WEBVTT - The New 60/40: 100/0? 0:00:00.400 --> 0:00:03.840 Strap on your parachute. It's time for What Goes Up 0:00:04.120 --> 0:00:13.800 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:13.880 --> 0:00:17.760 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzak, 0:00:17.880 --> 0:00:20.920 a reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.079 --> 0:00:24.120 a senior editor at Bloomberg. This week on the show, 0:00:24.280 --> 0:00:27.520 the stock market maybe buying the vaccine optimism, but the 0:00:27.520 --> 0:00:31.240 bond market isn't really budging Tina forever, or in other words, 0:00:31.280 --> 0:00:34.080 there is no alternative in a world where low interest 0:00:34.159 --> 0:00:36.400 rates have become the norm. Our guest walks us through 0:00:36.400 --> 0:00:39.519 where to find alpha, and as always, don't fret. We 0:00:39.560 --> 0:00:42.400 will close out the episode with our tradition the Craziest 0:00:42.440 --> 0:00:46.040 Thing I saw in Markets this week, Sarah, I'm returning 0:00:46.040 --> 0:00:49.199 to my roots in the alternative assets space for this 0:00:49.200 --> 0:00:51.560 this segment this week, I've got to say I'm really 0:00:51.600 --> 0:00:54.720 proud because a listener did right in and not only 0:00:54.840 --> 0:00:58.080 did he righte in, he had a prices right for you. 0:00:58.280 --> 0:01:00.160 So we're going to turn the tables on you and 0:01:00.320 --> 0:01:03.000 you could also very much describe it in alternative assets. 0:01:03.000 --> 0:01:05.600 So don't you worry. I like the prices right element 0:01:05.840 --> 0:01:10.039 that listeners sliding into Sarah's DM. I believe what that's 0:01:10.080 --> 0:01:12.640 known as that's what's happening lately. Alright, fine, that's good, 0:01:12.640 --> 0:01:15.800 we'll accept. We'll accept submissions that week. Also, Sara, a 0:01:15.880 --> 0:01:20.160 very perilous podcast this week because by my account, apart 0:01:20.200 --> 0:01:23.240 from the guest who I'll introduced in a moment within 0:01:23.360 --> 0:01:27.520 microphone range, we also have one puppy, one one year 0:01:27.520 --> 0:01:29.440 old baby I believe a year and a half, and 0:01:29.560 --> 0:01:32.960 one really loud mouth dog that that's my dog. So 0:01:32.959 --> 0:01:35.680 so this should be interesting. I don't be for success. 0:01:36.360 --> 0:01:39.319 I think we should at a cat. I believe a 0:01:39.360 --> 0:01:41.399 cat as well, So we should have a pool to 0:01:41.440 --> 0:01:45.720 see which which of these disrupts the content first. But hopefully, 0:01:45.760 --> 0:01:48.680 hopefully we'll get through it with some silence from all 0:01:48.720 --> 0:01:51.800 the dogs and babies and cats part of the what 0:01:51.960 --> 0:01:54.280 goes up team here. But let's get to that guest 0:01:54.360 --> 0:01:57.400 first time on the show. We're very happy to have him. 0:01:57.880 --> 0:02:01.800 He is the managing director of t Assets Solutions at 0:02:01.960 --> 0:02:05.120 Man Solutions, which is a division of Man Group, the 0:02:05.240 --> 0:02:09.320 big hedge fund firm. His name is Peter vander Wert. Peter, 0:02:09.400 --> 0:02:11.440 Welcome to the show. Hi, Thanks for having me. It's 0:02:11.520 --> 0:02:13.200 nice of a here, Yeah, Peter, I wanted to just 0:02:13.280 --> 0:02:16.160 start off by since Man Group is such a big company, 0:02:16.360 --> 0:02:18.440 runs a lot of different funds, a lot of different strategies. 0:02:18.480 --> 0:02:22.640 I'm just curious what the how the Solutions group works 0:02:22.680 --> 0:02:25.120 into the firm and your role specifically. I mean, my 0:02:25.160 --> 0:02:28.600 impression is that the solution groups kind of creates bespoke 0:02:28.760 --> 0:02:31.560 portfolios based on what certain clients need. Is is that 0:02:31.600 --> 0:02:34.240 a fair assessment of what you guys do? Yeah, that's 0:02:34.280 --> 0:02:36.520 exactly right. So what we do in Man Solutions we 0:02:36.560 --> 0:02:39.640 reach across the engine. So Man has basically four distinct 0:02:39.680 --> 0:02:42.680 meaningful engines. We have a pure discretionary group called g LG. 0:02:43.200 --> 0:02:45.200 We've got a quant arm called h L which does 0:02:45.200 --> 0:02:48.040 a lot of trend and systematic strategies. We have Numeric 0:02:48.080 --> 0:02:51.680 which does more equity trading quantimental, and then some private markets. 