speaker 4: Karan had to sleep on the floor on a mattress
Speaker 4: for three months. And by the way, this is coming
Speaker 4: from being over a decade on Wall Street. Like we're
Speaker 4: in house sleeping on the floor. Hey, there's nothing to
Speaker 4: do but get this done exactly. And this is why
Speaker 4: I say, like sometimes like if a former trader on
Speaker 4: Wall Street ends up in Silka Valley, they may end
Speaker 4: up in a dish because, like you have to go
Speaker 4: four years no pay, sleep on the floor. It's not
Speaker 4: fun where you're used to like wearing you know, suits
Speaker 4: and loafers on Park Avenue. It's a big shock to
Speaker 4: the system. But that's the thing is like, you know,
Speaker 4: the same time, it's okay sleeping on the floor. It's
Speaker 4: better than sleeping on the ground when you're in the military.
Speaker 4: But that's the grit that you kind of go through.
Speaker 2: Right coming up, we continue our conversation with Jeff Chang,
Speaker 2: co founder and president of vest, talking about his experiences
Speaker 2: at y Combinator. I'm Barry Ridults, you're listening to Masters
Speaker 2: in Business on Bloomberg Radio. I'm Barry Ridults. You're listening
Speaker 2: to Masters and Business on Bloomberg Radio. My extra special
Speaker 2: guest this week is Jeff Chang. He is the co
Speaker 2: founder and president of Vest. The firm manages fifty billion
Speaker 2: dollars in ETFs that are described as outcome orient investing.
Speaker 2: Some people call them buffer funds. So you have this
Speaker 2: experience with y Combinator, any of that graduating class with you,
Speaker 2: you're still in touch with who else were?
Speaker 4: Yeah, so I'm not sure folks out there. No get
Speaker 4: Lab sid was our group.
Speaker 2: My no relationship to get Hub.
Speaker 4: Yeah, but yeah, but get Lab was our I think
Speaker 4: they iPod on the Nasdaq. I think over five billion
Speaker 4: or something like that. They're doing really well. Uh, there's
Speaker 4: the equipment share was also our our batch.
Speaker 3: A lot a lot of a lot.
Speaker 4: Of big winners in our And by the way, you've
Speaker 4: probably been to college where you go into lecture hall,
Speaker 4: right and you have your first day class the first
Speaker 4: day of y C.
Speaker 3: You know what they tell you.
Speaker 4: They're like, you know, four percent of you guys in
Speaker 4: this room will be billionaires, right, you know, no intimidation
Speaker 4: factor By the way, that's the math, right, Like, on
Speaker 4: average it's a four percent I think right now is
Speaker 4: like I have to six percent Unicorn rate. But how
Speaker 4: many classes can you go through that? Like you're like, hey,
Speaker 4: h four to five percent of you guys are gonna
Speaker 4: have extremely successful companies coming out of clays And by
Speaker 4: the way, you look around, you're like, oh, man, is
Speaker 4: that really possible? And then you blank. Thirteen years later
Speaker 4: you're like, wow, it really did happen. Like there's incredibly
Speaker 4: successful firms and incredibly successful when you look back, and
Speaker 4: like even now I look at my group partners. I
Speaker 4: look back, my group partners were incredible. I had Gary
Speaker 4: Tann founded Initialized and also is now the president Coy combinator,
Speaker 4: Alexis Ohanden founder Reddit, Justin con founded Twitch, Kat Melanek,
Speaker 4: who is like an all star and marketing and pr
Speaker 4: like I had an all star group.
Speaker 2: Yeah, no, it definitely definitely sounds like it. We're talking
Speaker 2: about winners, but Silicon Valley, where's losers like a badge
Speaker 2: of pride? Yeah, Like it's hey, this is what's expected,
Speaker 2: which is very different than the way the East Coast
Speaker 2: tends to approach things. Tell us about that not being
Speaker 2: afraid to fail, not being afraid to try things, iterate
Speaker 2: and take this doesn't work, let's go with that. How
Speaker 2: different is that experience on the West Coast than what
Speaker 2: you experienced on Wall Street?
Speaker 4: Yeah, I mean.
Speaker 3: Definitely. In Silicon Valley failure is okay.
Speaker 4: They have a saying if you're going to fail, fail fast, right,
Speaker 4: whereas I feel like on Wall Street is like, you
Speaker 4: don't want to fail fast, Like that's called a blow up.
Speaker 3: Right.
Speaker 4: So there are some parts, given the industry that we're in,
Speaker 4: we have to ignore some of the aspects of it.
Speaker 4: I think everything that we did, I wouldn't say was
Speaker 4: ultimate failure, maybe not the success that we wanted, because
Speaker 4: we wanted to make sure everything built were strong in foundation.
Speaker 2: Right.
Speaker 4: It would like last stand test the time, no matter
Speaker 4: what happened. Maybe not wildly successful, but then that that's
Speaker 4: how you pivot. So it's not necessarily failure per se,
Speaker 4: but not the success you're looking for them pivot and
Speaker 4: try to find other ways to deliver and how to
Speaker 4: solve the problem better.
Speaker 3: But I still think that.
Speaker 4: The idea of not being afraid of failure and that
Speaker 4: grit and the ability to you know, pick yourself up.
Speaker 4: It's that attitude that, like, you know, this is not
Speaker 4: the end. Failure is just the the mother of success,
Speaker 4: and you just have to keep learning from those mistakes
Speaker 4: because everything is a learning process. I can't tell you
Speaker 4: one person that I know that's successful that has not failed.
Speaker 2: No, that makes perfect sense. You know, you you don't
Speaker 2: know what's going to work, and you don't know what's
Speaker 2: not gonna work until you try. And if you know
Speaker 2: the there's a story about Hey, if you're not failing occasionally,
Speaker 2: then you're just not taking enough risk to say the
Speaker 2: very least. All right, So so let's talk a little
Speaker 2: bit about how this developed. You come out of Y
Speaker 2: Combinator sometime in twenty fifteen. When did you first start
Speaker 2: taking client assets client money?
Speaker 3: Well, NYC, we were taking client assets.
Speaker 4: I think we launched our first mutual fund in twenty sixteen.
Speaker 4: It was the first buffer fund of its kind.
Speaker 3: And then so.
