Speaker 1: Welcome to Trillions. I'm Jeweber and I'm Eric bel Tunis Eric.
Speaker 1: Who are we talking to this week? This is uh.
Speaker 1: We actually made a last minute decision to bring uh
Speaker 1: these guests on because there was some news. There's a
Speaker 1: company called Simplify who we've been watching very closely. It
Speaker 1: was started by Paul Kim who was it Pimco worked
Speaker 1: on bond, new bill growth, that kind of thing, so
Speaker 1: he comes from that pedigree, started an e t F shop,
Speaker 1: hired some interesting people we've had. Uh. We had a
Speaker 1: good zoom call with them about six months ago and
Speaker 1: they're doing well. They're kind of up to looks like
Speaker 1: seventy million assets. That's a fift growth rate this year.
Speaker 1: And what's interesting about them is they keep making these
Speaker 1: interesting hires and what they're doing with some of their
Speaker 1: E t F s is doing options overlays. It's part
Speaker 1: of a bigger trend of package trades and we've seen
Speaker 1: this in the Innovator and buffer products. This is becoming
Speaker 1: more popular as the market gets uh you know, froth
Speaker 1: theer and froth theier. People want some protection and so
Speaker 1: the idea of using options is becoming a popular move
Speaker 1: and so they recently made a couple of big hires,
Speaker 1: including Mike Green, who a lot of people know if
Speaker 1: you're on Twitter. He used to work with Peter till
Speaker 1: he was at a logic after that, and then he's
Speaker 1: famous for having some worries about passive. He's famous for
Speaker 1: battling the bitcoiners on Twitter. I give him credit. Takes
Speaker 1: a brave person to combat to combat some of those folks.
Speaker 1: But he's just a really original thinker. And we've had
Speaker 1: many chats, and so I wanted to get that this
Speaker 1: capture this young firm and their growth, and also look
Speaker 1: at these products. We've had a couple of requests to
Speaker 1: talk about these downside protection type products that use options.
Speaker 1: So I thought that would be the idea here and
Speaker 1: joining us James Safer, Bloomberg Intelligence ETF analyst this time
Speaker 1: on trillions Simplify. Paul Michael, James, thanks for joining us
Speaker 1: on trillions pleasure. Thank you for the invite. It's Paul Michael.
Speaker 1: Before we start with you, I want to bring James
Speaker 1: in here. James, can you talk to us You know
Speaker 1: about the strategy um this option overlay strategy quite a bit.
Speaker 1: Can you give us your assessment of what the space
Speaker 1: looks like, Yeah, so Eric kind of touched on this,
Speaker 1: but right now is like a unique point in the
Speaker 1: asset management industry. There's a lot of people talking about
Speaker 1: the death of the sixty forty portfolio. We are at
Speaker 1: all time highs in the equity markets, we are near
Speaker 1: all time loads and just off of all time loads
Speaker 1: and rates. So people are looking for different ways to
Speaker 1: sort of adjust their portfolios. They're not set in the
Speaker 1: sixty forty portfolios. Advisers looking for ways to eke out
Speaker 1: additional return or additional yield, and a lot of the
Speaker 1: new ETFs are mentioned are using like option overlay strategies
Speaker 1: are as you mentioned the buffer products with have specific
Speaker 1: specified downside protection, but capped upside um simplified does this
Speaker 1: and it just kind of alters the risk of the
Speaker 1: investments that you have and whatever funds you're choosing, and
Speaker 1: all of this is just the way that some people
Speaker 1: and advisors and it's being spoken about. There's a lot
Speaker 1: of money coming into this these types of strategies to
Speaker 1: kind of maybe take a few percent of the equity side,
Speaker 1: some money out of the fixed income side, and eke
Speaker 1: out additional return and without altering your risk profile too much.
Speaker 1: So it's just a lot of people just figuring out
Speaker 1: different ways to um get a more risk, higher risk
Speaker 1: adjusted return or more eke out more yield, and they're
Speaker 1: doing it with options strategies and the area is booming.
Speaker 1: We're over ten ten billion dollars in this area for
Speaker 1: the most part, depending on how you slice and dice
Speaker 1: the marketplace, with the bulk of that being in those
Speaker 1: buffer products. Okay, Paul, you co founded this. What did
Speaker 1: you have in your pitch deck that James left out
Speaker 1: right there? So thank you for the chance to answer
Speaker 1: this question. Um this is my third et F platform,
Speaker 1: and I started at Pimpco. As Eric alluded to, My
Speaker 1: last stop was actually a principle for about five years
Speaker 1: right where I helped build their business up to a
Speaker 1: little over four billion. But at at Simplify. The sort
Speaker 1: of key thesis that we wanted to address was helping
Speaker 1: advisors build much more interesting portfolios and using options and
Speaker 1: derivatives to shape distributions to better address a very specific
Speaker 1: investment goals. So it may be goals such as risk
Speaker 1: mitigation or interesting or an uncorrelated return enhancement as well
Speaker 1: as income generation. And it's a really good time from
Speaker 1: a number of fronts. So from the regulatory front, UH,
Speaker 1: the timing was very important to see the SEC modernize
Speaker 1: the regulatory framework on the use of derivatives by registered
Speaker 1: investment companies and so what that did was basically catch
Speaker 1: up the US to some of the other regulatory frameworks
Speaker 1: out in places like Europe in the use it's format.