0:02:51.960 --> 0:02:55.560 Man Solutions kind of reaches across those various engines looking 0:02:55.560 --> 0:02:57.720 for things that we can use to help clients, whether 0:02:57.720 --> 0:03:00.600 it's based on risk control or generating now uh, but 0:03:00.680 --> 0:03:04.280 in a bespoke way. So the real overarching goal at 0:03:04.280 --> 0:03:06.480 Man solish is a bit to deconstruct the hedge fund 0:03:06.480 --> 0:03:09.720 and deliver exactly what clients need as opposed to trying 0:03:09.720 --> 0:03:11.680 to just keep giving them the same product or the 0:03:11.720 --> 0:03:14.839 same product pitch. So to keep it pretty broad, I mean, 0:03:15.360 --> 0:03:19.200 considering where we stand in like you mentioned, bond yield 0:03:19.280 --> 0:03:21.760 extremely low, how much growth have you seen and how 0:03:21.760 --> 0:03:24.120 difficult has it become to kind of create come up 0:03:24.120 --> 0:03:28.480 with creative new solutions to get through the environment that 0:03:28.520 --> 0:03:30.959 we've been living in. So a lot of our clients 0:03:30.960 --> 0:03:34.440 are basically institutional investors. So the types that are grappling 0:03:34.440 --> 0:03:36.920 with the broad bond problem for two reasons. And you know, 0:03:37.000 --> 0:03:39.160 the first half of the problem is that yields are 0:03:39.160 --> 0:03:42.240 really low and they have pretty high return objectives. Right, 0:03:42.240 --> 0:03:44.200 So your average pension in the US needs to make 0:03:44.240 --> 0:03:46.720 seven percent to meet the return target. If you own 0:03:46.760 --> 0:03:48.480 a one percent yielding as that, you're really not going 0:03:48.520 --> 0:03:51.280 to get there easily. Right, You need that much exactly, 0:03:51.440 --> 0:03:54.320 you need that much more contribution from bonds. And so 0:03:54.480 --> 0:03:57.240 that's problem number one. And problem number two is sixty 0:03:57.760 --> 0:04:00.920 been really easy to run statically, Right, That's just it's 0:04:00.920 --> 0:04:02.920 a made up number. It's a made up construct. It's 0:04:02.960 --> 0:04:05.200 worked for thirty years and everyone quite likes it. Right, 0:04:05.640 --> 0:04:08.400 But if you get past the made up nous of it, 0:04:08.400 --> 0:04:11.160 it happens to be pretty stable because bonds contribute during 0:04:11.200 --> 0:04:14.080 a crash, and I think there's an increasing concern that 0:04:14.200 --> 0:04:16.599 maybe bonds don't have that much left to give in 0:04:16.640 --> 0:04:19.159 the next crash. So if I don't make much money 0:04:19.200 --> 0:04:21.400 and yield, and I don't get much out of a crash, 0:04:21.920 --> 0:04:23.880 then what is it doing in my portfolio at all? 0:04:23.920 --> 0:04:26.000 As the question we get, Yeah, I'm glad you bring 0:04:26.040 --> 0:04:29.159 that up, Peter. I feel like I've edited about straight 0:04:29.240 --> 0:04:32.320 stories about the death of sixty forty and what's what's 0:04:32.320 --> 0:04:35.479 replacing everything in that? You sound like you're on the 0:04:35.480 --> 0:04:38.839 front lines of that. Is there really this legitimate groundswell 0:04:38.880 --> 0:04:42.560 of people trying to reimagine that sixty? And granted, like 0:04:42.640 --> 0:04:44.400 as you said, that's a made up number, maybe you're 0:04:44.400 --> 0:04:47.480 really seventy thirty or fifty fifty if you're more conservative, 0:04:47.520 --> 0:04:50.240 but it really does seem like there's this mad dash 0:04:50.279 --> 0:04:53.039 to to sort of replace that forty with something a 0:04:53.120 --> 0:04:56.840 little bit uh, you know, better yielding than than treasuries 0:04:56.880 --> 0:04:59.400 at this point, you know, the sixty is kind of 0:04:59.400 --> 0:05:01.640 the straw man that