Speaker 2: Wait, let's stay with mutual funds, which have their own
Speaker 2: complications with capital gains tax. Given what you do primarily
Speaker 2: with derivatives and options in order to create that buffer,
Speaker 2: how does that play out in a mutual fund wrapper?
Speaker 4: Yeah, there are obviously challenges that may not be as
Speaker 4: let's say, the same as like an ETF that you know.
Speaker 4: In twenty nineteen they introduced the in kind This is
Speaker 4: also another example of the partnership with Cibo.
Speaker 2: It's been around for real estate for forever. It seems
Speaker 2: that's right, and it just took Wall Street a while
Speaker 2: to catch up to that explain what in clount incline
Speaker 2: creation and redemption looks like, what it means to you.
Speaker 4: So in mutual funds there's a challenge in some cases
Speaker 4: that if there's a redemption, you would sell your securities,
Speaker 4: which could have the potential to realize gains. In ETFs
Speaker 4: not just unique to these ETFs or all ETFs, they
Speaker 4: have the ability to let's say.
Speaker 3: In kind security.
Speaker 4: So when someone wants their money back, instead of giving
Speaker 4: the market maker selling securities and giving them cash in
Speaker 4: some cases, you can give them securities, thereby not potentially
Speaker 4: realizing the gain.
Speaker 3: For the shareholders.
Speaker 4: So it has the potential for tax efficiency by having
Speaker 4: inkin now. Prior to twenty nineteen. October twenty nineteen, that
Speaker 4: was not we weren't able to do that with options
Speaker 4: that was introduced in October twenty nineteen, we launched our
Speaker 4: first buffer ETFs in November of twenty nineteen in partnership
Speaker 4: with our partners at First Trust, and so that has
Speaker 4: been one of the fastest growing areas, not just for
Speaker 4: our firm, but as the ETF industry as a whole.
Speaker 2: So let's talk a little bit about what a buffer
Speaker 2: fund does, what are the advantages, what are you giving
Speaker 2: up in order to obtain those advantages. What's the largest funds?
Speaker 2: What's the largest ETF now at VEST.
Speaker 4: So the largest buffer fund and the one at VES
Speaker 4: is BUFR. And it's built Yeah, it's built on the
Speaker 4: foundation that you know, the kind of fundamentals of the
Speaker 4: strategy is the buffer strategy, which is, you know, let's
Speaker 4: say you get SMP exposure for one year, the first
Speaker 4: ten percent is protected. So as an example of strategy,
Speaker 4: if SMP is down ten your flat for the year,
Speaker 4: and then you get upside up to let's say a
Speaker 4: predetermined cap. So let's say SMP is up fifteen, you're
Speaker 4: up fifteen, but the most you can make is fifteen.
Speaker 4: So if smps up sixteen, you're up fifteen, right, so
Speaker 4: you're capped out at that face.
Speaker 2: So years like twenty three and twenty four kind of unusual.
Speaker 2: You don't usually see twenty five percent two years in
Speaker 2: a row. But if you were in the fund in
Speaker 2: twenty two, down twenty two percent means you're only down
Speaker 2: twelve percent, that's right.
Speaker 3: That's right.
Speaker 2: So that's the trade off.
Speaker 4: Yeah, And here's the thing is that most people don't
Speaker 4: realize these strategies have the potential to outperform the market,
Speaker 4: even if you're talking about you know, high double digit
Speaker 4: equity returns. Because think about this, in twenty twenty two,
Speaker 4: because of inflation, when interest rates went up, stocks and
Speaker 4: bonds both went down at the same time. Right, you
Speaker 4: could have mixed your stocks and bonds any way you wanted.
Speaker 2: In twenty twenty two, sixty was negative exactly twenty.
Speaker 4: And unless you were managing money forty years ago, you
Speaker 4: had not experienced inflation, right, And you couldn't hide anywhere.
Speaker 3: I mean, you were like Tom Brady.
Speaker 4: Choosing between alimony and child support while taking your kids
Speaker 4: jiu jitsu practice. Like the thing is, there was nowhere
Speaker 4: to hide, right Whereas if you were hedging. And the
Speaker 4: great thing about hedging is if you buy SMP and
Speaker 4: you buy an SMP put, that put is perfectly negatively correlated.
Speaker 2: It.
Speaker 4: And so imagine if you had a strategy that did
Speaker 4: not participate in the majority of the drawdowns in twenty
Speaker 4: twenty two, that means you had more to invest to
Speaker 4: take advantage of the games in twenty twenty three, twenty
Speaker 4: twenty four, and twenty twenty five. This is the compounding
Speaker 4: effect of winning without losing, right, It's the compounding effect
Speaker 4: of playing offense and defense at the same time, because
Speaker 4: the end of the day is a lot of times,
Speaker 4: you know, these types of strategies are not the get
Speaker 4: rich game. If you're twenty years old, probably not the
Speaker 4: strategy for you. But you know, in our industry, a
Speaker 4: lot of the people that have wealth, they're in the
Speaker 4: stay rich game.
Speaker 2: Right.
Speaker 4: These types of strategies are in the stay riche game
Speaker 4: because if if you have wealth, you just don't want
Speaker 4: to be poor, right, So that's why that's the kind
Speaker 4: of crux of protecting your equity exposure. And the idea
Speaker 4: is the issue with hedging has always been that to
Speaker 4: hedge with options and so on and so forth one
Speaker 4: of the biggest and they had surveys on why you know,
Speaker 4: investors and financial advisors don't hedge with options, and they
Speaker 4: everybody said the same two things, compliance and scalability. You know,
Speaker 4: the compliance burden associated with trading options and the scalability
Speaker 4: because when you buy a fund, you buy a stock
Speaker 4: you can put in your portfolio fallsey for thirty years.
