WEBVTT - Easterly’s Holzer on Asymmetric Return Patterns 0:00:15.600 --> 0:00:18.759 Welcome to Inside Active, a podcast about active managers that 0:00:18.800 --> 0:00:21.599 goes beyond sound bites and headlines and looks deeper into 0:00:21.640 --> 0:00:26.439 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:26.480 --> 0:00:29.360 i lead mutual fund and active research at Bloomberg Intelligence. 0:00:29.480 --> 0:00:32.680 Today my co host is James Seifert, ETF, analyst with 0:00:32.680 --> 0:00:35.400 Bloomberg Intelligence. James, thank you for joining me today. 0:00:35.600 --> 0:00:37.320 Yeah, thanks for having me. David, happy to be back. 0:00:37.479 --> 0:00:38.680 It's always fun to do these. 0:00:38.520 --> 0:00:41.560 Things, definitely. So we're today we're going to be talking 0:00:41.600 --> 0:00:44.519 about a hedge equity strategy, which you know, kind of 0:00:44.520 --> 0:00:47.400 reminds me of, you know, the popularity that's happening right 0:00:47.440 --> 0:00:51.720 now with buffer ETFs, options over lay ETFs. What have 0:00:51.800 --> 0:00:54.160 the flows been like to those products so far this year? 0:00:55.240 --> 0:00:58.440 I mean, if you are looking at those buffer defined 0:00:58.480 --> 0:01:01.960 outcome ETFs as we call them, the options overlay ets 0:01:02.000 --> 0:01:05.440 where you're getting income or protection of some sort, they 0:01:05.480 --> 0:01:08.560 are arguably one of the hottest categories in ETFs in 0:01:08.560 --> 0:01:10.679 the US as far as a percentage growth basis. I mean, 0:01:10.800 --> 0:01:12.880 they're not taking in as much money as a standard 0:01:13.000 --> 0:01:15.560 standalone s A P five hundred type product, but if 0:01:15.640 --> 0:01:18.160 you're looking at it on a percentage growth basis, I mean, 0:01:18.200 --> 0:01:21.399 it is some serious it's a serious category. And when 0:01:21.400 --> 0:01:23.360 you combine the two of them, I mean, right now, 0:01:23.440 --> 0:01:26.600 in the US alone, you're looking at for those defined 0:01:26.640 --> 0:01:30.920 outcome ETFs, eighty seventy billion dollars in ETF, so only 0:01:30.959 --> 0:01:33.200 on equity. There's some in other areas. And then if 0:01:33.200 --> 0:01:35.479 you again, if you're looking at options overlay, again only 0:01:35.520 --> 0:01:39.200 in equity, that's almost one hundred and ten billion dollar category, 0:01:39.240 --> 0:01:42.440 which granted it's not a trillion dollar category, but it's big. 0:01:42.480 --> 0:01:44.160 And the main thing I want to point out is 0:01:44.200 --> 0:01:47.520 it's growing quickly. So they're taking in combined three billion 0:01:47.560 --> 0:01:50.120 dollars a month like clockwork, pretty much for the year 0:01:50.160 --> 0:01:53.520 of twenty twenty five. So if you're an issue or 0:01:53.520 --> 0:01:56.280 advisor kind of targeting the same sort of strategy, it 0:01:56.600 --> 0:01:58.840 should be looking pretty good for you that you can 0:01:58.880 --> 0:02:01.880 maybe pull away some of the money that's going there. 0:02:01.880 --> 0:02:03.520 You know, the fish are jumping in the boat. People 0:02:03.520 --> 0:02:06.360 obviously like the ideas behind these categories, so it'll see 0:02:06.360 --> 0:02:07.080 how it turns out. 0:02:07.360 --> 0:02:09.720 Well, there's definitely a lot of interest, which makes a 0:02:09.760 --> 0:02:12.800 great segue to our guests today. I'd like to welcome 0:02:12.840 --> 0:02:15.520 our name Holzer to the podcast. Our name is the 0:02:15.520 --> 0:02:20.160 global macro strategist and client portfolio manager at Easterly EAB 0:02:20.680 --> 0:02:25.040 and a portfolio manager on their Easterly Hedge equity strategy. 0:02:25.240 --> 0:02:26.920 Our name thank you for joining us today. 0:02:27.160 --> 0:02:29.359 Thanks for having me, David, and great to meet you, James. 0:02:30.080 --> 0:02:32.919 So let's dive right in. What is the investment philosophy 0:02:33.000 --> 0:02:33.880 behind the strategy. 