everyone uses that. I mean, by 0:05:01.680 --> 0:05:02.960 and large, i'd love to tell you that all of 0:05:03.000 --> 0:05:07.440 our pensions are treasuries, but I mean they've already taken 0:05:07.480 --> 0:05:10.880 a sneaky walk away from sovereign bonds, and they've picked 0:05:10.920 --> 0:05:13.240 up more corporate credit. They've picked up some high yield, 0:05:13.640 --> 0:05:17.880 so the forty doesn't exactly look like treasury bonds. The sixty, though, 0:05:17.920 --> 0:05:20.760 really does look a lot like equities, so that part 0:05:20.880 --> 0:05:23.200 you know they're still looking for a return. And so 0:05:23.360 --> 0:05:25.200 one of the arguments I do get though, for people 0:05:25.200 --> 0:05:27.760 who use treasuries and still rely on them, as if 0:05:27.760 --> 0:05:31.120 you're a big five billion pension or a huge institution, 0:05:31.680 --> 0:05:34.840 what can you get that scalable like bonds are scalable. 0:05:34.880 --> 0:05:37.360 The nice thing about US deficit spending is that there's 0:05:37.600 --> 0:05:41.160 trillion of bonds available if you need to use them. 0:05:41.200 --> 0:05:43.400 It's pretty hard to say I can get thirty trillion 0:05:43.440 --> 0:05:46.400 of gold, unless you know Elon Musk succeeds and sends 0:05:46.440 --> 0:05:48.919 something to an asteroid and minds a bunch of gold 0:05:48.960 --> 0:05:51.200 up there and brings it back, at which point it 0:05:51.240 --> 0:05:53.559 might not be worth exactly what you thought it was worth, 0:05:53.800 --> 0:05:57.720 but at least you have enough gold for your portfolio. Solution, Sarah, 0:05:57.760 --> 0:05:59.760 I think Peter has been listening to to my strategy 0:05:59.800 --> 0:06:03.200 there that I think so too. We've we've brought up 0:06:03.240 --> 0:06:05.480 the asteroid a fair amount of times. I think it's 0:06:05.520 --> 0:06:09.800 come up on the last three shows somehow, I promise you, 0:06:09.839 --> 0:06:14.080 but I agree the topic. I think is the only 0:06:14.160 --> 0:06:15.400 one who will be able to do it, and I 0:06:15.440 --> 0:06:19.400 think it perfectly finally explains Tesla's valuations. But you realize 0:06:19.400 --> 0:06:22.240 there's a Twilight Zone episode that's predicated on them finding 0:06:22.320 --> 0:06:24.520 infinite amount of gold and they like go into like 0:06:24.560 --> 0:06:26.599 some kind of deep sleep. They wake up five hundred 0:06:26.680 --> 0:06:29.080 years later and gold is worthless because there's infinite amount 0:06:29.120 --> 0:06:32.400 of gold in the world, so that the end isn't 0:06:32.440 --> 0:06:50.400 really good. You know, you you bring up you do 0:06:50.480 --> 0:06:52.680 bring up gold, And I want to ask you about gold, Peter, 0:06:53.560 --> 0:06:55.200 what is the role of gold in a portfolio? Right now? 0:06:55.240 --> 0:06:56.840 I feel like this year there has been a lot 0:06:56.880 --> 0:07:00.599 of back and forth about the use of gold. Some say, yes, 0:07:00.640 --> 0:07:04.640 it's an inflation hedge, Others say it's just a safe 0:07:04.640 --> 0:07:09.920 haven um. Lately, though, the narrative has been that we're 0:07:09.920 --> 0:07:12.320 going to get a vaccine, whether it's from Visor and Maderna, 0:07:12.440 --> 0:07:15.600 a mix of the two, or even more we'll see 0:07:15.600 --> 0:07:18.520 growth pickup, we'll see inflation pick up. But gold has 0:07:18.640 --> 0:07:20.480 not been rising as it did earlier in the year. 0:07:20.520 --> 0:07:23.600 It's been falling, Like, what, what's the situation there? What's 0:07:23.600 --> 0:07:25.960 the case? Well, I think the problem with gold when 0:07:25.960 --> 0:07:28.600 people talk about is this tendency that we need to 0:07:28.600 --> 0:07:31.720 explain to day's move based on something. Right, stocks were down, 0:07:31.800 --> 0:07:35.120 marketing crisis, gold is up, or you know something inflation 0:07:35.200 --> 0:07:36.960 is showing up, gold is up. I think if we 0:07:37.120 --> 0:07:40.560 really bottom line what's happening is, first, the Fed's kept 0:07:40.640 --> 0:07:43.160 rates low, so gold is an alternative, is not painful 0:07:43.200 --> 0:07:44.800 to carry, so there's nothing wrong with that. I do 0:07:44.840 --> 0:07:48.160 think there's a narrative calling it a safe haven. You 0:07:48.160 --> 0:07:50.440 know Cam Harvey, who you may have hund on before. 