Speaker 4: Maybe you rebalance once a quarter. You buy an option
Speaker 4: every thirty days sixty days from now you have to
Speaker 4: trade it. By having it inside a fund, we can
Speaker 4: trade that for you and so now you can ask
Speaker 4: it out, Okay, rebalance once a quarter. It solves a
Speaker 4: lot of those issues. And this is the thing that
Speaker 4: I find very interesting is two things. Number one is
Speaker 4: these strategies have been around for over thirty years. The
Speaker 4: buffer structure note has been around for years. Buffer annuities,
Speaker 4: I think were introduced in twenty ten. All we did
Speaker 4: was cut the bank and insurance company out. Instead of
Speaker 4: having the banker insurance company hedge themselves with options and
Speaker 4: then issue you a policy or issue you a no,
Speaker 4: we just said, why not just put the hedge in
Speaker 4: a fund and now you own it. We cut the
Speaker 4: middleman out of the middle. The other component is to
Speaker 4: think about in business that I always look back. So
Speaker 4: Richard Thayer, the professor at Universe Chicago won the Nobel
Speaker 4: Prize for Behavioral finance.
Speaker 2: Right essentially created the field.
Speaker 4: Yeah, the nudge, And I believe one of the studies
Speaker 4: by Cornell University had this study of I think they
Speaker 4: had kids in the lunchline. They gave them free apples,
Speaker 4: Like you get the end of that, you get a
Speaker 4: free apple right by the way, the consumption was like
Speaker 4: less than like, I don't know, twenty percent, Like it
Speaker 4: was a very low consumption rate.
Speaker 3: No one took the apple.
Speaker 4: Then they cut the apples up and they put them
Speaker 4: in little bags. By the way, the consumption went through
Speaker 4: the roof. Why this was the nudge. This was the
Speaker 4: idea that you make it simple, people will use it.
Speaker 4: Think about options as apples, and then that we had
Speaker 4: bag those apples to make it easier for the user
Speaker 4: to consume them without the compliance and scalability burden to them.
Speaker 4: Because theoretically any broker or any financial advisor out there
Speaker 4: can actually trade those themselves. But that's like the same thing,
Speaker 4: like every child could sit there and cut their own
Speaker 4: slice their own apples, but they don't want to do that.
Speaker 2: So let me ask you, because you've brought this up
Speaker 2: a few times, and I want to hone in on
Speaker 2: this is your target consumer, mom and pop mainStreet investors,
Speaker 2: or you focused more on the advisor channel or brokerage
Speaker 2: channel or all three some combination.
Speaker 4: We are not that focused in the retail space mostly
Speaker 4: and by the way, I would say one hundred percent
Speaker 4: of our focus is in financial professionals really because those
Speaker 4: are our partners. Those are the people that we stand
Speaker 4: side by side with, we build products that those are
Speaker 4: the people we're solving problems for them, which they're solving
Speaker 4: problems for their clients. We stand side by side with
Speaker 4: the financial professionals and manage, you know.
Speaker 2: And once you bring them up to speed, it's it's
Speaker 2: incumbent on them to find the clients that think are
Speaker 2: the right fit for this, and they get to explain
Speaker 2: that exactly.
Speaker 4: Because every single client is different and unique. We make
Speaker 4: products across and every client is different and how that
Speaker 4: gets utilized.
Speaker 3: We help the financial.
Speaker 4: Advisor even you know, how to best build and achieve
Speaker 4: their client's investment objectives. But as far as the end client,
Speaker 4: that's typically not our customer.
Speaker 2: So I mentioned sixty forty earlier. Does a buffer fund
Speaker 2: act as a substitute for sixty forty in other words,
Speaker 2: if you own whether it's sixty forty, seventy thirty, you
Speaker 2: own bonds for income of which there has been a
Speaker 2: lot over the past fifteen twenty years, but also as
Speaker 2: a non correlated asset with equity other than eighty one
Speaker 2: and twenty twenty two, does this and it offsets the
Speaker 2: volatility and draw down's inequities. Do buffered funds behave similarly
Speaker 2: to a sixty forty? Is that the thinking I.
Speaker 4: Wouldn't say similarly. Let me give you a kind of
Speaker 4: a how we think about it. So if you look
Speaker 4: at let's say, a strategy of a ten percent buffer
Speaker 4: on SMP, in fact, you know there are indexes out
Speaker 4: there that track these. If you compare that to let's say,
Speaker 4: like a black Rock sixty forty portfolio, actually notice that
Speaker 4: the standard deviation is almost identical. Volatility is very similar
Speaker 4: right over the long term, but the source of the
Speaker 4: risk management is different.
Speaker 3: Right you're actually hedging.
Speaker 4: You're not hoping that the correlation between stocks and bonds,
Speaker 4: the negative correlation is there that you know, when my
Speaker 4: stocks go down, I hope my bonds go up kind
Speaker 4: of situation, right.
Speaker 2: Well, historically they do most of the time. Yeah, they
Speaker 2: didn't in twenty twenty two, they didn't in nineteen eighty one, exactly,
Speaker 2: you know, So it's every forty years or so we
Speaker 2: seem to get this rork.
Speaker 4: With inflation at you know, three percent. What happens if
Speaker 4: inflation rears its head.
Speaker 2: Again rising exactly, You'll end up with the same issue
Speaker 2: the next time we see a serious exactly.
Speaker 4: And this is why we say, why not diversify your
Speaker 4: risk management and hedge. So if I have one hundred
Speaker 4: dollars portfolio, and let's say I have sixty dollars in equity,
Speaker 4: forty dollars in fixed income, and let's just say I
Speaker 4: take ten bucks out, I put six, take six from equity,
Speaker 4: four from fixed income, I put it into let's say
Speaker 4: a ten percent buffer strategy in S and P. Perhaps
Speaker 4: the standard deviation of the portfolio could be very, very similar.
Speaker 4: But notice the source your risk management has changed. You've
Speaker 4: introduced hedging as the source of your risk management, without
Speaker 4: the compliance, without the trading scalability issues of options. You've
Speaker 4: introduced hedging as the source of risk management if inflation
Speaker 4: were toor rears its head. Because the thing is, this
Speaker 4: is what everybody needs to ask themselves. If inflation were
Speaker 4: to come back, right, which.
Speaker 3: Is a very. It's not a very.
Speaker 2: There's a non zero pity way above that.
Speaker 4: Yeah, exactly what in your portfolio is going to save
Speaker 4: you if twenty twenty two repeats itself. That's the question
Speaker 4: everybody needs to ask. I always get the answer. Commodities,
Speaker 4: great commodities. It's a timing trade, right, you can get
Speaker 4: in it'll work. But when it's not inflationary, what happens
Speaker 4: to that trade?
Speaker 3: I mean, you point out.