0:02:34.280 --> 0:02:37.760 The philosophy is very simple. What we're trying to do 0:02:38.000 --> 0:02:41.640 is create an asymmetric return pattern where we get more 0:02:41.680 --> 0:02:44.560 of the upside of the S and P than we 0:02:44.639 --> 0:02:46.920 get of the downside of the S and P, and 0:02:47.000 --> 0:02:51.280 particularly minimize drawdowns so that what you do is improve 0:02:51.320 --> 0:02:55.200 sharp ratios and sortino ratios, give investors a smoother ride, 0:02:55.240 --> 0:02:58.560 but actually give them a much more efficient hedge dequity 0:02:58.560 --> 0:03:01.040 approach than what's available and other products. 0:03:01.320 --> 0:03:05.280 Well, let's stick deeper. What is the investment management process like? 0:03:05.480 --> 0:03:07.720 So how does it work in terms of how do 0:03:07.800 --> 0:03:08.440 you approach this? 0:03:09.400 --> 0:03:12.200 Well, at our core, our firm is a is a 0:03:12.240 --> 0:03:15.800 derivatives research firm, and the work that we did showed 0:03:16.520 --> 0:03:19.960 that you know many many of the down drafts that 0:03:20.040 --> 0:03:22.760 occur in the market historically are in the one to 0:03:22.800 --> 0:03:25.560 two standard deviation area, in other words, between two and 0:03:25.680 --> 0:03:29.280 ten percent down drafts, and so we're really not trying 0:03:29.639 --> 0:03:34.680 to defend the deepest, you know, fifteen twenty percent down 0:03:34.760 --> 0:03:38.280 drafts in any one moment. We're trying to basically make 0:03:38.480 --> 0:03:42.840 relevant protection in that one to two standard deviation area 0:03:43.320 --> 0:03:46.240 and really hedge that. And then if the market continues 0:03:46.280 --> 0:03:49.280 to go down, we'll roll down further and we keep 0:03:49.280 --> 0:03:51.600 our trades kind of short. In other words, the structure 0:03:51.600 --> 0:03:54.280 of this is usually three to five week trades, and 0:03:54.360 --> 0:03:57.120 the market really goes down twenty five or thirty percent, 0:03:57.680 --> 0:04:00.200 you know, in a five to ten day period. By 0:04:00.280 --> 0:04:05.640 monetizing more more irregular down drafts, more occurring down drafts, 0:04:05.880 --> 0:04:09.480 you're actually able to protect more relevantly rather than waiting 0:04:09.520 --> 0:04:12.440 for that big down draft that often occurs only once 0:04:12.480 --> 0:04:14.920 every three four five years and you pay a lot 0:04:14.960 --> 0:04:18.200 for that. So our idea is to monetize to make 0:04:18.880 --> 0:04:23.159 offset from lower down drafts and then reinvest at those 0:04:23.240 --> 0:04:26.720 rates and get a quicker clawback. And what you find 0:04:26.880 --> 0:04:31.680 is a more relevant and actually a more efficient defense mechanism, 0:04:31.760 --> 0:04:35.400 a more efficient participation mechanism that gives you better sharp 0:04:35.600 --> 0:04:38.520 and sortino ratios than even the underlying S and P. 0:04:39.120 --> 0:04:42.800 So I'm going to jump in here real quick. Can you, like, 0:04:43.480 --> 0:04:47.599 how are clients using this strategy? Are you seeing it? Like? 0:04:48.400 --> 0:04:51.040 Are people using this as a core allocation? Are they 0:04:51.120 --> 0:04:55.760 using it as defensive or tactical? Like? Exactly is it? 0:04:55.839 --> 0:04:55.919 Like? 0:04:55.960 --> 0:04:57.560 Where is it going in the portfolio? 0:04:57.800 --> 0:05:00.280 I guess this is a great question, James, And you're 0:05:00.320 --> 0:05:03.240 going right to the meat of the issue. And if 0:05:03.279 --> 0:05:05.400 you don't mind, let me you know, kind of construct 0:05:05.839 --> 0:05:08.039 what the difference and how this and how this is 0:05:08.120 --> 0:05:13.000 used versus other funds, other buffer funds and kind of 0:05:13.000 --> 0:05:18.920 defined risk funds are basically defending one for one down 0:05:19.000 --> 0:05:21.880 drafts and participating and giving up some upside participation to 0:05:21.960 --> 0:05:25.839 do that. And they're really dumbing down. They're really muting 0:05:25.960 --> 0:05:29.200 volatility kind of equally on the upside and the downside. 