Speaker 1: Basically what that means is now companies can bring much
Speaker 1: more interesting combinations of strategies that just did not or
Speaker 1: could not fit into the forty act rapper. So that
Speaker 1: tied with the sort of demand for e t f s,
Speaker 1: the long running advantages of ETO, specifically tax deferral, transparency,
Speaker 1: easier access, as well as I think individual preferences and
Speaker 1: comfort on the use of derivatives. We we have the
Speaker 1: financial crisis way in the rear view mirror at this point,
Speaker 1: and I think the comfort on the use of derivatives
Speaker 1: to help portfolios, the stigma associated with the dangers or
Speaker 1: pitfalls of derivatives UM as well as individuals learning to
Speaker 1: trade things like single stock options and institutions looking for
Speaker 1: ways to solve portfolio challenges, i e. How do you
Speaker 1: hedge in a world of high correlations and low interest rates. Um,
Speaker 1: it's a perfect time for a brand new company that
Speaker 1: focuses right in that sweet spot. So, Paul, that was
Speaker 1: a really good overview, And I just want to try
Speaker 1: to get more into the details of how this the
Speaker 1: e t f s work. Like I said, we've gotten
Speaker 1: a lot of requests from people to go into some
Speaker 1: of the options using e t f s that offer
Speaker 1: downside protection and really to understand exactly how they tick.
Speaker 1: So let's look at SPD. This is your biggest one
Speaker 1: is to simplify us when you plus downside convexity e
Speaker 1: t F, which when I first saw this file I
Speaker 1: thought was a bit of an oxymoron to have simplifying
Speaker 1: convexity in the name. It was the first DTF with
Speaker 1: the word convexity in the name. Um, So let's walk
Speaker 1: through what's in it and then you tell me why.
Speaker 1: Um So, I've got the SMP five hundred e t
Speaker 1: F I VV is a holding and then it looks
Speaker 1: like there's five put options with various months and various
Speaker 1: strike prices. Um, you know, it looks like they go
Speaker 1: all the way out into June two. So just if
Speaker 1: you could walk us through what's going on here, why
Speaker 1: you pick those and what the return stream should look
Speaker 1: like with this thing. Sure, so at the highest level,
Speaker 1: we're trying to stay true to the beta. In this case,
Speaker 1: the beta that we're offering inside of this is the
Speaker 1: SMP five very popular, very very highly used for US
Speaker 1: large cap exposure UM, and so we're taking that as
Speaker 1: a starting point. And then what we're doing is if
Speaker 1: you could think of it as surgically modifying the distribution
Speaker 1: using options, but in a way that does not take
Speaker 1: away the upside or the day to day returns of
Speaker 1: that beta. So it's gonna give you pretty much SMP fire.
Speaker 1: But what we've laid on through options is one in
Speaker 1: the case of our flagship strategy, the two tail version
Speaker 1: UH Spicy, we've added about percent of the portfolio and
Speaker 1: downside hedges, so we're buying les eggs of deep out
Speaker 1: of the money puts, which tend to be cheap and
Speaker 1: from at least from a probabilitistic return perspective, we think
Speaker 1: they're fatter tales and ree equity returns than what are
Speaker 1: priced in these options, and so they provide a really
Speaker 1: interesting way to protect the portfolio with very very modest
Speaker 1: use of capital and on relatively unique for our strategies
Speaker 1: were also enhancing the upside. And I know Mike has
Speaker 1: a ton of comments or opinions on this, but we think, uh, basically,
Speaker 1: the market structure um as well as all sorts of
Speaker 1: fiscal and monetary policies make the upside a significant risk
Speaker 1: as well in terms of keeping up with the purchasing
Speaker 1: power of that investment portfolio. So we focused on both
Speaker 1: sides and create customized scientific option overlays unique to each
Speaker 1: of the tails, and we do it in a way
Speaker 1: that mitigates the cost that of that option strategy and
Speaker 1: delivers about at one point a beta. Okay, Mike, I
Speaker 1: wanna ask you because you came from a hedge fund
Speaker 1: background and so I want to talk about that, But
Speaker 1: I also just gotta ask, like, what's it like to
Speaker 1: have Paul as your boss instead of Peter Teal Uh. Well,
Speaker 1: we're still new in this process, but I will tell
Speaker 1: you that Paul smiles a lot more. Um. It is
Speaker 1: the reason for the move from hedge funds to the
Speaker 1: e t F space is actually exactly what Paul articulated.
Speaker 1: The rules have changed and so products that were not
Speaker 1: able to be created in the E t F space
Speaker 1: or in the retail space are now actually available in
Speaker 1: the way they just haven't been before. And you know,
Speaker 1: broadly Eric was referring to this earlier. My career is
Speaker 1: largely characterized by trying to identify how the regulatory regime
Speaker 1: is changing, how the market structure is changing. And for
Speaker 1: the first time this is now open and so I'm
Speaker 1: thrilled to be on board with the Simplified team. Join
Speaker 1: my friend Harley Bassman, who's another you know, legend in
Speaker 1: the in the rate space in particular, who's going to
Speaker 1: be introducing similar products um and I think the opportunity
Speaker 1: to be kind of first out of the gate with
Speaker 1: some really fantastic products that introduce convexity, right and so
Speaker 1: convexity we can talk about that dynamic, but the simplest
Speaker 1: way to think about it is that you're creating a
Speaker 1: structure that can potentially participate with more than to the
Speaker 1: upside and yet avoid portions of the downside. You're just
Speaker 1: changing the shape of that distribution. That's an incredibly exciting
Speaker 1: opportunity to an adventure to be part of. When when
Speaker 1: did you recognize, especially in the hedge fund world, that
Speaker 1: that there was going to be an opportunity to actually
Speaker 1: like enhance what et s were capable of. Well, so
Speaker 1: the rule change occurred, Um, Paul, correct if I'm wrong.
Speaker 1: I think it was last June. Um, yeah, officially October,
Speaker 1: but it's been shadowed for at least a number of ryers.