Speaker 2: That gold didn't do great in twenty one or twenty two.
Speaker 2: It's only in the past few years where it's really
Speaker 2: exploded higher.
Speaker 4: That's right, That's right. So I'm not smart enough to
Speaker 4: time that trade. And that's the great thing about these
Speaker 4: types of solutions is you don't have to time the trade, right,
Speaker 4: Like you're diversifying your risk management through just hedging. And
Speaker 4: like I said repeated again, this is the Stayerage game, right,
Speaker 4: how do we protect wealth, not like make exorbitant amounts
Speaker 4: of it, but protect wealth and get a decent return
Speaker 4: from people's wealth.
Speaker 2: So buffer is ten percent hedged on the S and
Speaker 2: P five hundred. Tell us about some of the other ETFs,
Speaker 2: you guys, run.
Speaker 4: So one of the kind of overall themes that we've
Speaker 4: seen in the market is, you know, the two things
Speaker 4: that really people are looking for is downside protection, but
Speaker 4: the other one is income generation. As the boomers are
Speaker 4: in retirement, the need for yield has really shown how
Speaker 4: high it is. I mean, if you look at the
Speaker 4: derivative income space, I think in twenty eighteen and the
Speaker 4: morning Stars ranked fifty eighth last year is ranked ninth
Speaker 4: and flows right. People are looking for income and as
Speaker 4: volatility goes up, just like strategies like right cover calls
Speaker 4: are extremely it's another way to derive yield by monetizing
Speaker 4: volatility in different asset classes. You could do it in gold,
Speaker 4: you can do it in bitcoin, you can do it
Speaker 4: in equities, you can do it in fixed income. And
Speaker 4: that's the thing is people were always thinking one dimensionally.
Speaker 4: That like the innovation is always about thinking three dimensionally
Speaker 4: when everybody else is thinking in two dimensions. Right, this
Speaker 4: is why we have UH, you know, build strategies to
Speaker 4: derive income from uh you know, not just equities, but
Speaker 4: fixed income, but for from gold, from bitcoin, from any
Speaker 4: asset class.
Speaker 2: You can so give us a few ETFs that are
Speaker 2: primarily income focused.
Speaker 3: Yeah.
Speaker 4: So one of our biggest ones is UH UH K
Speaker 4: and G, which tracks the divin in aristaurrats our d
Speaker 4: v I which tracks the uh divin in achievers. These
Speaker 4: all provide uh.
Speaker 3: You know, attractive level yield. I think.
Speaker 2: So diven in aristocrats tend to be high dividends, low price.
Speaker 2: They tend not to be high PE companies, so they're
Speaker 2: fairly stable. Is that? Is that?
Speaker 4: So the companies that have grown their dividend is created
Speaker 4: by S and P back in two thousand and five,
Speaker 4: companies have grown. They're diven in for twenty five consecutive years.
Speaker 2: Wow.
Speaker 4: And these are diven and growers. They're not diven in payers.
Speaker 4: So they typically I believe, you know, yield less than
Speaker 4: two percent. But they've grown. They're diven in for twenty
Speaker 4: five consecutive years. So for a company to grow, they're
Speaker 4: diven in for twenty five consecutive years.
Speaker 2: That's a stable business.
Speaker 4: Yes, And it has to cash flow. It's not a
Speaker 4: pe play right for all intents and purposes. It is
Speaker 4: companies that have to have strong notes. And the other
Speaker 4: thing that people miss is good corporate governance because who
Speaker 4: makes dividend policy The board for board to never cut
Speaker 4: a dividend for twenty five years. It actually was a
Speaker 4: filter for good corporate governors.
Speaker 2: Now and that stock symbol is that ETF.
Speaker 4: Symbol is KNG k NG, Yeah, and you.
Speaker 2: Guys generate additional income on that with recover call writing.
Speaker 3: That's right.
Speaker 2: So if it's a two percent yield, what do you
Speaker 2: actually so.
Speaker 3: Our distribution yields probably in the past year over eight percent.
Speaker 2: Really that's a big number.
Speaker 3: And we're on.
Speaker 4: Average, I believe, covering around twenty percent of every single name.
Speaker 4: So you know, if I have one hundred shares of Walmart,
Speaker 4: I'm writing in at the money call and let's say
Speaker 4: twenty of those shares as an example to achieve that
Speaker 4: target income. So one of the things that core beliefs
Speaker 4: that we have when writing cover calls is like one
Speaker 4: of the biggest.
Speaker 3: Drivers is stock selection. You pick the stocks you get
Speaker 3: good results. Right.
Speaker 4: While you know the aristocrats they don't have the high
Speaker 4: flying mag seven names, right, but definitely as you look
Speaker 4: forward into the windshield, these are really going to be
Speaker 4: the names as the market bronze out right, Like I
Speaker 4: really do think in the next year, you're really looking
Speaker 4: at kind of a Barbell approach where you yeah.
Speaker 3: You have the NVIDIAs in the.
Speaker 4: In the high hyper scalers portfolio, but you really need
Speaker 4: to have the strong staples that cash flow.
Speaker 2: What are some of the names in KNG.
Speaker 4: What you got like Chevron, Walmart, like you're really blue
Speaker 4: chip names that are there.
Speaker 3: I mean, look at Chevron.
Speaker 4: They they have the potential to be, you know, one
Speaker 4: of the beneficiaries of oil in Venezuela right like they were,
Speaker 4: they were there before. And these are the cash flowing
Speaker 4: like crime like companies that like, like I said, grown,
Speaker 4: they're giving for twenty five second years.
Speaker 3: These are strong, strong names that are out there.
Speaker 2: You do you do anything with fixed income on the
Speaker 2: yield side as well?
Speaker 3: Yeah, so.
Speaker 4: We have cover calls on high yield tracking HyG gives
Speaker 4: you also a I believe a double digit distribution yield
Speaker 4: only covering about you know, twenty to twenty five percent
Speaker 4: of the portfolio, so you're still getting over you know,
Speaker 4: on a weekly basis seventy And.
Speaker 2: What's that symbol h y T I heidi mm hmm.
Speaker 4: Yeah.
Speaker 2: And what about do you do anything on the commodity So.
Speaker 4: We have gold IGLD, so you know, biggest not on
Speaker 4: goal has been a hunk of metal.