0:05:29.520 --> 0:05:32.919 And that's really the problem, I would say into the 0:05:32.960 --> 0:05:36.200 Great Financial Crisis, which was we've got to figure out 0:05:36.200 --> 0:05:39.520 how to give our investors a less volatile ride, because 0:05:39.560 --> 0:05:42.200 the moments that they dealt with in terms of the 0:05:42.240 --> 0:05:44.760 tech wreck and in terms of the Great Financial Crisis 0:05:45.040 --> 0:05:49.240 were primarily not correlation expansion or beta problems. They were 0:05:49.279 --> 0:05:54.520 primarily volatility issues, and that volatility scared investors. Now what 0:05:54.600 --> 0:05:58.400 happened post to GFC is really interesting. The problem that 0:05:58.480 --> 0:06:01.520 we see occurred post the GFC is that correlations became 0:06:01.600 --> 0:06:05.559 much more unstable and David and James the real issue 0:06:05.640 --> 0:06:09.800 with modern portfolio theory is that it optimizes to volatility. 0:06:10.279 --> 0:06:14.000 But what we found, the kind of conundrum that investors 0:06:14.000 --> 0:06:16.080 and advisors have, and we talk to advisors every day, 0:06:16.640 --> 0:06:19.479 is that when you need correlations to be stable, which 0:06:19.520 --> 0:06:23.280 is the assumption in modern portfolio theory, they're uniquely unstable. 0:06:23.600 --> 0:06:26.400 And so your real problem from the Great Financial Crisis 0:06:26.400 --> 0:06:28.120 going forward and has been seen in the last five 0:06:28.200 --> 0:06:32.760 years post COVID, is that correlations across multi assets are 0:06:33.080 --> 0:06:37.159 just not stable. And so, for example, fixed income has 0:06:37.200 --> 0:06:39.600 been more often correlated to equities in the last four 0:06:39.680 --> 0:06:43.479 or five years than uncorrelated. And so the problem that 0:06:43.520 --> 0:06:46.400 you have from a portfolio management point of view is 0:06:46.440 --> 0:06:49.720 not so much giving a lower volatility to the overall portfolio, 0:06:49.920 --> 0:06:52.400 which is why people use the buffer funds. The traditional 0:06:52.440 --> 0:06:56.600 buffer funds that defend one for one, we defend twice 0:06:56.640 --> 0:06:59.360 the notional to the downside, and the reason is we're 0:06:59.400 --> 0:07:03.440 trying to the correlation problem and the beta expansion problem. 0:07:03.600 --> 0:07:07.520 And so by defending that downside with twice the notional 0:07:07.560 --> 0:07:10.160 downside and put spreads, what we do is we squeeze 0:07:10.160 --> 0:07:13.520 the beta risk to zero as the market goes down 0:07:13.600 --> 0:07:17.240 into our put spreads. That's a very different problem. And 0:07:17.360 --> 0:07:20.000 what we're doing is we're saying, look, your big issue 0:07:20.000 --> 0:07:22.320 from a portfolio management point of view, is it across 0:07:22.360 --> 0:07:26.800 even your equities alone, James, your correlations blow out much 0:07:26.800 --> 0:07:28.680 more meaningfully than they used to. And part of that 0:07:28.760 --> 0:07:33.040 is because inflation, because multi assets really perform differently than 0:07:33.080 --> 0:07:35.280 they used to. So what I would say is, in 0:07:35.320 --> 0:07:37.480 the past, you just use it as kind of an 0:07:37.480 --> 0:07:41.400 additional volatility MUTER. Now with our fund, what we're seeing 0:07:41.640 --> 0:07:44.360 is people are using it as a the diversification part 0:07:44.360 --> 0:07:48.600 of fixed income. They're substituting that piece. So not anybody 0:07:48.640 --> 0:07:51.320 in a sixty to forty model needs forty percent of 0:07:51.400 --> 0:07:54.760 their portfolio for income purposes. Of that forty percent in 0:07:54.800 --> 0:07:58.200 their allocation, often fifteen or twenty percent of that was 0:07:58.240 --> 0:08:01.520 actually for diversification per pose. So we're a very good 0:08:01.560 --> 0:08:04.440 substitute from a diversification point of view to plug in 0:08:04.440 --> 0:08:07.560 in that part of the portfolio. But now more and more, 0:08:07.680 --> 0:08:11.680 what we're actually seeing, after particularly eighteen, but more twenty two, 0:08:12.120 --> 0:08:15.120 where you saw S and P core positions, this core 0:08:15.160 --> 0:08:18.200 satellite idea and equity portfolios. What you're seeing is some 0:08:18.240 --> 0:08:20.560 folks