Speaker 1: And so the challenge that I had in that context
Speaker 1: was I have no skill set in terms of launching
Speaker 1: e t s. I have a history of participating in
Speaker 1: launching hedge funds. Sort of join up with an organization
Speaker 1: that is really skilled in launching those ETFs was really
Speaker 1: one of the key components in terms of the opportunity itself.
Speaker 1: I became aware of it in early one is my
Speaker 1: friend Harley Basman made the transition over to simplify and
Speaker 1: basically said, hey, you gotta take a look at this,
Speaker 1: and I came to the conclusion that he was right.
Speaker 1: So quick question, you guys keep talking about the rule change.
Speaker 1: The rule change you're talking about is that? Is that
Speaker 1: the ability to do in kind transactions with options? Is that?
Speaker 1: Is that the rule change of referencing it's it's not,
Speaker 1: Although that one is also an important one. So in
Speaker 1: October sec past essentially a modernized regulatory framework on the
Speaker 1: use of derivatives. It's it's been long in sort of
Speaker 1: the pipeline and then was formally finalized and passed, and
Speaker 1: that again modernizes the use of derivatives. UM, as I
Speaker 1: alluded to earlier, does the other point you're making, UM
Speaker 1: only magnifies the opportunity because not only are you permitting
Speaker 1: the use of derivatives inside of an et F rapper
Speaker 1: or vehicle, you're now giving it a tax advantage relative
Speaker 1: to maybe other ways of holding that same option. Much
Speaker 1: like ETFs have have a tax advantage in holding single
Speaker 1: single name stocks and bonds, you're now able to redeem
Speaker 1: out in kind single name stock options, including options on
Speaker 1: e t F s, and so that creates a whole
Speaker 1: new ability to creatively think about really interesting ETF strategies
Speaker 1: that are very tax efficient. UM. Let me jump in here,
Speaker 1: because over the years there's been many downside hedge TTF
Speaker 1: that's been air You that it looks good on paper,
Speaker 1: but in a bull market, a lot of them dragged,
Speaker 1: And I get your idea is to not drag as
Speaker 1: much and get as much upside, and then assuming that
Speaker 1: the more of the market gets bubbly, which probably leads
Speaker 1: to Mike Green's you know, passive bubble theory where when
Speaker 1: you do have these downturns they get steep, right. So
Speaker 1: this this way you're protecting your downside. Is this the
Speaker 1: type of product that you use on top of, say
Speaker 1: a Vanguard five fund or do you sort of are
Speaker 1: you trying to replace that whole part of the portfolio. Um?
Speaker 1: How are you presenting this in terms of portfolio construction
Speaker 1: to advisors? Um, we are presenting it as a tool.
Speaker 1: So for some advisors, they they they viewed as a
Speaker 1: dollar for dollar replacement of their equity beta in the
Speaker 1: case again of our SMP strategies. And it makes sense
Speaker 1: in the context of a higher risk adjusted return potential
Speaker 1: through similar reasons at a sixty forty off and out
Speaker 1: forms equity beta in that by cutting off the downside,
Speaker 1: you're you improve the compounding and potentially improve your geometric returns. Right,
Speaker 1: And so that sort of concept UH is an attractive
Speaker 1: one for one. But in today's environment, where yields are
Speaker 1: essentially at negative real rates, UM, the advantages of UH
Speaker 1: sort of having that fixed income is offset by the
Speaker 1: negative carry of that fixed income. And so in that case,
Speaker 1: if you could create some other way to directly hedge
Speaker 1: downside instead of instead of relying on fixed income, it
Speaker 1: could actually also improve your returns. And so we may
Speaker 1: be getting a partial dollar out of your fixed income
Speaker 1: bucket as well as the equity bucket. And so those
Speaker 1: are the two main use cases that we found. But
Speaker 1: our core value proposition is that we're trying to keep
Speaker 1: and maintain that roughly one beta exposure. So, Mike, um,
Speaker 1: you and I have had several discussions both offline over
Speaker 1: I B and then on Filbox podcast, which if you
Speaker 1: want background on Mike's thoughts on passive and his worries
Speaker 1: about it, go listen to that podcast. Um, he goes
Speaker 1: over all of it there. But you're you are known.
Speaker 1: Oh you're also on Odd Lots and I thought that
Speaker 1: was a good one too. You went over all that
Speaker 1: on that, which is a sister podcast to ours. So
Speaker 1: but let's just for people out there, Mike's a little
Speaker 1: worried about passive being a sort of problem. And now,
Speaker 1: so when I tweeted about your coming over to simplify,
Speaker 1: of course, you had some knuckleheads out there. They're like, Oh,
Speaker 1: what's going on here, Mike? I thought you said the
Speaker 1: S and P S dune, you know, passives of bubble.
Speaker 1: How does this is? How is this in tune with
Speaker 1: your thoughts on passive or is there a little bit
Speaker 1: of a conflict there? So I don't think there's a
Speaker 1: conflict at all. I mean, the point that I have
Speaker 1: continually made on passive is is that it is changing
Speaker 1: the market structure, right, that it is influencing the behavior
Speaker 1: of markets. And we see this both in the behavior
Speaker 1: of rallies and in the behavior of selloffs. The selloffs
Speaker 1: are more frequent in terms of the negative skew that
Speaker 1: presents in the market and others. The market's propensity to
Speaker 1: crash is rising over time. Propensity for highly correlated selloffs
Speaker 1: is rising over time. At the same time, the dynamics
Speaker 1: of the shift to passive away from active are creating
Speaker 1: many of the themes that we hear in the market
Speaker 1: right the by the dip type mentality, etcetera. What you have,
Speaker 1: by and large is a um unthinking allocation mechanism that
Speaker 1: simply relies on Americans participating through their four oh one
Speaker 1: case or people around the world participating through their retirement
Speaker 1: programs or through their deductions. That they're making from their
Speaker 1: paychecks or regular contributions. And the rules of passive in
Speaker 1: ones the behavior of the market and just the simplest form. Right,
Speaker 1: the rules of passive are as simple as did you
Speaker 1: give me cash? If so, then by did you ask
Speaker 1: for cash? If so, then sell? And the work that
Speaker 1: I have focused on is the impact of introducing that
Speaker 1: systematic type of strategy on market behavior. What that really does,
Speaker 1: and what I've been very clear on is is that
Speaker 1: that change in the distribution of outcomes that occurs because
Speaker 1: of the influence of passive means that options are improperly priced.