Speaker 3: Since your portfolio doesn't do anything.
Speaker 4: Now you can monetize the volatility and have you know, potentially.
Speaker 2: Same process covered coal writ in exactly. So this is
Speaker 2: why CBOW is to partner with you. Guys. How does
Speaker 2: that relationship help you manage all of this option writing,
Speaker 2: all this all active.
Speaker 4: That's a great question. So let's take eye Gold as
Speaker 4: an example. Right, prior to that fund, GLD options stop
Speaker 4: trading at four o'clock. By the way, this is one
Speaker 4: of the reasons why CEBO partner with us is how
Speaker 4: do we solve certain issues in the option market for
Speaker 4: the construction of funds? Right if options stop trading at
Speaker 4: four o'clock and I need to know the clothes, I
Speaker 4: can't create an ETF on that.
Speaker 3: That's right.
Speaker 4: S and P options, SPI options they trade, they close
Speaker 4: at four fifteen. Today, GLD options stop trading at four fifteen.
Speaker 4: By the way, that's a really cool statement to say
Speaker 4: that the entire street trades GLD options that extra fifteen
Speaker 4: minutes because we wanted that.
Speaker 2: That's great, but that was you have you have to
Speaker 2: take the closing price at four and then use it
Speaker 2: for and we need that, they need.
Speaker 4: That we need that option market to be open that
Speaker 4: extra fifteen minutes. And by the way, that that those
Speaker 4: products by for trust invests are the reason why we
Speaker 4: have an extra fifteen minutes to trade GLD option. So
Speaker 4: if you're you're late and you're trading at four or five,
Speaker 4: that's us.
Speaker 2: And option trading is so much more complicated, so much
Speaker 2: more difficult. Like you, I started on an equity desk,
Speaker 2: but have always been a little bit of an option
Speaker 2: junkie because it's so fascinating and most people use don't
Speaker 2: use options correctly. They're just making like a lottery ticket bet,
Speaker 2: which tends not to be smart. You guys are using
Speaker 2: options for a very specific purpose to achieve what you
Speaker 2: describe as a defined outcome.
Speaker 3: Solve a problem.
Speaker 2: Solving a problem. Really interesting. Yeah, coming up, we continue
Speaker 2: our conversation with Jeff Chang, co founder and president a VEST.
Speaker 2: I'm Barry Ridults. You're listening to Masters in Business on
Speaker 2: Bloomberg Radio. I'm Barry Redults. You're listening to Masters in
Speaker 2: Business on Bloomberg Radio. My extra special guest this week
Speaker 2: is Jeff Chang. He's president and co founder a VEST,
Speaker 2: the firm specializes in outcome oriented investing via primarily ETFs.
Speaker 2: Then run over fifty billion dollars in assets. Before I
Speaker 2: get to my favorite questions, I want to ask any
Speaker 2: So we've covered stocks, bonds, commodities. You mentioned crypto. What
Speaker 2: are you doing in terms of crypto and generating additional
Speaker 2: defined outcome results using derivatives.
Speaker 4: Yeah, so we have a strategy also target income almost
Speaker 4: I believe about a eighteen nineteen percent yield and you're
Speaker 4: still only covering about twenty percent. So that strategy tracks bitcoin,
Speaker 4: so you can get on a weekly basis, let's say
Speaker 4: you know, seventy eighty percent of the upside and bitcoin
Speaker 4: and then you know really high almost twenty percent yield
Speaker 4: by monetizing the volatility. It's the same thing because like
Speaker 4: just like gold, some of the knock is is that
Speaker 4: it just sits in my portfolio, doesn't do anything, and
Speaker 4: the value.
Speaker 2: Well, no one can say that about bitcoin. It's always
Speaker 2: doing something going up and down.
Speaker 3: Yeah, exactly.
Speaker 2: And what's the ETF symbol.
Speaker 3: For the ibit.
Speaker 4: I'm sorry not that's black, right, yeah, yeah, DFII, that's.
Speaker 2: Right, DFI. And so that's options. How much of the upside,
Speaker 2: how much of the downside, do you get and give
Speaker 2: up or is it just geared?
Speaker 4: We're just writing cover calls on to target you know,
Speaker 4: a specific yield, Like I said, I think anywhere from
Speaker 4: recovering every week about twenty to twenty five percent and
Speaker 4: at the mind how every week every week, every Friday.
Speaker 2: Yeah.
Speaker 3: The reason why we like weeklies.
Speaker 4: Is that when you sell a call, you want the
Speaker 4: premium to go to zero, right, that's right, and that
Speaker 4: decay accelerates in that last week if you're selling a
Speaker 4: monthly options, so if you like do it four times
Speaker 4: a month, you have the potential to generate more yield
Speaker 4: because you're always capturing that extra decay. It's like it's
Speaker 4: like football tickets, right, Like you ever go on step
Speaker 4: up like game times at one o'clock and you go
Speaker 4: on stop up at twelve, the ticket starts to drop
Speaker 4: like rock. Imagine if you kept tracking that and you
Speaker 4: you made money off that drop, right, and everything.
Speaker 3: Kind of follows that.
Speaker 4: In fact, there's actually only one thing that doesn't follow that,
Speaker 4: you know what that is go on Giants tickets, they
Speaker 4: decay before the season starts.
Speaker 2: Well as a guy used to be in New Jersey
Speaker 2: for sure.
Speaker 4: Or jets, tickets. Actually both of those are anominally there.
Speaker 2: So really so in other words, bad assets don't generate
Speaker 2: good option that that's pretty reasonable. How often do things
Speaker 2: get called away? That's obviously the risk when you're writing calls.
Speaker 2: How do you manage around that? How frequently is that
Speaker 2: built into your models?
Speaker 4: I mean, that can happen pretty frequently. But here's the deal, Like,
Speaker 4: think about this, and this is just a concept of
Speaker 4: let's say I collect a two dollar premium and the
Speaker 4: stock goes up one dollar. You're good, Yeah I made
Speaker 4: a dollar, but it's still got called away, but I
Speaker 4: still made a dollar. I just buy the stock back
Speaker 4: or however way I deal with the assignment, depending on
Speaker 4: the strategy.
Speaker 3: So the idea is, as long as the stock.