0:07:50.480 --> 0:07:52.200 I think it has talked about as a safe haven, 0:07:52.240 --> 0:07:53.760 and I'm kind of with him. It's a little hard 0:07:53.760 --> 0:07:57.120 on portfolio construction to have assets that fall with equities 0:07:57.160 --> 0:07:59.440 as frequently as gold does, and it's a high vaal 0:07:59.480 --> 0:08:02.520 asset rights sev vold. It's as vulnatble as equities are, 0:08:02.920 --> 0:08:05.080 so it's not the easiest thing to use in your 0:08:05.080 --> 0:08:07.640 portfolio as a safe haven. But I see the logic 0:08:07.680 --> 0:08:09.480 of it right, you can kind of feel reliable. On 0:08:09.520 --> 0:08:12.200 the flip side, the inflation bit Cam has written a 0:08:12.200 --> 0:08:14.600 lot about that, you know, the fact that it seems 0:08:14.640 --> 0:08:18.280 like gold prices way outstripped the level of inflation. What 0:08:18.400 --> 0:08:20.240 you see is it seems to be low level of 0:08:20.360 --> 0:08:23.680 rates that's pushing gold higher. So gold is quite correlated 0:08:23.680 --> 0:08:25.600 to bonds. So if I'm a big pension, I say, 0:08:25.600 --> 0:08:28.200 how do I replace my bonds? Maybe I should use gold. 0:08:28.760 --> 0:08:31.400 The first thing I find is that when equities fall, 0:08:31.520 --> 0:08:34.040 sometimes it falls, so that's not a good bond replacement. 0:08:34.080 --> 0:08:36.000 And the second thing I find is, over the last 0:08:36.000 --> 0:08:39.360 twenty years, it's been very correlated to bonds, which means 0:08:39.360 --> 0:08:42.600 if bonds fall, it's likely gold fall. So that means 0:08:42.600 --> 0:08:45.640 I'm replacing a bond with something that's behaving a bit 0:08:45.720 --> 0:08:48.400 like a bond on a risk basis. So the whole 0:08:48.480 --> 0:08:51.840 narrative works. If the FED keeps rates controlled and we 0:08:51.920 --> 0:08:54.679 have inflation, that's when you want to own gold. It's 0:08:54.679 --> 0:08:57.640 a pretty narrow subset of things that might happen to 0:08:57.960 --> 0:09:00.400 make that really work. But then you'll see a funds 0:09:00.400 --> 0:09:02.000 and I think gold is very much a flow of 0:09:02.040 --> 0:09:04.840 funds thing. You know, as much money and sentiment builds up, 0:09:04.920 --> 0:09:07.200 it keeps going and going and going, and so we 0:09:07.320 --> 0:09:09.679 like looking at that more on a trend basis, maybe 0:09:09.960 --> 0:09:11.720 you know, owning it in the trend and getting rid 0:09:11.720 --> 0:09:13.680 of it if the trend breaks, and using it in 0:09:13.720 --> 0:09:16.600 that kind of construction. But I think the big dilemma 0:09:16.640 --> 0:09:20.960 for all investors again the scalable concept, would you replacet 0:09:21.360 --> 0:09:26.280 of your portfolio with gold, And first you probably wouldn't. Second, 0:09:26.360 --> 0:09:28.520 there actually isn't enough gold out there right. The World 0:09:28.559 --> 0:09:30.559 Gold Council has a cool website. You can check out 0:09:30.559 --> 0:09:32.200 a gold dot org and they tell you kind of 0:09:32.200 --> 0:09:34.280 what they think how much gold is above the ground 0:09:34.280 --> 0:09:36.120 and how much is in the ground. And there's a 0:09:36.120 --> 0:09:38.720 few trillion dollars of gold left in the ground. So 0:09:38.840 --> 0:09:42.160 that's not enough for the two trillion of financial assets 0:09:42.160 --> 0:09:44.760 to use as a diversifier. So in a way, gold 0:09:44.840 --> 0:09:47.760 is in terms of what could cause a superspike. There's 0:09:47.800 --> 0:09:50.360 not enough gold out there. But it's also its own 0:09:50.360 --> 0:09:53.400 worst enemy because you know, if everyone needs it, there's 0:09:53.400 --> 0:09:55.240 just not enough of it. So it kind of doesn't 0:09:55.280 --> 0:09:58.319 fit a solution unless you're a niche investor. And so 0:09:59.040 --> 0:10:00.959 I do think some of our investors are a bit 0:10:00.960 --> 0:10:03.760 guilty of saying it's not scalable, so I won't use it. Well, 0:10:03.760 --> 0:10:06.439 it's scalable if you're running ten twenty billion dollars, right, 0:10:06.480 --> 0:10:09.000 It just isn't scalable for everyone. But I think of 0:10:09.080 --> 0:10:12.160 reliability is really the key thing, right, doesn't fit my portfolio? 