Speaker 1: And so throughout my career I've been a value investor
Speaker 1: in the context not of saying, you know, here's a
Speaker 1: super cheap company based on my estimate of future free
Speaker 1: cash flows, but instead to say, here's a super cheap
Speaker 1: instrument or security that can be purchased at a price
Speaker 1: that inaccurately reflects the future distribution of outcomes for the
Speaker 1: underlying product. Right, That's what we're doing. It simplify, right,
Speaker 1: the the ability to overlay the options and participate in
Speaker 1: the inflation that's occurring because of the passive dynamic, but
Speaker 1: to do so in a way that protects investors both
Speaker 1: to the downside and from the risk of a market
Speaker 1: that effectively runs away from them is as I said,
Speaker 1: like it didn't exist technically before. You couldn't do it
Speaker 1: from a regulatory framework, and now suddenly you can. And
Speaker 1: the second component is is that the options themselves don't
Speaker 1: accurately reflect these prices, creating the opportunity to do stuff
Speaker 1: that I think of as true value investing. We talked
Speaker 1: about the broad allocation e t s. We've talked about
Speaker 1: the benefits of taking part of your six your inequities
Speaker 1: or party fix income and putting him in these broader
Speaker 1: um e t s. You guys have launched, but you
Speaker 1: guys also have launched a suite of more specific, targeted
Speaker 1: thematic ETFs almost using kind of the same strategy with
Speaker 1: hoping to get additional upside in like v car, which
Speaker 1: is robocar, disruption fintech, and v fin um a whole
Speaker 1: bunch of these. Can you just talk about how you
Speaker 1: view those being used, how you chose the strategies to launch,
Speaker 1: and anything you have to say about them. Sure, um,
Speaker 1: And so just just because we started off with broad
Speaker 1: beta does not mean that's sort of where fixed fixated
Speaker 1: on UM. We're also trying to solve advisor and investor
Speaker 1: demand for things like concentrated investing, which often play out
Speaker 1: in thematic investing. And so what we've done is create
Speaker 1: very hyper concentrated e t s again that push the
Speaker 1: boundaries to what's permissible in a forty act vehicle UM,
Speaker 1: and also concentrate further by enhancing the upside potential by
Speaker 1: buying buying single names stock options mostly calls on some
Speaker 1: of our key names in the portfolios that hang on
Speaker 1: that theme. And the idea from a high level view
Speaker 1: is kind of do what Warren Buffett and Carl Lyken
Speaker 1: and other famous investors have done in their careers, which
Speaker 1: is really concentrated into a few few key names to
Speaker 1: you take advantage of their relative growth to the universe
Speaker 1: or potential growth, and then do it in a risk
Speaker 1: measured way where we're also embedding sort of downside hedges,
Speaker 1: so that if you're not exactly right with your timing,
Speaker 1: it could still have a structure that creates this really
Speaker 1: concentrated upside, but much more diversified and hedge downside. So
Speaker 1: that's the interesting thing. At the very highest level, it's
Speaker 1: it's a variance maximization structure. So you've concentrated, you have
Speaker 1: relatively high variance names, and you have a structure that
Speaker 1: captures moves when they go up in a way to
Speaker 1: sort of diversify and mitigate the downside when they don't
Speaker 1: go up as fast. Yeah, so these these strategies can
Speaker 1: theoretically almost compound almost like some of the leverage gts
Speaker 1: UM if you if it starts really going in those calls,
Speaker 1: those upside calls get hit, which is extremely interesting from
Speaker 1: our point of view. The other thing is themes is
Speaker 1: like I feel like it's always been talking about last year,
Speaker 1: themes are taking over sector investing because people don't want
Speaker 1: to invest in a specific sector like themes are easier
Speaker 1: to talk about. They're taking away some of the thunder
Speaker 1: from smart beta, E t F s UM. So it
Speaker 1: just makes complete sense to kind of packages in these
Speaker 1: other strategies. Yeah, when you said the hunger for concentration,
Speaker 1: I just want to hone it on that. In a minute.
Speaker 1: We are noticing this clear barbelling of flows where it's
Speaker 1: either dirt chief beta or wild and crazy you know,
Speaker 1: something very different. This is sort of the artifact I
Speaker 1: guess if you will, themes are right in there. Um,
Speaker 1: this is this because portfolios are barbelling. People are just
Speaker 1: they're gonna they're gonna have this cheap base and then
Speaker 1: sort of decorate it with what we tend to refer
Speaker 1: to as hot sauce. I mean, is that what you're
Speaker 1: finding from advisors is that why you're in fact in
Speaker 1: your area you have the barbell going right there in
Speaker 1: terms of the product line. Well, so I would actually,
Speaker 1: um take a stab at that. I think again for me,
Speaker 1: part of of the interesting dynamic that we're seeing with
Speaker 1: theme stocks, etcetera is is that it's a reflection of
Speaker 1: the market fragility dynamics we're talking about, right, So in
Speaker 1: many of these situations, the core buyers and holders of
Speaker 1: these theme stocks are going to be the vanguards and
Speaker 1: black rocks of the world. The question is, can you
Speaker 1: gain increased convexity or rocket fuel to an exposure because
Speaker 1: you decide to make a concentrated bet in that area, right,
Speaker 1: and the ability to articulate that and to do so
Speaker 1: in a manner that is easily accessible and tradeable from
Speaker 1: an r A framework, It's tough to see that is
Speaker 1: not offering value to the community. Just before we move
Speaker 1: on to the limitations, I think Joe's gonna about limitations.