Speaker 4: Doesn't go above the premium, if I'm writing out the
Speaker 4: money or what I've actually.
Speaker 2: Gives you a buffer to repurchase the stock, not at
Speaker 2: a loss exactly.
Speaker 4: And this comes into what we call about the implied
Speaker 4: versus realized premium, meaning options. If I look historically of
Speaker 4: a particular asset, whether it be a stock or a
Speaker 4: commodity or whatever, and it historically moves X, I'm not
Speaker 4: going to sell the premium at that number to be plus, right,
Speaker 4: just like when you sell car insurance, Like if my
Speaker 4: expected loss is one thousand dollars, I'm not going to
Speaker 4: sell the premium. If for a thousand, I'm gonna sell
Speaker 4: it for twelve hundred dollars to make two hundred, right,
Speaker 4: that extra a little bit.
Speaker 3: So in options, they have.
Speaker 4: What's called the implied versus realized premium, And so that's
Speaker 4: really kind of where you're trying to capture, is the
Speaker 4: implied volatility versus what the realized volatility, And you're hoping
Speaker 4: that the implied will be greater than the realize. I mean,
Speaker 4: that's the hope and option, especially when you're selling them,
Speaker 4: all right, I think there's a stat that, like, you know,
Speaker 4: sixty percent or seventy percent of the time, the person
Speaker 4: selling the option wins the trade, right right.
Speaker 2: Most you know, old option traders don't die, They just
Speaker 2: expire worthless. Yeah, is the exactly that's joke. But you know,
Speaker 2: if you're a writer of options, you're making a very
Speaker 2: specific bet, and if you're a purchase of options, you're
Speaker 2: making a very different bet.
Speaker 3: Yeah, yeah, I mean you see this.
Speaker 4: Uh, you know, in some cases the buying options is
Speaker 4: like you said it can you know, even warm Buffet
Speaker 4: said there could be weapons of mass destruction.
Speaker 3: I mean you can see these zero day options that.
Speaker 2: People are buying, and that's become crazy.
Speaker 4: I mean those are like scratch off lottery tickets, right,
Speaker 4: who's buying them?
Speaker 3: I don't know.
Speaker 4: The kid and his mom basement pop and his pimples
Speaker 4: eat many sandwiches.
Speaker 2: I'm at one point in time, I imagine that there
Speaker 2: were market makers that had a hedge that, for reasons
Speaker 2: that were complicated, they were stuck with overnight positions like
Speaker 2: I almost understand that. But the day traders playing with
Speaker 2: these this is fan duels and draftking, pure speculative nonsense.
Speaker 3: Yeah, exactly.
Speaker 4: So that's why we don't have anything in that space,
Speaker 4: but it is something to look at from AFAR.
Speaker 2: Really fascinating stuff. Last question before I jump to my
Speaker 2: favorite questions. So you're constantly thinking about how do we
Speaker 2: hedge this position, how do we create a buffer, how
Speaker 2: do we define a specific outcome for clients? What do
Speaker 2: you think the average investor isn't thinking about relative to
Speaker 2: that approach, but perhaps should be. What do you think
Speaker 2: most people are kind of missing or not paying enough
Speaker 2: attention to and it could be a geography, it could
Speaker 2: be a policy whatever, but you're obviously thinking about a
Speaker 2: lot of things differently than the typical index purchaser. What
Speaker 2: are we missing?
Speaker 4: Yeah, I think, you know, while we've had a tremendous
Speaker 4: amount of growth in kind of the option space of
Speaker 4: downside protection and the income generation part, I think a
Speaker 4: lot of the market.
Speaker 2: Is still.
Speaker 4: I think thinking two dimensionally in the stocks and bonds, right, Like,
Speaker 4: instead of just diversifying across, think about you can still diversify,
Speaker 4: but think about other ways to shape your return, right
Speaker 4: or thinking about income generation out of the equity portfolio,
Speaker 4: think about income generation or boosting yield and your fixed
Speaker 4: income part of it, and then also thinking about risk
Speaker 4: management beyond diversification. While there is a lot of good
Speaker 4: part of the financial professional space that is picking up
Speaker 4: on this, I still don't think like we're just tip
Speaker 4: of the iceberg at this point.
Speaker 2: Right.
Speaker 4: That's on one one standpoint I think people are still missing.
Speaker 4: The second I think is that I think one of
Speaker 4: the biggest drivers of the market today, no one would
Speaker 4: discree a is AI right. However, that's not the part
Speaker 4: that people are missing that you know, haven't been through
Speaker 4: the two thousands. I really feel like this is like
Speaker 4: nineteen ninety nine, two thousand. Like, think about the stocks
Speaker 4: that were big then, right.
Speaker 2: Like you had Juniper Networks, Metromedia five right.
Speaker 4: Like I remember you guys remember price Line Global Crossing.
Speaker 2: Yeah, you know a lot of these companies have been
Speaker 2: either absorbed into other companies and still Priceline Expedia, there's
Speaker 2: a through line there. How is pets dot Com not
Speaker 2: chewy today? So some of them were just a little
Speaker 2: early exactly.
Speaker 3: So let me ask you who won that trade?
Speaker 4: Facebook, Google, Amazon, Amazon, Apple, Microsoft. A lot of those
Speaker 4: companies were private or startups then Google, Right, think about that,
Speaker 4: and I think that's the same, like history doesn't repeat
Speaker 4: itself at rhymes. I actually think a lot of the
Speaker 4: kind of the hugely successful companies from AI in startup mode.
Speaker 4: They're at y Comedy or the ninety of the uh
Speaker 4: almost eighty ninety percent of the companies at YC are
Speaker 4: AI driven. They have I've seen an article recently. Their
Speaker 4: month over month average for the batch is double digits,
Speaker 4: meaning their revenue is growing over ten percent month month
Speaker 4: to month or in some cases week over weeks.
Speaker 2: That's unbelievable. And I said to someone the other day,
Speaker 2: someone said, who's gonna dethrone and Video? And I said,
Speaker 2: the founder of that company hasn't graduated high school yet.
Speaker 2: But he's common or she's coming, he's not. It's not impossible.
Speaker 2: All right, Let's let's jump to our favorite questions that
Speaker 2: we ask all of our guests, starting with who are
Speaker 2: your mentors who helped shape your career?