0:10:12.280 --> 0:10:14.480 Is it reliable? Does it kind of do what I want? 0:10:15.040 --> 0:10:16.920 If it goes down a lot in a crash, it's 0:10:17.000 --> 0:10:20.959 draining liquidity from me where bonds have historically given me liquidity. 0:10:21.080 --> 0:10:22.800 That's a big problem, right, So I think, well, we 0:10:22.800 --> 0:10:24.760 look at portfolio constructions. We want to make sure that 0:10:24.840 --> 0:10:29.400 the hedge like things, the diversifiers, don't take liquidity from you. Right. 0:10:29.440 --> 0:10:33.160 It seems to me, um difficult, maybe impossible that if 0:10:33.160 --> 0:10:36.440 you are trying to replace that or whatever your your 0:10:36.480 --> 0:10:40.080 bond allocation is that you pretty much have to embrace 0:10:40.160 --> 0:10:42.360 more risk to do that, which is kind of goes 0:10:42.360 --> 0:10:45.559 against the grain of why you you have that in 0:10:45.600 --> 0:10:48.800 the safety of bonds to begin with. And what alternative 0:10:48.880 --> 0:10:51.520 I've I've heard a few times is well, look at 0:10:51.520 --> 0:10:54.560 some of the real cyclical currencies, you know, and if 0:10:54.600 --> 0:10:57.400 if you're you know, want sort of a hedge against 0:10:57.559 --> 0:11:00.840 an economic slowdown. You could shut some of the glocal currencies. 0:11:00.840 --> 0:11:03.120 I guess, you know, maybe the keywi or the Ausy 0:11:03.200 --> 0:11:06.280 dollar or something like that that strikes me as especially risky. 0:11:06.280 --> 0:11:08.440 But is that, you know, does that fit into a 0:11:08.480 --> 0:11:11.400 possible body replacement? Is is sort of dabbling in the 0:11:11.400 --> 0:11:14.720 currency markets because I gotta say, you know, it's it's 0:11:14.720 --> 0:11:18.160 a treacherous place for people who aren't sort of dedicated 0:11:18.160 --> 0:11:20.680 to to that macro look view of the world and 0:11:20.679 --> 0:11:22.839 and the currency. So you know, if I don't love 0:11:22.880 --> 0:11:25.320 gold given some of its risk attributes, and and it 0:11:25.360 --> 0:11:27.840 does work, I think in some portfolio constructions over a 0:11:27.840 --> 0:11:30.200 long term currencies are going to be a bit of 0:11:30.200 --> 0:11:33.559 a worry. So we do run hedging businesses tailheage type 0:11:34.200 --> 0:11:37.680 portfolios for clients. And actually Ausi dollar is one of 0:11:37.679 --> 0:11:40.760 those currencies that does really badly in deflationary times. It's 0:11:40.800 --> 0:11:43.360 pretty reliable, and we like using options around it because 0:11:43.360 --> 0:11:45.920 options are often very cheap, so it's pretty cool to 0:11:46.000 --> 0:11:48.160 use in a solution with a lot of different things 0:11:48.200 --> 0:11:50.280 that might be going. So you have option hedges and 0:11:50.320 --> 0:11:54.240 indices and currencies and gold and credit as a composite 0:11:54.240 --> 0:11:56.400 that works pretty well, but if you're gonna start relying 0:11:56.440 --> 0:11:59.560 on it again for its slug of the fort there's 0:11:59.559 --> 0:12:01.360 a couple of things you gotta make sure you're right. 0:12:01.760 --> 0:12:05.200 Pretty much, you feel comfortable in deflationary regime, but I 0:12:05.240 --> 0:12:08.640 bet you've had a lot of conversations about inflationary regimes lately, 0:12:08.679 --> 0:12:10.520 and you know, what is all this fiscal stimulus going 0:12:10.600 --> 0:12:12.640 to do? And how how is it gonna look? Well, 0:12:12.679 --> 0:12:16.200 those currencies that look deflationary and bad times are going 0:12:16.240 --> 0:12:18.679 to go up in inflationary regimes, right, we should feel 0:12:18.679 --> 0:12:21.240 confident that commodities will go up with inflation, and so 0:12:21.280 --> 0:12:24.680 Ausie dollar could That means if you're not using options, 0:12:24.720 --> 0:12:27.640 you have kind of unlimited upside downside on this stuff, right. 