Speaker 1: Paul Um back to the i VV and then the
Speaker 1: puts and that tail risk hedge yep UM. Have you
Speaker 1: tested this in environments? And do you know about how
Speaker 1: much of the market downturn you save? Like, do you
Speaker 1: have any way to quantify what you're saving there? Because
Speaker 1: the Bruce bond Over an innovator, he has these exact metrics.
Speaker 1: You know, you'll you'll have the stomach the first five percent,
Speaker 1: but then after that will cover you know, he's very
Speaker 1: clear on this is exactly what you get. How do
Speaker 1: you answer that question to somebody who's like, well, how
Speaker 1: much will this save me if the market tanks? So
Speaker 1: you can't get a precise forward looking number, but there's
Speaker 1: certainly a lot of historical episodes going back way to
Speaker 1: the you know, periods like the Great Depression UM, where
Speaker 1: you could estimate UM sort of draw downs and sort
Speaker 1: of the limits and timing of those drug downs. UM
Speaker 1: in a nutshell by buying very deep out of the
Speaker 1: money puts, they act as a shock ups over, almost
Speaker 1: like a rubber band. It's it's hard to forecast exactly
Speaker 1: what that force is, but it's it's a very powerful force.
Speaker 1: And UH, which is the term convexy right gamma and
Speaker 1: equity terms it basically, at the further and faster you fall,
Speaker 1: and higher the implied volves go up, these options significantly
Speaker 1: increasing value. And so if you look back at a
Speaker 1: very generic one percent of your portfolio and sort of
Speaker 1: a thirty percent put, this is not our strategy, but
Speaker 1: I'm just talking generically that going into March, that one
Speaker 1: percent would have done more than the work of a
Speaker 1: forty percent allocation to long treasuries. So very modest amount
Speaker 1: of out of the money puts effectively protects the entire portfolio,
Speaker 1: or has the potential to protect the entire portfolio as
Speaker 1: a full on, hard duration allocation to the longest UH
Speaker 1: treasuries out there. Um, that's powerful, right. That really speaks
Speaker 1: to how much UH sort of a help these puts
Speaker 1: can have. The drawback is constructing it in the right
Speaker 1: way and having a systematic approach that makes sure you're
Speaker 1: not over spending on protection and buying the right strikes
Speaker 1: and looking for opportunities where options are cheap. Okay, Michael,
Speaker 1: what are the limitations or the or the potential limitations
Speaker 1: of the strategy. Well, I think Paul just hit on
Speaker 1: one of them, right. The history doesn't repeat at rhymes,
Speaker 1: and so we're never going to know exactly what the
Speaker 1: performances of a derivative overlay strategy. It's going to depend
Speaker 1: on where volatility rises, is going to depend on the
Speaker 1: shape of the volatility surface or the curve that that
Speaker 1: exists in the volatility space. It's going to depend on
Speaker 1: the speed of the decline, etcetera. Right, so these are
Speaker 1: all factors that you have to consider when you're thinking
Speaker 1: about protecting a portfolio or how to manage against that.
Speaker 1: And then there's the further issue that you have of
Speaker 1: you know, is the picture of the past an accurate representation.
Speaker 1: We went through two thousand seven eight, passive strategies were
Speaker 1: roughly fifteen percent of the market. Today they're somewhere in
Speaker 1: the neighborhood oft and more than half of all the
Speaker 1: managed assets. And so understanding those differences means that you're
Speaker 1: never going to have perfect insight. And candidly, I have
Speaker 1: not seen the claims of we'll do exactly this protection, etcetera.
Speaker 1: But I would challenge the ability to make that type
Speaker 1: of statement. Um. There is a secondary benefit, though, is
Speaker 1: you move away from using interest rates to protect your portfolio.
Speaker 1: What you're really relying on with the interest rate dynamic
Speaker 1: is the FEDS reaction function. Is the Central Bank going
Speaker 1: to cut interest rates in reaction to a decline in
Speaker 1: equity prices? All right, that's a relatively recent phenomenon in
Speaker 1: terms of markets that really only began to emerge in
Speaker 1: the aftermath of long term capital management in the Asian
Speaker 1: Financial crisis, brief episode of it with the crash seven.
Speaker 1: But here you're talking about doing something differently because if
Speaker 1: you're embedding derivatives that are tied directly to the stock market,
Speaker 1: so puts on the S and P five hundred, for example,
Speaker 1: you have a reduced level of what in the industry
Speaker 1: is referred to as basis risk, or the risk that
Speaker 1: the protection that you bought in your portfolio doesn't actually
Speaker 1: protect your portfolio because it's not directly tied to it. Right.
Speaker 1: So there's some improvement and there's some increase in uncertainty
Speaker 1: around other aspects of it. Ultimately, I don't think people
Speaker 1: have a choice because what we've seen is the FED
Speaker 1: has so aggressively targeted market selloffs and risk off events.