Speaker 3: Oh, that's a great question.
Speaker 4: I would actually uh have to say my brother really yes,
Speaker 4: and in what way? I have an older brother, he's
Speaker 4: four years older than me. He's the overachiever. I'm the
Speaker 4: underachiever of the uh so, uh my brother I remember
Speaker 4: growing up he was like the uh he was good
Speaker 4: at math and science. I would literally show up the
Speaker 4: class and they'd be like, Oh, you're Bill Chain's brother.
Speaker 3: You must be smart by the way. You know what
Speaker 3: that does to you.
Speaker 4: It's like a lot of pressure, a lot of pressure.
Speaker 4: So he went on. He worked at Apple and then
Speaker 4: was at Tesla. I think he was chief architect of
Speaker 4: the dojo dojo price Folks that aren't familiar with dojo,
Speaker 4: it's the AI system at Tesla that coded the self
Speaker 4: driving right. He recently, and in fact, Bloomberg wrote an
Speaker 4: article about his firm, Density Ai that I think they
Speaker 4: are one of the first companies to really, uh kind
Speaker 4: of take on because the dojo I think system is
Speaker 4: one of the one of the more efficient ways that
Speaker 4: can take on in video for the chips. So that's
Speaker 4: why it's funny that you said, like, Hey, the person
Speaker 4: that's going to de thrown a video it may may
Speaker 4: not may still be in high school.
Speaker 3: I was like, yeah, he might just be four years old, right.
Speaker 2: Or he can be deep into the process already. Yeah.
Speaker 4: So, uh, they recently, like I said, like, Bloomberg just
Speaker 4: wrote an article about them on dense Ai and he
Speaker 4: he has been extremely Like a lot of times people
Speaker 4: ask like, hey, did you work that hard because your
Speaker 4: parents were, you know, like tire your parents. No. Actually
Speaker 4: I was just chasing my brother the whole time. It
Speaker 4: was definitely a different dynamic and uh, yeah, I couldn't
Speaker 4: be more proud of him.
Speaker 2: Uh.
Speaker 4: And a lot of times people are like, hey, what
Speaker 4: what tea are the chains drinking? Because we're but we
Speaker 4: get along great. While we're competitive, we we support each other.
Speaker 3: But he's been.
Speaker 2: You're in different fields, so the competition exactly.
Speaker 3: He's engineering. I'm in financial yeah, yeah.
Speaker 2: Exactly, so similar, similar background. Let's talk about books. What
Speaker 2: are some of your favorites. What are you reading right now? Oh?
Speaker 3: I said Liar's Poker, a very inflacable one.
Speaker 2: Yeah, just had its thirtieth anniversary. I think last year.
Speaker 4: I like, I thought was really good for me was
Speaker 4: the book Influenced by Robert Childonie Fantastic.
Speaker 3: It was a great book. Kind of along with that,
Speaker 3: how to win friends and influence people.
Speaker 4: I think those are great. I actually in financed. One
Speaker 4: of my first ones was The Intelligent Investor by Ben Grant.
Speaker 3: Yeah, Ben Graham. Those are kind of cornerstones.
Speaker 2: Yeah, that's a great list. I know you are on
Speaker 2: planes a lot when you're not reading. What are you streaming?
Speaker 2: What's keeping you entertained on these long cross country flights,
Speaker 2: either podcasts or Netflix or whatever.
Speaker 4: I do listen to podcasts a masters in business. However,
Speaker 4: there's a new thing that I've been doing. Actually it's
Speaker 4: not a book, all right, and it'll probably be hit
Speaker 4: everybody differently on on what I'm doing here. Okay, And
Speaker 4: I could tell you I got this from a good
Speaker 4: friend of mine and he's going to kill me for
Speaker 4: saying this, So.
Speaker 3: I'm good.
Speaker 4: A friend of mine and his name Matt Bellamy, he's
Speaker 4: the lead singer in the Muse and he actually taught
Speaker 4: me this, so I can't take credit for this. We
Speaker 4: go into chat EBT and he actually sent me the prompt,
Speaker 4: and we prompt chat GBT, tell me in the last
Speaker 4: two weeks, what you have learned that is beyond human
Speaker 4: comprehension something.
Speaker 3: Along those lines.
Speaker 4: How fascinating And by the way it spits out all
Speaker 4: this stuff because if you think about it humans, like
Speaker 4: we as a human you could get a PhD in
Speaker 4: biology you get a PhD. And astrophysicists you get PhD
Speaker 4: in chemistry, but like you're the expert in their field.
Speaker 4: But think about this that like chat GBT passed the
Speaker 4: Bar exam and like, I don't know, like a couple
Speaker 4: of weeks, right, So it's becoming experts and everything, and
Speaker 4: then it's combining all of those things together. So how
Speaker 4: many like PhDs and chemistry, astrophysics do you have that
Speaker 4: I have like the expert and everything, And then what
Speaker 4: comes out like you tend to learn so many things
Speaker 4: that like by the way it turns into this rabbit hole.
Speaker 4: And I noticed that my prompt actually because I always
Speaker 4: tell it to me, like explain it to me, Like
Speaker 4: I'm sixteen, so I've been driving into this other thing.
Speaker 4: Of Uh, it's been teaching me about quantum entanglement.
Speaker 3: Are you familiar with this?
Speaker 2: Of course, like we wasn't familiar with spooky action at
Speaker 2: a distance. I mean they teach that in middle school.
Speaker 3: Yeah, exactly.
Speaker 4: So the quantum entanglement that you have two protons that
Speaker 4: you know, if you do want to X, why we'll
Speaker 4: do the same. It's just like having two dice. If
Speaker 4: dice on Earth. By the way, they've proven this, like
Speaker 4: if you roll the dice on Earth it rolls a six,
Speaker 4: it will definitely roll six, and it's not bound by
Speaker 4: space and time, so basically it could be light years away.
Speaker 3: You roll that dice, it rolls an eight. This one
Speaker 3: on Earth is going to roll in eight.
Speaker 4: And so then they sort of combine that with is
Speaker 4: that part of human consciousness that is your consciousness? Quantum
Speaker 4: entangled is what makes you you?
Speaker 3: By the way, this type of thinking.