say, wait a second, if the S and P 0:08:20.720 --> 0:08:25.240 went down nineteen percent in twenty twenty two, how good 0:08:25.280 --> 0:08:28.120 a core position was that? Really? From a risk management 0:08:28.160 --> 0:08:30.240 point of view, the fact that our fund was down 0:08:30.360 --> 0:08:32.559 less than three percent, if you had had that at 0:08:32.559 --> 0:08:35.040 the core. And yes, it's an active fund, and yes 0:08:35.520 --> 0:08:38.199 there's a fee management fee, but on a net basis, 0:08:38.200 --> 0:08:42.080 being down under three from a risk management and an 0:08:42.080 --> 0:08:45.319 efficiency point of view, it becomes a very interesting core 0:08:45.400 --> 0:08:48.880 equity allocation. And we're beginning to see more advisors say, 0:08:48.880 --> 0:08:52.040 wait a second, can't I look at this hedge dequity 0:08:52.400 --> 0:08:57.160 almost like a factor fund. Yes it's not growth or 0:08:57.280 --> 0:09:01.640 value or capsize or dividend, but it's a factor of volatility. 0:09:01.679 --> 0:09:04.360 And this you know, these funds manage actively the way 0:09:04.360 --> 0:09:07.600 they play the volatility range, and that factor adds value 0:09:07.640 --> 0:09:11.080 as an equity fund. So we're beginning to see people say, wait, 0:09:11.120 --> 0:09:13.880 a second, this can be actually a core equity allocation, 0:09:14.320 --> 0:09:16.960 and over the last three years it's you know, it's 0:09:17.040 --> 0:09:20.720 it's outperformed, for example, equal weighted SMP with half of 0:09:20.760 --> 0:09:24.000 the risk. So it's a very interesting core equity piece 0:09:24.360 --> 0:09:26.840 given how well it's performed. 0:09:27.120 --> 0:09:33.160 A way to partially replace traditional bonds that that section 0:09:33.240 --> 0:09:36.680 of the portfolio. But now it's taking up more of 0:09:36.720 --> 0:09:37.640 the equity side. 0:09:37.640 --> 0:09:40.480 Would you say, yeah, I think I think the the 0:09:40.480 --> 0:09:44.240 the issue for equity investors, particularly in this environment. And James, 0:09:44.360 --> 0:09:46.080 you know you probably see this quite a bit with 0:09:46.120 --> 0:09:48.880 the growth in some of these specialty funds, but you 0:09:48.880 --> 0:09:55.520 know AI extended tech, you know, very focused renewables, energy funds. 0:09:56.320 --> 0:09:57.679 You know, in the old days, there was you know, 0:09:57.920 --> 0:10:01.520 years ago, there was the marijuana based funds. You're seeing investors, 0:10:01.559 --> 0:10:04.319 you know, obviously you know the frontier emerging markets. You're 0:10:04.320 --> 0:10:08.240 seeing investors say, look, I think where there's not perfect information, 0:10:08.559 --> 0:10:11.320 I can get very high alpha in some parts of 0:10:11.320 --> 0:10:14.920 my equity portfolio. But David, the problem with those allocations 0:10:15.280 --> 0:10:18.320 is that you expand the potential for beta risk, for 0:10:18.400 --> 0:10:21.800 beta expansion risk, and so if you want to search 0:10:21.840 --> 0:10:24.720 for return and more of these younger clients. These forty 0:10:24.720 --> 0:10:27.640 and fifty year old clients are looking for relevancy in 0:10:27.679 --> 0:10:31.000 their equity portfolios. The problem with that as an advisor, 0:10:31.040 --> 0:10:33.560 and I talk to advisors every day, is they're saying, yes, 0:10:33.600 --> 0:10:36.400 I understand they want crypto, I understand they want AI. 0:10:37.160 --> 0:10:39.840 But the beta risk of these funds it might look 0:10:39.880 --> 0:10:41.800 like a one point four beta to the S and 0:10:41.880 --> 0:10:45.600 P in quiet times, But if you get a liquidity moment, 0:10:45.840 --> 0:10:47.760 or you get a big decline in the SMP, that 0:10:47.840 --> 0:10:50.560 one point four or one point three beta could become 0:10:50.600 --> 0:10:52.920 a two point five beta, and then what do I 0:10:52.920 --> 0:10:55.920 do with my equities? They could really hurt my clients. 