Speaker 1: With the policy of cutting interest rates, that we've now
Speaker 1: ended up at a point where those bonds offer almost
Speaker 1: no prospect of reasonable return and you're effectively buying, you know,
Speaker 1: a synthetic put on your equity portfolio when you buy
Speaker 1: a ten year treasury or a thirty year treasury, with
Speaker 1: significant uncertainty as to whether that's going to deliver the
Speaker 1: return profile that you're hoping for. All Right, I want
Speaker 1: to shift a little bit too, this sort of ambition
Speaker 1: that you guys have. You know, it's not just the
Speaker 1: products that you've come out with and the hires that
Speaker 1: you've made. I've seen a really interesting filings from Simplify.
Speaker 1: I know you can't talk at them, so I'll throw
Speaker 1: them all out there for the listener and then just
Speaker 1: lets you comment on however you want. You have a
Speaker 1: filing for a c d X E t F. This
Speaker 1: is a basically a credit default swap ETF. That term
Speaker 1: has a lot of uh, you know, people have a
Speaker 1: lot of feelings when they hear that, although there was
Speaker 1: one tried before. You have an equity plus bitcoin ETF.
Speaker 1: You have a inverse vall E t F. Another one
Speaker 1: that gets people the fields right there, although it's not
Speaker 1: all the way one time inverse, I think it's half
Speaker 1: for inflation convexity, gold convexity. I mean, you really have
Speaker 1: this interesting arsenal of products in the pipeline that really
Speaker 1: put you on on a trajectory to be almost like
Speaker 1: the alternative issuer. You know, is that is that your
Speaker 1: goal here is too is to really own that spot. Um,
Speaker 1: what's the grand vision here? So I think it's one
Speaker 1: level higher than that which alternatives tend to be a
Speaker 1: smaller Porsche and of a portfolio. Right, So what we're
Speaker 1: really trying to do is create either improved beta's or
Speaker 1: really take existing beta's, deep public accessible beta's and turning
Speaker 1: them into either return generators or or sort of better
Speaker 1: building blocks for portfolios. And again, in the context of
Speaker 1: a forty years sixty forty paradigm that's embedded itself in
Speaker 1: every sort of retirement channel out there, we want to
Speaker 1: provide an alternative way to think about ASSE allocation that
Speaker 1: can navigate the road ahead. So if you think about
Speaker 1: views on either extreme inflation or deflation, very few et
Speaker 1: F platforms in my view, have U sort of a
Speaker 1: significant offering that works when rates go up or when
Speaker 1: inflation picks up as an example, right, and also very
Speaker 1: few platforms offer sort of exposure to UH ways of
Speaker 1: navigating times when risk assets i e. Short vowel assets
Speaker 1: sell off. So can we offer things that are much
Speaker 1: more long volatility that take the other side, but doing
Speaker 1: in a way that can be put into a portfolio
Speaker 1: that has a positive expected value and can help meet
Speaker 1: investors returns. And so that's sort of how we view
Speaker 1: the building blocks. It's not so much. Again, Let's go
Speaker 1: for a ten or twenty slice of somebody's portfolio and
Speaker 1: give something interesting, it's really less reimagining and create another
Speaker 1: path for much more interesting as allocation frameworks and give
Speaker 1: advisors that tool that before have never been accessible, even
Speaker 1: two very large advisors, things that require things like is
Speaker 1: does right UM which even um relatively large hedge funds
Speaker 1: may not have access to UH. Create interesting again, strategies
Speaker 1: that take advantage of capital efficient see balance sheet efficiency,
Speaker 1: really interesting and thoughtful use of leverage in a very
Speaker 1: risk focused way. So those are all the things that
Speaker 1: we have down the road, and you're you're starting to
Speaker 1: see the filings and sort of hinting out where we're
Speaker 1: trying to take this place. By the way, Joel, this
Speaker 1: is you know when people are like, oh, they're e
Speaker 1: t s are a bubble, and I'm like they kind
Speaker 1: of quite ets with beta. I'm like, no, they actually
Speaker 1: make e t s to capitalize on the bubble bursting
Speaker 1: or people, I think sometimes forget that. It's really fascinating
Speaker 1: that all this stuff is being put into this structure. Yeah. Yeah,
Speaker 1: it's like a wrapper around a roup. I would say,
Speaker 1: building on what Eric just said, Michael Birnie talked about
Speaker 1: passive PUBB ETF and investing in small cap values specifically,
Speaker 1: and then cited a couple of names you've invested in,
Speaker 1: like game Stop and other other names that were like
Speaker 1: passively owned, which is way higher than the average. So
Speaker 1: it just shows that a lot of times, even extremely
Speaker 1: smart investors don't have the true understanding of exactly et
Speaker 1: s and passive investing or what we call passive investing.