Speaker 2: There's a related topic and I haven't run this through
Speaker 2: chat GBT, but I should, which is the concept of
Speaker 2: emergence intelligence emergence as the natural outcome of the universe.
Speaker 2: Why does the universe exist if not to create a
Speaker 2: conscience intelligence? Although the flip side of that is life
Speaker 2: is fairly common throughout the universe hydrogen, carbon, oxygen, nitrogen,
Speaker 2: but advanced technological life so far at least, appears to
Speaker 2: be exceedingly rare. So that's the counterbalance of emergence totally.
Speaker 4: And then the other thing that I found recently that
Speaker 4: people can dig into I think this is fascinating, is
Speaker 4: that your head experiences time different than your feet from
Speaker 4: the proximity of Gravity's.
Speaker 2: Well, certainly we have to adjust GPS because for the
Speaker 2: relative relative the GPS persons, which Einstein turned out to
Speaker 2: be right about exactly so. But the difference between your
Speaker 2: head and feet, oh yes, is so tiny unless you're
Speaker 2: falling into a black hole. And then spaghetification is the problem. Yeah.
Speaker 4: So then you take quantum entanglement uh huh, And you
Speaker 4: then say, okay, if I have a proton here and
Speaker 4: a proton elsewhere, and the light in the how that
Speaker 4: proton experiences time through entanglement versus how time bends with gravity.
Speaker 3: By the way, all of this just.
Speaker 4: Keeps going deeper and deeper and deeper into And then
Speaker 4: the thing is that I keep telling it to explain
Speaker 4: it to me like I'm sixteen. Now my entire prompt
Speaker 4: explains everything. I will explain it to you as if
Speaker 4: you're sixteen years old.
Speaker 2: So the issue I occasionally run in with perplexity or
Speaker 2: chat ept is it tends to conform its output to you. Yes,
Speaker 2: And sometimes I'll ask a question. It's like, no, I
Speaker 2: want a list of ten podcast questions. I just tell
Speaker 2: me about Jeff Chang and what led to VEST. Don't
Speaker 2: give me a podcast. I have my own questions.
Speaker 4: That's why I use multiple rock every right. That way
Speaker 4: I get a whole plethora. And then what ends up
Speaker 4: happening is you get all this new stuff and then
Speaker 4: you dig deep into whatever topic. And I found that
Speaker 4: so fascinating because I just it's curiosity.
Speaker 2: It's like if you're interested in these sorts of things exacsolutely,
Speaker 2: but you have to be on guard for the occasional hallucination.
Speaker 2: And every now and then I find myself leaving AI
Speaker 2: to go to just traditional search and say, hey, show
Speaker 2: me a source for this. Is this I don't think
Speaker 2: before AI. I don't think people were skeptical enough about
Speaker 2: the sources of what they consumed with AI. You really
Speaker 2: have to know what is real and what is fake.
Speaker 2: People miss that, all Right, our final two questions, what
Speaker 2: sort of advice would you give to a recent college
Speaker 2: grad interested in a career in asset management or or
Speaker 2: ETFs specifically?
Speaker 4: Yeah, I think at recent college grad, I think similar
Speaker 4: to kind of bringing in full circle same thing, like
Speaker 4: develop the skills that you know you're not beholden to anybody,
Speaker 4: right whatever that is, whether you're in college or out
Speaker 4: of college, Like develop those skills that you can actually
Speaker 4: that they're portable one or the other, and then not
Speaker 4: be afraid of failure, take chances. Now, this is not
Speaker 4: for everybody, I would say, you know, meaning not everybody
Speaker 4: is going to be a founder. Not everybody's going to
Speaker 4: be an entrepreneur, which I, by the way, I find
Speaker 4: as two different people. Founder has the creativity, an entrepreneur
Speaker 4: has the grit and influence. A founder has to have
Speaker 4: the creativity because you're actually introducing a whole new industry
Speaker 4: or a whole new thing that somebody else has not
Speaker 4: seen yet.
Speaker 3: Right, But that's the thing.
Speaker 4: And then also keep your eye out for painful problems
Speaker 4: that you have the skill set to solve. So obtain
Speaker 4: those skill sets and then have your eyes out, eyes
Speaker 4: peeled throughout life, write them down, look for pain points,
Speaker 4: look for pain points, look for problems. And then the
Speaker 4: second the last thing is just a person thing is
Speaker 4: don't take yourself too seriously, right, have fun with life.
Speaker 4: And I think that that is because otherwise all this
Speaker 4: stuff can create massive amounts of burnout.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of buffered funds? Investing ETFs today might have been
Speaker 2: healthful fifteen twenty years ago when you were first getting started?
Speaker 3: How hard it would have been? Right?
Speaker 2: Like? Literally would that have discouraged you from launching?
Speaker 4: Yeah? Well, I think that was actually the superpower, Right
Speaker 4: Like when you climb a mountain and you don't know
Speaker 4: how high it is, and if there's a cloud base,
Speaker 4: if you saw it and a clearer view, it probably
Speaker 4: wouldn't be If you told me to quit my job
Speaker 4: and I wouldn't get paid for four plus years, I
Speaker 4: probably wouldn't have done that, huh. But then it's like
Speaker 4: always success is always around the corner, at least you
Speaker 4: dream of it, right, everybody sees what you are now.
Speaker 4: They don't see the pain where you're constantly just waiting
Speaker 4: for that cloud to clear on the next part of
Speaker 4: the mountain. Because I could tell you this that like
Speaker 4: if you saw how.
Speaker 3: Big the mountain is, it would be nobody would.
Speaker 2: Do it really really interesting. Thank you Jeff for being
Speaker 2: so generous with your time. We have been speaking with
Speaker 2: Jeff Chang, co founder and president of vest. If you
Speaker 2: enjoy this conversation, well check out any of the six
Speaker 2: hundred we've done over the past twelve years. You can
Speaker 2: I find those at iTunes and Spotify, YouTube, Bloomberg, wherever
Speaker 2: you get your favorite podcasts. I would be remiss if
Speaker 2: I didn't thank the product staff that helps with these
Speaker 2: conversations together each week. Alexis Norriega is my video producer.
Speaker 2: Sean Russo is my researcher. Anna Luke is my podcast producer.
Speaker 2: I'm Barry Ritoltz. You've been listening to Masters in Business
Speaker 2: on Bloomberg Radio.