0:10:56.480 --> 0:11:01.280 And so using a fund like ours that squeezes beta demonstrably, 0:11:01.679 --> 0:11:03.960 you know, it goes from a normal forty to forty 0:11:04.000 --> 0:11:08.480 two beta to towards a zero beta. In twenty eighteen, 0:11:08.480 --> 0:11:10.680 we actually made money when the market was down. In 0:11:10.720 --> 0:11:13.320 twenty two we squeezed that down to less than a 0:11:13.400 --> 0:11:17.320 point one beta. In those kind of extreme environments. Allows 0:11:17.360 --> 0:11:21.240 your equity portfolio to stretch for return with higher alpha funds. 0:11:21.559 --> 0:11:24.640 But at the same time, David, in the decline moment 0:11:24.640 --> 0:11:27.440 that creates a beta risk, you have that you have 0:11:27.480 --> 0:11:32.400 that defensive fund in the middle that provides that balance. Yeah. 0:11:32.440 --> 0:11:34.800 I know it's cliche, but like everyone's saying, it's the 0:11:34.840 --> 0:11:37.040 death of the sixty forty. But the more and more 0:11:37.080 --> 0:11:40.000 I talk to people that are allocators, like advisors and institutions, 0:11:40.040 --> 0:11:42.680 it really is kind of gone. For the most part. 0:11:42.679 --> 0:11:45.160 It's becoming more like or at least what is in 0:11:45.200 --> 0:11:48.080 those sixty and forty categories has expanded. It's like sixty 0:11:48.160 --> 0:11:50.960 thirty ten or seventy twenty ten where they're doing more 0:11:50.960 --> 0:11:54.920 strategies like yours, like those alpha strategies are going thematic 0:11:54.960 --> 0:11:56.840 investing or crypto or something along those lines. In those 0:11:56.840 --> 0:11:59.600 satellite positions. Things really have changed as far as the 0:11:59.600 --> 0:12:02.240 allocation side of things goes, and from my point of view, 0:12:02.640 --> 0:12:05.200 it really exacerbated things in twenty twenty two, and you know, 0:12:05.280 --> 0:12:07.439 your equities and your bond's went down together. I think 0:12:07.480 --> 0:12:10.080 that's part of the growth we're seeing in strategies like 0:12:10.120 --> 0:12:13.720 yours and buffers and overlays. So I guess my next 0:12:13.760 --> 0:12:16.880 question would be, is there a tactical component to your 0:12:16.960 --> 0:12:19.839 equity exposure, like are you going after low vall stocks 0:12:19.920 --> 0:12:21.040 or is it just beta to the S and P 0:12:21.120 --> 0:12:23.760 five hundred on the equity leg. Can you just talk 0:12:23.800 --> 0:12:24.640 a little bit about that. 0:12:24.600 --> 0:12:27.360 So we'll get into the structure. So the biggest risk 0:12:27.440 --> 0:12:31.360 as a forty year financial professional, the biggest risks you 0:12:31.440 --> 0:12:36.640 have in markets is really mismatches, right, It's leverage and 0:12:36.679 --> 0:12:41.960 it's mismatches. So the mismatch issue is you don't want 0:12:42.000 --> 0:12:45.120 to own single stocks if you're trying to reduce beta risk. 0:12:45.200 --> 0:12:49.160 If you're trying to reduce risk, that correlations blow out. 0:12:49.240 --> 0:12:52.000 So we own the S and P. The structure owns 0:12:52.000 --> 0:12:55.520 the S and P through spy, and we leverage the 0:12:55.559 --> 0:12:59.720 structure thirty percent extra exposure through a swap with Golden Sacks. 0:13:00.160 --> 0:13:03.000 So we're in essence a one thirty thirty five, So 0:13:03.040 --> 0:13:05.640 it's thirty percent swap with Goldman Sachs. So we get 0:13:05.679 --> 0:13:08.400 one hundred and thirty percent exposure, which right away gives 0:13:08.400 --> 0:13:10.839 you additional exposure to an asset that starts at the 0:13:10.840 --> 0:13:12.719 bottom left and goes to the top right. So that's 0:13:12.760 --> 0:13:16.360 a good thing. We then sell up to one hundred percent. 