Speaker 1: I should say, because there's a there's a spectrum, but
Speaker 1: there's definitely a big gap in this understanding even among
Speaker 1: super intelligent investors. James, I, I I just wanted to um
Speaker 1: emphasize the point that you're making there, right, which is
Speaker 1: when you look at a lot of the theme stocks
Speaker 1: that you look at a lot of the behavior that's
Speaker 1: happened in markets, it tends to have happened in these
Speaker 1: stocks that have high concentrations of ownership. Whether that's because
Speaker 1: there are significant option quantities that are outstanding against them,
Speaker 1: or whether there are passive players who perversely choose to
Speaker 1: add to stuff effectively, as new money comes in, they'll
Speaker 1: buy more of something as it goes higher, reinforcing momentum
Speaker 1: type characteristics. Again, those are the opportunities that we think
Speaker 1: we have the chance to take advantage of that really
Speaker 1: haven't existed in the markets in the past. And simultaneously,
Speaker 1: that means that we can allow investors to participate in
Speaker 1: what feels like craziness to us, but also feel some
Speaker 1: degree of protection to the downside. So, Michael, does that
Speaker 1: mean that you could potentially get into a place where where,
Speaker 1: like right now, you're using sort of broader indexes, but
Speaker 1: you could get into one where you're customizing and doing
Speaker 1: so based on trends that you're seeing in certain places. Yeah,
Speaker 1: it's difficult to talk about the product development framework um
Speaker 1: other than what's already been filed. Eric referred to a
Speaker 1: couple of these things. What I hope Simplify becomes known
Speaker 1: for is actually something that Paul alluded to before, which
Speaker 1: is the thoughtful construction of these products and the appropriate
Speaker 1: use of leverage. So, for example, a short volatility e
Speaker 1: t F. People are obviously familiar with products like x
Speaker 1: I V that, um, you know, blew up quite spectacularly
Speaker 1: in February of two thou eighteen. They're also familiar with
Speaker 1: two times or three times levered S and P type products,
Speaker 1: or you know, Russell products, etcetera. What you often find
Speaker 1: with those is that they were created, in my view,
Speaker 1: without a a a significant amount of thought behind should
Speaker 1: we do this? Is this appropriate for investors? Is this
Speaker 1: the right degree of leverage? When you create products that
Speaker 1: have the linear payouts that those products historically have had,
Speaker 1: and all you're doing is attaching significant leverage to it,
Speaker 1: you actually increase the odds of events like the February
Speaker 1: eighteen volmerged where a very popular two plus billion dollar
Speaker 1: e t F went to zero in a single day,
Speaker 1: right or effectively to zero in a single day. UM,
Speaker 1: we can do better than that, and we can be
Speaker 1: much more thoughtful about how to appropriately construct these products
Speaker 1: we're not trying to create the you know, three four
Speaker 1: five scent return things. We're trying to replace products in
Speaker 1: people's portfolios that no longer work, for example, bonds. So, Paul,
Speaker 1: it sounds like you have things on a white board
Speaker 1: that are really exciting, and then there's some other things
Speaker 1: on the other side of the whiteboard that might be
Speaker 1: farther away. And I'm curious, like, like, what, you know,
Speaker 1: the name of your company is simple, Why how many
Speaker 1: products do you think you'll ultimately have here? I get
Speaker 1: a lot of complaints internally on how fast we're moving. Uh,
Speaker 1: we have nine currently and have another six on docket
Speaker 1: and probably another six waiting right beyond that, So I
Speaker 1: could easily see thirty or forty t f s and
Speaker 1: you know, in a couple of years um, which most
Speaker 1: being very very very unique and solving very very big
Speaker 1: problems for advisors. And that's sort of the sort of
Speaker 1: the urgency behind how how aggressive we're trying to tackle this,
Speaker 1: because it feels like there's this window of opportunity to
Speaker 1: move fast, to just feed into that creativity and opportunity
Speaker 1: and really address some of the biggest challenges that we
Speaker 1: feel are not being addressed properly today. Mike Green. One
Speaker 1: thing you said on the last time we were on
Speaker 1: the podcast at Phil's Phil's pod cast was and it's
Speaker 1: stuck with me. You said that the government and just
Speaker 1: in general, they now look at the stock market as
Speaker 1: America's retirement savings. And Yellen said something along the lines
Speaker 1: of how active bond mutual funds. We're going to have
Speaker 1: to unload all these bonds in the middle of March,
Speaker 1: and it was going to be fire sale, and she
Speaker 1: kind of alluded that's why they stepped in, which was
Speaker 1: part of my hunch. It seems like the whole mutual
Speaker 1: fund industry, active and passive, is the new too big
Speaker 1: to fail thoughts. Unfortunately, I think that's right, And you know,
Speaker 1: I referred to this earlier, that the Federal Reserve has
Speaker 1: taken a much more active role in quote unquote protecting
Speaker 1: the market. Right, so the reaction function to declines has
Speaker 1: become more aggressive over time, and it has become quicker
Speaker 1: to be instituted. Right on, in two thousand, we saw
Speaker 1: a dramatic market decline with relatively limited intervention. By the
Speaker 1: time we got to two thousand and twenty, you know,
Speaker 1: the within days and weeks of the market declined beginning
Speaker 1: the Federal Reserve is rolling out unprecedented programs. Right. Part
Speaker 1: of the reason why that's happening is to say, the
Speaker 1: FED is relied in the post two thousand eight, post
Speaker 1: GFC environment on the wealth effect to stimulate the economy,
Speaker 1: recognizing that a sizeable and growing fraction of the US
Speaker 1: population relies on self directed retirement accounts to provide for
Speaker 1: extended retirements, etcetera. I don't know that there is any
Speaker 1: way out of that, but the tools that are becoming
Speaker 1: of the tools that they have available are becoming fewer
Speaker 1: and fewer. Right, So the ability to cut interest rates
Speaker 1: from the six percent level in two thousand I'm sorry,
Speaker 1: two thousand seven and we were at nine percent, right,
Speaker 1: that's now largely gone. We can't cut those interest rates
Speaker 1: much further from zero without it becoming potentially contractionary because
Speaker 1: it becomes effectively attacks on wealth. So that the need
Speaker 1: for investors to take the steps to protect their portfolios,
Speaker 1: in my view, is actually growing. At the same time,
Speaker 1: of course, that the confidence in the Fed's ability to
Speaker 1: protect the markets through you know, various memes of FED
Speaker 1: printer Goesburg etcetera is growing higher and higher and higher. Right,
Speaker 1: people have completely forgotten that the market could crash as
Speaker 1: aggressively as it did in March. Now the perception is
Speaker 1: you can't have any type of decline of of you know,
Speaker 1: any sustained period or severity it is. It is fascinating. Um.