0:12:28.000 --> 0:12:29.760 And so if we're going to use the Ausie dollar 0:12:29.920 --> 0:12:31.880 and you're saying short it as a kind of a 0:12:31.920 --> 0:12:35.240 safe haven or a protective instrument for your portfolio, a 0:12:35.280 --> 0:12:37.600 big inflationary regime could be a bit of a shock, right, 0:12:37.640 --> 0:12:40.640 And the same might be for Canadian currency commodities. So 0:12:40.720 --> 0:12:43.800 there's there's quite a bit of difficulty anytime we start 0:12:44.320 --> 0:12:48.600 going a further afield from you know what bonds have done, right, 0:12:48.640 --> 0:12:51.160 Bonds were kind of always a nice risk off set. 0:12:51.400 --> 0:12:52.920 But one of the things we haven't even mentioned is 0:12:52.960 --> 0:12:56.000 that correlations could change. Right, Bond equity correlation has been 0:12:56.120 --> 0:12:59.640 very reliable, and so we haven't been challenged with a 0:12:59.720 --> 0:13:02.840 unit firs where bonds and equities go down simultaneously since 0:13:02.960 --> 0:13:05.560 the nineties, right, maybe the seventies in terms of meanings 0:13:05.600 --> 0:13:07.839 full size. I think what we're going to see is 0:13:07.880 --> 0:13:11.000 a lot of regime shifts going forward. I don't think 0:13:11.000 --> 0:13:13.120 we have a good grasp on what the aftershocks of 0:13:13.120 --> 0:13:15.640 the pandemic are, so we can have a lot of 0:13:15.679 --> 0:13:18.800 movement and currencies, a lot of movement in bonds different 0:13:18.840 --> 0:13:22.120 than what we're expecting. So you kind of alluded to 0:13:22.120 --> 0:13:25.240 where we're going with the bondary replacement argument in a sense, 0:13:25.520 --> 0:13:27.840 and maybe it's a two part discussion. The first part 0:13:27.920 --> 0:13:30.600 is should you replace bonds? And the second part is 0:13:30.600 --> 0:13:33.120 if you decide you shouldn't you know, do you go 0:13:33.160 --> 0:13:35.240 to a a hundred percent risk on? And then what you know, 0:13:35.240 --> 0:13:36.560 how do you deal with a crash? And I think 0:13:36.640 --> 0:13:37.920 you kind of said maybe you should just go a 0:13:38.200 --> 0:13:40.920 d percent risk on And that's a little bit what 0:13:41.000 --> 0:13:42.480 we're looking at. What does it look like with a 0:13:42.559 --> 0:13:44.679 hundred percent risk on what are the tails, what are 0:13:44.679 --> 0:13:46.800 the crashes look and what can you do to mitigate 0:13:46.840 --> 0:13:50.079 that crash risk? And you know, in our business people 0:13:50.080 --> 0:13:52.880 have been trying to replicate bonds for decades, and so 0:13:52.960 --> 0:13:55.640 they would take a bunch of positive carry stuff and 0:13:55.720 --> 0:13:58.520 staple it together, glue it in a basket, take a 0:13:58.640 --> 0:14:01.560 bunch of tail hedges and trend and interesting kind of 0:14:01.559 --> 0:14:04.200 defensive looking things and glue that together, mush it all 0:14:04.200 --> 0:14:06.760 together and make this Frankenstein that was going to be 0:14:06.800 --> 0:14:09.040 a bond replacement. And you can tell that I'm not 0:14:09.120 --> 0:14:12.240 a strong advocate of doing that kind of stuff um 0:14:12.280 --> 0:14:14.680 these days. Though, if I start with a construct that 0:14:14.720 --> 0:14:17.880 bonds don't make anything, then maybe the construct for me 0:14:18.000 --> 0:14:21.120 is just to build something that's risk mitigating, right and 0:14:21.160 --> 0:14:23.280 try to reduce a drag. And that's the first step 0:14:23.360 --> 0:14:42.440 to having an all risk portfolio. So on that note, 0:14:42.480 --> 0:14:44.440 something you said that really resonates is the fact that 0:14:44.800 --> 0:14:46.800 we don't really know what the aftermath of the COVID 0:14:46.880 --> 0:14:49.400 nineteen chok is really going to look like. And it 0:14:49.480 --> 0:14:52.080 makes me wonder, how can you go about having any 0:14:52.120 --> 0:14:56.760 conviction in portfolio construction or whatever it may be going 0:14:56.840 --> 0:15:00.120 forwards from this point in time when they're still are 0:15:00.120 --> 0:15:02.920 so many unknowns and so many questions about what the 0:15:02.960 --> 0:15:05.120 economy is going to look like post COVID one, we 0:15:05.240 --> 0:15:07.400 are actually even going to get to a post COVID world, 0:15:07.880 --> 0:15:10.600 I mean, it's really difficult to kind of make any decisions. 