0:13:16.679 --> 0:13:19.840 We never sell the thirty percent, any thirty percent of 0:13:19.880 --> 0:13:22.800 that swap, any of that exposure in calls in the 0:13:22.840 --> 0:13:25.520 two to four percent range. On a let's say a 0:13:25.520 --> 0:13:29.120 one month trade, and we use that to finance two 0:13:29.200 --> 0:13:33.640 hundred notional two hundred percent of our notional in putspreads 0:13:33.840 --> 0:13:36.080 in a one to two standard deviation, which would be 0:13:36.200 --> 0:13:39.120 two percent down to seven percent down a ninety eight 0:13:39.240 --> 0:13:43.360 ninety three put spread. That's a one to two standard deviation. Now, 0:13:43.400 --> 0:13:45.959 the reason we do that is basically, we want to 0:13:46.000 --> 0:13:50.920 get exposure to where declines normally happen, and when those 0:13:50.960 --> 0:13:55.080 declines happen, we're going to monetize excess return, right because 0:13:55.280 --> 0:13:59.040 we're hedging two hundred percent of our notional, not two 0:13:59.120 --> 0:14:01.880 hundred percent of the hundred not not you know, one 0:14:01.920 --> 0:14:06.080 hundred percent. Most buffer funds are constructed on three month 0:14:06.160 --> 0:14:10.040 trades and they only defend their notional so they don't 0:14:10.080 --> 0:14:12.040 have leverage, so they don't get access return from the 0:14:12.120 --> 0:14:15.400 S and P and they don't get excess return from 0:14:15.400 --> 0:14:19.480 their hedge because they're only they're only hedging their notional amount. 0:14:19.480 --> 0:14:23.440 They're one hundred dollars basically, so we get access return 0:14:23.520 --> 0:14:26.160 if the market does go into our range, and as 0:14:26.160 --> 0:14:29.000 the market recovers, we have room to rise into our 0:14:29.040 --> 0:14:32.840 sold calls, into our short calls. That's financial structure is 0:14:32.840 --> 0:14:36.200 in a positive income, positive data, so we don't bleed, 0:14:36.560 --> 0:14:39.480 and that's a very important thing because many option structures 0:14:40.040 --> 0:14:43.040 provide defense, but they bleed, so you're losing return of 0:14:43.080 --> 0:14:46.800 the market. And because we never sell, we never short 0:14:47.000 --> 0:14:50.040 calls on that thirty percent of the swamp, we always have. 0:14:50.480 --> 0:14:52.360 In the worst market for us, which would be something 0:14:52.360 --> 0:14:54.920 like twenty seventeen, where there's no volatility in the market 0:14:54.920 --> 0:14:56.760 goes straight up, we're going to get thirty to thirty 0:14:56.760 --> 0:14:59.400 five percent of the market with about thirty five percent 0:14:59.400 --> 0:15:02.200 of the volatile. It's a you know, forty percent of volatility. 0:15:02.240 --> 0:15:04.840 It's a very it's a very safe structure even in 0:15:04.920 --> 0:15:08.480 a very low vol straight up market, but most investors 0:15:08.480 --> 0:15:10.760 don't buy us for that environment because they have other 0:15:10.800 --> 0:15:14.160 equity products that really work in that environment. What happens 0:15:14.240 --> 0:15:16.560 is normally, after very low vall environments, you get a 0:15:16.600 --> 0:15:19.400 high vowel event and we we do exceedingly well in 0:15:19.480 --> 0:15:24.760 those events. But that structure is not is not discretionary. 0:15:25.040 --> 0:15:27.680 It's a it's a structure, a systematic structure that we've 0:15:27.720 --> 0:15:31.800 researched works now that the strikes of that whether it's 0:15:31.840 --> 0:15:34.440 a three week trade or a five week trade, whether 0:15:34.480 --> 0:15:37.480 it's a ninety eight ninety three put spread or a 0:15:37.600 --> 0:15:42.200 ninety six you know, you know eighty five, the range 0:15:42.320 --> 0:15:45.080 might vary a little bit based on the math of 0:15:45.120 --> 0:15:48.560 where the options are, the volatility is, and that kind 0:15:48.600 --> 0:15:53.160 of constructs the actual put you know puts, and the 0:15:53.560 --> 0:15:56.120 dimensions of the trade. But the structure of the trade 0:15:56.280 --> 0:15:59.280 is always in place and stays relevant to the market. 0:15:59.560 --> 0:16:02.480 So if market goes up, we're following up the market, 0:16:02.560 --> 0:16:04.720 and then if the market falls from that elevated level, 0:16:04.920 --> 0:16:08.120 we start to defend in that range where some of 0:16:08.160 --> 0:16:11.360 the longer traits, the three month trades can become very irrelevant. 0:16:11.400 --> 0:16:14.200 If the market goes up, their puts may be irrelevant 0:16:14.400 --> 0:16:17.720 to normal declines. And again if the market goes down 0:16:17.760 --> 0:16:20.720 through their puts, they may no longer participate to the downside. 