Speaker 1: The more I just think and think about it, I'm like, yeah,
Speaker 1: and plus all the book, it's all boom or retirement money,
Speaker 1: and the boomers have all the power and there's a
Speaker 1: revolving door it. I don't want to go conspiracy theory,
Speaker 1: but it just seems like they they're just not going
Speaker 1: to let the market go down. It's now almost like
Speaker 1: socialized in a weird way, where they have to have
Speaker 1: it stay up so people can take the retirement money out.
Speaker 1: The point of the stock market, which is supposed to
Speaker 1: be not really that bankable you know, used us to
Speaker 1: be risky, has become the They shaped it to be
Speaker 1: something that is more reliable, and now there's so much
Speaker 1: money in it and it's hard to see where it ends. Well,
Speaker 1: I think, uh, I think Eric's going to go to
Speaker 1: a bitcoin island. Well, I think this will come to
Speaker 1: crypto Yeah, I mean, um, Joel's joke about bitcoin Island.
Speaker 1: I mean, I've I've said this elsewhere and i'll i'll,
Speaker 1: you know, continue to stand behind it that people understand
Speaker 1: that the system is growing increasingly fragile and growing increasingly
Speaker 1: dependent on the need to keep stability right. And so
Speaker 1: this play is right into the Hyman Minsky type framework
Speaker 1: of the more you create stability, the more you build fragility.
Speaker 1: The system when it breaks becomes catastrophic. We can't possibly
Speaker 1: know when that's going to occur, but all I can
Speaker 1: do is encourage people to recognize that the message that
Speaker 1: they get from the stock market, right, the idea that
Speaker 1: there's the expectations channel and the smart and brightest minds
Speaker 1: in America are speculating in stocks and telling you the
Speaker 1: forward expected returns associated with the US economy and income prospects, etcetera.
Speaker 1: That's just not true in the presence of systematic strategies
Speaker 1: that literally are as simple as did you give me cash?
Speaker 1: If so, then by right, And that is really what
Speaker 1: you know catches my imagination in terms of the opportunity
Speaker 1: to build a better solution for investors and a set
Speaker 1: of tools that simplify the process for investment advisors that
Speaker 1: are trying to understand how to protect their portfolios, both
Speaker 1: on a right tail outcome and on a left tail outcome.
Speaker 1: I like how you slipped and simplified there, Michael, that
Speaker 1: was good product. But yeah, how much does this? How
Speaker 1: much does this actually help understand and explain the bitcoin phenomenon?
Speaker 1: Right of Like if there's this inherent feeling that things
Speaker 1: are getting more fragile, like here's this, I'll turn native
Speaker 1: asset that no one's ever seen before. That's better than
Speaker 1: nothing else, Right, Yeah, shouldn't this make you pro bitcoin?
Speaker 1: Mike um when you say, shouldn't make me pro bitcoin?
Speaker 1: So so, I just want to emphasize my view on
Speaker 1: bitcoin is not whether it is going to go up
Speaker 1: or down in the short term. Right. My view on
Speaker 1: bitcoin is that it is distracting people from um participating
Speaker 1: in a robust discussion around how to fix the system
Speaker 1: the minute you choose an exit voice, right, which candidly
Speaker 1: has happened historically before. Right. The nineteenth century was largely
Speaker 1: about immigrants, immigrants from Europe and the rest of the
Speaker 1: world coming to the New World in order to buy
Speaker 1: a better future for themselves, taking an exit voice from
Speaker 1: you know, the corrupt societies that they were part of.
Speaker 1: Right today you see people trying to do that same
Speaker 1: thing without changing their geographic location, and it just doesn't
Speaker 1: work that way. You can separate yourself from authoritarian m
Speaker 1: in danger by physically removing yourself and taking yourself an
Speaker 1: ocean away onto a protected continent. You can't do that
Speaker 1: by moving your bank account. Right. It's just it's not
Speaker 1: an accurate representation or a realistic way to step out
Speaker 1: of the system. And further, it doesn't create the opportunity
Speaker 1: for building something better. That's my complaint about bitcoin, Paul,
Speaker 1: last question for you favorite et F ticker other than
Speaker 1: your own? Um, I've always liked PPNJ. I don't know
Speaker 1: like tickers like that are fun um and and not
Speaker 1: a direct competitor either, which is great. Good. There you go.
Speaker 1: And my goal. What is Peter Til's favorite? I have
Speaker 1: no idea. How about yours? Um x I V legend
Speaker 1: People still tweet about it. I mean, if you if
Speaker 1: you look dollar sign x I V, it's probably five
Speaker 1: six tweets today. People miss that thing. Yeah, I would
Speaker 1: love the opportunity to have another shot that, but um,
Speaker 1: Instead we'll come at it from a different angle, Paul
Speaker 1: Michael James, thanks for joining us on Trillions. Thank you guys, pleasure,
Speaker 1: thanks for having Thanks for listening to Trillions. Until next time.
Speaker 1: You can find us on the Bloomberg Terminal, Bloomberg dot com,
Speaker 1: Apple Podcast, Spotify, and Warbils. Do you'd like to listen,
Speaker 1: We'd love to hear from you. We're on Twitter, I'm
Speaker 1: at Joel Wepper Show, He's at Eric Baltunus and you
Speaker 1: could find James at j S E y f F.
Speaker 1: For more unsimplified, go to simplify dot us. This episode
Speaker 1: of Trillions was produced by Magnus Hendrickson and Jessica Levy
Speaker 1: is the head of Bloomberg Podcast. Bye.