0:15:10.720 --> 0:15:13.280 Feels like it does feel like that, And and the 0:15:13.280 --> 0:15:15.600 best way to kind of articulate our view on that 0:15:15.680 --> 0:15:18.080 as a firm is take a look at all the 0:15:18.160 --> 0:15:20.440 forecasts for the market at the beginning of the last 0:15:20.480 --> 0:15:24.520 four years right, and the strategists never get it right. 0:15:24.600 --> 0:15:27.400 And and we're not saying we're smarter, we're saying we 0:15:27.560 --> 0:15:29.960 probably wouldn't get it right either. We've got Cambridge and 0:15:30.040 --> 0:15:32.880 Oxford QUANTZ running all over the place in London, and 0:15:32.920 --> 0:15:35.680 nobody's pretending that they can get that right. And so 0:15:35.920 --> 0:15:38.600 if none of us really can come together and get 0:15:38.640 --> 0:15:41.600 pretty decent forecasts, you know, as it is, if everyone's 0:15:41.600 --> 0:15:43.560 forecasts were right, then the market woul immediately moved to 0:15:43.560 --> 0:15:45.680 the forecast right. We can kind of accept this as 0:15:45.680 --> 0:15:49.000 an odd tautology, but given that none of us can 0:15:49.040 --> 0:15:52.520 forecast it right, our view is that going forward, we 0:15:52.600 --> 0:15:55.560 can't get the regimes. It's not quite the same as 0:15:55.600 --> 0:15:58.760 we remember everything. So maybe directly attacking risk is the 0:15:58.800 --> 0:16:01.840 way you have to go. So, you know, tail hedging 0:16:01.920 --> 0:16:03.680 is very expensive, but there are things you can do 0:16:03.680 --> 0:16:05.200 with futures, and there are other things you can do 0:16:05.240 --> 0:16:09.160 to start attacking the specific risk profile of your portfolio. 0:16:09.560 --> 0:16:13.120 And I think the whole conversation about bonds, you never 0:16:13.160 --> 0:16:16.120 really had to explain any to anyone how well bonds 0:16:16.160 --> 0:16:18.280 didn't make as much during a crisis as we thought 0:16:18.320 --> 0:16:21.200 because they kind of kept doing what you needed to. Now, 0:16:21.280 --> 0:16:24.040 going back to the gold and the FX and tailhaging, 0:16:24.120 --> 0:16:27.160 all these conversations, when they don't work, you wind up 0:16:27.160 --> 0:16:30.040 with this. What happened was conversation and and no c 0:16:30.240 --> 0:16:32.720 I O of a pension or no investor in a fund, 0:16:33.040 --> 0:16:35.120 No one likes to hear what happened was as the 0:16:35.160 --> 0:16:38.760 first few words introducing what went wrong? Right, Nobody ever 0:16:38.800 --> 0:16:41.080 says what happened was, we really did a great job 0:16:41.120 --> 0:16:42.920 and we made a lot of money for you. It's 0:16:42.920 --> 0:16:46.160 always what happened was different from what we expected. And 0:16:46.240 --> 0:16:49.320 so you know, as we talk about bond replacements, what 0:16:49.360 --> 0:16:52.160 we really want to have is things that just directly 0:16:52.200 --> 0:16:55.240 attacked the exact risk we have and maybe we have 0:16:55.360 --> 0:16:58.400 to accept that there's a drag associated with doing that 0:16:58.520 --> 0:17:01.040 kind of exact risk attacks. Oh you know, if I'm 0:17:01.040 --> 0:17:03.160 going to use the Japanese yend the hedge equities and 0:17:03.160 --> 0:17:05.919 it doesn't work, I can lose a lot. Whereas if 0:17:05.960 --> 0:17:08.119 I use you know, puts and I spent a little 0:17:08.119 --> 0:17:10.720 too much, I know it's gonna work. And that's the 0:17:10.760 --> 