0:16:21.200 --> 0:16:23.720 And what we do instead is we stay relevant to 0:16:23.760 --> 0:16:25.640 the up and to the down of the market because 0:16:25.640 --> 0:16:29.800 our trades are shorter. So that's the structural difference. It's 0:16:29.880 --> 0:16:33.560 not so much discretionary as it is systematic based on 0:16:33.600 --> 0:16:34.680 the math of the market. 0:16:35.680 --> 0:16:40.360 So I guess basically like I get you're saying, the 0:16:40.400 --> 0:16:42.640 structure is determined based on what's going on in the 0:16:42.680 --> 0:16:44.960 market and how options are being priced, whether it's the 0:16:44.960 --> 0:16:47.320 state of the time value to kay vega, what all 0:16:47.400 --> 0:16:49.560 those Greek letters that go into valuing it. That's what 0:16:49.600 --> 0:16:52.240 you're determining where things are. So do you distinguish it 0:16:52.280 --> 0:16:54.760 all between secular and secular changes or are you just 0:16:54.880 --> 0:16:57.600 kind of maintaining your same sort of structure no matter 0:16:57.600 --> 0:17:00.560 what's going on in your your situation is basically determined 0:17:00.560 --> 0:17:02.360 by what's going on in the market and how where 0:17:02.360 --> 0:17:04.240 your hedges correct. 0:17:04.320 --> 0:17:09.960 The structure is systematic, but the levels where it trades 0:17:10.040 --> 0:17:12.360 depend on the math of the market. And the benefit 0:17:12.400 --> 0:17:18.480 of that has really shown through because if you're really 0:17:18.560 --> 0:17:22.199 fixed in your structure and your very long term you 0:17:22.240 --> 0:17:25.760 can't adjust to the math of volatility, and you can't 0:17:25.760 --> 0:17:29.840 adjust to the skew of the options market. And the 0:17:29.920 --> 0:17:34.000 benefit of our structure is if skew is to the call, 0:17:34.960 --> 0:17:37.160 you know we're able to take advantage because we don't 0:17:37.160 --> 0:17:40.520 have to trade our trade at a particular level versus 0:17:40.600 --> 0:17:43.600 where we are. If skew is to the call, we 0:17:43.640 --> 0:17:46.000 can set our call, our short calls at a much 0:17:46.040 --> 0:17:48.840 higher level, which gives us more room to participate up 0:17:49.080 --> 0:17:53.080 so our percentage of participation will actually be better in 0:17:53.119 --> 0:17:57.239 that environment. And if skew is to the put, you know, 0:17:57.280 --> 0:17:59.639 then we're able to sell our put spreads a little 0:17:59.640 --> 0:18:03.480 bit more optimally in a different fashion as well. Whereas 0:18:03.480 --> 0:18:05.719 the structures, you know, some of the buffer funds and 0:18:05.720 --> 0:18:09.160 some of our competitors are very stuck in a dogmatic 0:18:09.320 --> 0:18:13.800 trade that is numerically basically structured. They can't adjust to that. 0:18:14.440 --> 0:18:17.479 And so that's very important, particularly when you recognize that 0:18:17.520 --> 0:18:20.480 the changes in the options market the last several years 0:18:20.520 --> 0:18:25.240 and the really the retailization of options has given us 0:18:25.280 --> 0:18:28.879 tremendous advantages because it's allowed us to do, I think, 0:18:28.920 --> 0:18:32.600 to even adjust our structure more optimally then we might 0:18:32.640 --> 0:18:36.000 have envisioned five ten years ago when the structure started. 0:18:36.040 --> 0:18:38.360 We just passed our ten year anniversary this last month, 0:18:38.400 --> 0:18:43.119 by the way. But when the structure was initially envisioned, 0:18:43.720 --> 0:18:46.679 I don't think we recognized the potential for some of 0:18:46.720 --> 0:18:51.480 these ranges. With skew and retail interest zero one two 0:18:51.560 --> 0:18:55.240 day to expery that has you know, really increased the 0:18:55.280 --> 0:18:58.880 liquidity and some of the ranges for the technical part 0:18:58.880 --> 0:19:01.760 of options that that I don't think anybody expected and 0:19:01.800 --> 0:19:03.040 it's actually helped our product. 0:19:03.240 --> 0:19:05.560 So if we if we think about this for our 0:19:05.640 --> 0:19:10.920 listeners that don't understand options, you know, if they're thinking 0:19:10.960 --> 0:19:14.879 about it, how does this strategy typically behave you know, 0:19:14.960 --> 0:19:19.199 relative to S and P five hundred during rallies versus corrections. 0:19:19.280 --> 0:19:20.800 So if we just kind of simplify it. 0:19:21.680 --> 0:19:25.520 So there, there's there's It's really like a light that 0:19:25.720 --> 0:19:28.359 has the characteristics of a particle and has the characteristics 0:19:28.359 --> 0:19:33.120 of a wave. So so the particle is the equity market, right, 0:19:33.200 --> 0:19:35.720 so we follow the equity market. If the equity market 0:19:35.760 --> 0:19:38.199 goes up, we have a high correlation to equities. We 0:19:38.280 --> 0:19:40.440 have you know, for those who know you know correlation, 0:19:40.520 --> 0:19:42.320 we have a we have a well over ninety R 0:19:42.359 --> 0:19:45.720 squared to the equity market. So we participate well as 0:19:45.760 --> 0:19:50.760 the market goes up. When the market goes down, if 0:19:50.760 --> 0:19:53.480 it goes down very little, yes we go down a 0:19:53.520 --> 0:19:56.080 little bit as well. But if the market goes down 0:19:56.200 --> 0:19:58.439 through the one to two standard deviation area, which is 0:19:58.520 --> 0:20:00.479 kind of in that two to seven percent area, if 0:20:00.480 --> 0:20:04.239 it goes into that area and volatility rises, that's the 0:20:04.280 --> 0:20:07.800 wave issue. We start to correlate to volatility and we 0:20:07.840 --> 0:20:10.960 get a benefit from that and our puts start to 0:20:11.000 --> 0:20:14.679 generate return. And so the idea here is we really 0:20:14.760 --> 0:20:17.520 the factor that we're making money off of is the 0:20:17.520 --> 0:20:21.720 cyclicality of volatility. So investors have historically been hurt by 0:20:21.760 --> 0:20:25.640 volatile times. Some people call it volatility drag, it hurts portfolio. 0:20:25.760 --> 0:20:28.640 Some people like to call it beta expansion. But what 0:20:28.680 --> 0:20:32.240 we do is we participate with equities on the in 0:20:32.359 --> 0:20:36.200 normal markets and in upward rising markets. But if there 0:20:36.280 --> 0:20:40.600 is any kind of cyclicality to volatility or a volatility rises, 0:20:41.080 --> 0:20:44.640 that gives us a second form of compensation, and we're 0:20:44.680 --> 0:20:47.639 able to take advantage of that because of the nature 0:20:47.680 --> 0:20:52.200 of our trade, which has a tendency to buy volatility, 0:20:52.280 --> 0:20:54.240 you know, kind of on the cheap side, and sell 0:20:54.320 --> 0:20:57.440 volatility more on the rich side. We have a tendency 0:20:57.480 --> 0:21:01.080 to sell equities on the you know, in the normal markets, 0:21:01.119 --> 0:21:04.040 because we sell calls, you know, in that two to 0:21:04.080 --> 0:21:07.280 four percent above where we are. So we sell calls 0:21:07.760 --> 0:21:10.640 equity up on the upside, and we tend to buy 0:21:10.680 --> 0:21:14.440 equity on the downside because as the market goes down, 0:21:14.600 --> 0:21:18.320 our extra defense is compensating us, is monetizing us, and 0:21:18.359 --> 0:21:20.800 we'll roll to a new structure and the excess goes 0:21:20.800 --> 0:21:23.159 into units of the S and P. And so what 0:21:23.200 --> 0:21:25.959 you see with a structure like this that is overdefended 0:21:26.520 --> 0:21:29.399 is we get overcompensated for the downside, which means we 0:21:29.440 --> 0:21:31.520 have money to buy low and when the when the 0:21:31.560 --> 0:21:35.400 market mean reverts, and historically the market has always mean reverted, thankfully, 0:21:36.760 --> 0:21:39.520 that means that we have a tendency to buy more 0:21:39.640 --> 0:21:43.199 units in those lower amounts, which means we claw back fast, 0:21:43.880 --> 0:21:46.240 which helps you overall portfolio because you have an asset 0:21:46.480 --> 0:21:49.800 that's starting to come back sooner than the market, you know, 0:21:49.880 --> 0:21:51.120 than other products in the market. 0:21:52.240 --> 0:21:55.600 So you just basically said that volatility actually is pretty 0:21:55.600 --> 0:21:58.000