0:17:13.600 real tension, Like how do I reconcile between the cost 0:17:13.680 --> 0:17:17.879 of mitigating risk and the potential return? Sir? I I 0:17:17.960 --> 0:17:23.080 can't get that image of Cambridge and uh, who's the 0:17:23.119 --> 0:17:26.120 other one? Where the clans for Cambridge Cambridge at Oxford 0:17:26.600 --> 0:17:29.480 quantz running all over London. It's it sounds like a 0:17:29.560 --> 0:17:33.080 muddy python or a Betty Hills kids. And the truth 0:17:33.160 --> 0:17:38.160 is they probably never moved from their desks. But period, 0:17:38.240 --> 0:17:41.520 you know, you bring up tail risk kedging and I 0:17:41.840 --> 0:17:44.120 assume the best I don't know, Maybe the only way 0:17:44.160 --> 0:17:46.640 to do that is in is in the options market. Um, 0:17:47.440 --> 0:17:50.720 and what a crazy year it's been for the options market. 0:17:50.760 --> 0:17:54.040 I mean, we we've come around to this idea that 0:17:54.200 --> 0:17:57.520 the retail day traders of the world sort of became 0:17:57.560 --> 0:18:00.240 almost this new whale in the options market, and correct 0:18:00.280 --> 0:18:01.800 me if I think if I'm sort of off based 0:18:01.800 --> 0:18:04.320 in that description, but at least in the press, that's 0:18:04.359 --> 0:18:08.120 kind of the picture that's been presented. Has this new 0:18:08.200 --> 0:18:11.720 sort of mom and pop or maybe it's college kid 0:18:11.720 --> 0:18:14.800 in a basement day trader, this whole new class of 0:18:14.800 --> 0:18:18.639 of options player. Have they really shifted sort of the 0:18:18.680 --> 0:18:21.520 complexion of the options market? Is it a permanent shift? 0:18:22.280 --> 0:18:25.400 And you know, boy, I would think for a sophisticated 0:18:25.640 --> 0:18:29.280 shop like yours, that's kind of easy pickings to sort 0:18:29.280 --> 0:18:31.800 of to sort of exploit this kind of this kind 0:18:31.840 --> 0:18:34.600 of new fast money coming into the market. I know 0:18:34.640 --> 0:18:36.920 that's a twelve part. I was actually thinking that was 0:18:36.960 --> 0:18:44.359 ten parts, but that's less. But answer however many parts 0:18:44.720 --> 0:18:46.440 you feel like it's a bit like quiz sho. I'll 0:18:46.440 --> 0:18:50.680 take the fourth part first. So so the first part, 0:18:51.240 --> 0:18:53.199 you know, maybe i'll broadly talk about what I think 0:18:53.280 --> 0:18:56.119 is happening in option. So to begin with the retail 0:18:56.160 --> 0:18:58.680 dynamic is a big change. So we used to see 0:18:58.720 --> 0:19:02.359 retail investors buying the short vall et F products like 0:19:02.400 --> 0:19:04.760 the x I V and of course we all remember 0:19:04.760 --> 0:19:08.800 the spectacular outcome and keep in mind that the VALL 0:19:08.880 --> 0:19:11.760 industry has created a long vall only product called the 0:19:11.840 --> 0:19:14.879 v x X, which is down from it's high, and 0:19:14.920 --> 0:19:18.560 created a short VAUL product that was loss in a day. 0:19:18.640 --> 0:19:21.040 So you know, it's the same underlying after all. So 0:19:21.040 --> 0:19:23.400 it's a little confusing I think too investors. But they 0:19:23.400 --> 0:19:25.320 still they keep seem want to come back to these 0:19:25.320 --> 0:19:28.320 sort of things, these these structured products. But what I 0:19:28.359 --> 0:19:30.840 will say is that's a shift one that they're really 0:19:30.880 --> 0:19:33.920 not selling vall the same magnitude as they used to be. 0:19:34.000 --> 0:19:37.880 And and you are right, they've turned buyer of sorts. Right, 0:19:37.920 --> 0:19:40.720 So just looking at the top five text stocks, we 0:19:40.760 --> 0:19:44.000 saw about thirty billion dollars in in volume a day 0:19:44.080 --> 0:19:47.200 trading in two thousand nineteen. Decent sized number, it sounds 0:19:47.200 --> 0:19:49.720 like a lot. That number in August of this year 0:19:49.760 --> 0:19:52.080 was as high as a hundred twenty billion, so that's 0:19:52.080 --> 0:19:54.760 a lot. And retail investors, you know, there's a big 0:19:54.840 --> 0:19:57.240