Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe wisn't so, Joe. It's
Speaker 1: that time of year again. You know, we're getting close
Speaker 1: to the end of and that means everyone is starting
Speaker 1: to talk about what nineteen might have in store for markets. Truly,
Speaker 1: the most wonderful time of year, I think is the
Speaker 1: season right about now. It always warms my heart and
Speaker 1: that's when you start getting analyst notes from sell side
Speaker 1: shops talking about what the forecasts are for all asset classes, uh,
Speaker 1: stocks and bonds and currencies. I truly think it's really
Speaker 1: like the most heartwarming time of year for right, Okay, Um,
Speaker 1: don't you absolutely the most wonderful time of the year. Indeed. Uh,
Speaker 1: But there's there's a little bit of a difference this year,
Speaker 1: I feel, and probably it's because December is coming off
Speaker 1: the back of November and October, which, as we've discussed
Speaker 1: on the All Thoughts Podcast before, have been pretty painful
Speaker 1: months for a lot of investors. Yeah, that's true, and
Speaker 1: of course people always update their forecasts basically to some extent,
Speaker 1: extrapolating on what happened in the recent past. So I
Speaker 1: think the fact that we got this sort of October
Speaker 1: November intense about of volatility has caused people to say, oh, suddenly,
Speaker 1: we see all these new risks on the horizon, Whereas
Speaker 1: if you had asked them at the end of September,
Speaker 1: they would have been much more sanguine about what the
Speaker 1: future had in store. Yeah, everyone's sort of rushing to
Speaker 1: retool their risk forecast for next year. But there's one
Speaker 1: person who has been consistent in forecasting a very similar
Speaker 1: set of risks for many years now, and that person
Speaker 1: is going to be our guest on the show today.
Speaker 1: That's great. I'm looking forward to this because a it'll
Speaker 1: be nice to get an alternative viewpoint from the always
Speaker 1: sort of, you know, somewhat rosy outlook of the mainstream
Speaker 1: investing class. But it's also interesting to talk to people
Speaker 1: who are contrarians, because while it's true that you know,
Speaker 1: it can pay to have a different view, in the
Speaker 1: meantime when markets aren't blowing up, it can be a
Speaker 1: costly view. So how you reconcile that is always very interesting. Yeah, absolutely,
Speaker 1: And I have to say I've been a fan of
Speaker 1: this particular person's work for a very, very long time.
Speaker 1: So I'm quite happy that we're going to have him
Speaker 1: on the show and that we'll get to put these
Speaker 1: questions to him. So, without further ado, our guest for
Speaker 1: this episode is Chris Cole over Artemis Capital Management. Chris
Speaker 1: is the founder and c IO of Artemis Capital and
Speaker 1: he's been writing about the markets and specifically volatility for many,
Speaker 1: many years now. Chris, welcome to the show. Thank you
Speaker 1: for a pleasure to be here. So Chris, maybe just
Speaker 1: to get started, you can give us a little bit
Speaker 1: about your background and how you got to Artemis and
Speaker 1: what exactly it does, because it's a little bit unusual,
Speaker 1: I feel sure. Well, I think the mission of Artemis
Speaker 1: is to really create opportunity out of chaos. Normally, when
Speaker 1: there's volatility in the marketplace, that's a bad thing, big
Speaker 1: equity draw downs, it impacts people's portfolio in a negative way.
Speaker 1: Our job is to turn that volatility into something that's positive.
Speaker 1: And the history of the firm actually comes out of
Speaker 1: an old school hedge fund story. I used to I
Speaker 1: was trading my own proprietary capital throughout the period of
Speaker 1: two thousand seven to two thousand ten, and really turned
Speaker 1: two thousand eight into something that was quite profitable and
Speaker 1: try to develop strategies that paid off in the event
Speaker 1: that there was a tremendous amount of volatility, but it
Speaker 1: didn't bleed uncontrollably or lose a tremendous amount of capital.
Speaker 1: Uh if the market continue to do well. And that
Speaker 1: that was how Artemis was founded. It was founded out
Speaker 1: of a bedroom um and you know today we have
Speaker 1: institutional clients all over the world. So is the goal
Speaker 1: of Artemis to be or even the goal of their
Speaker 1: sort of framework, to be profitable over the long term,
Speaker 1: or is it as some other funds are positioned, to
Speaker 1: essentially allow people to take more risks during the good
Speaker 1: times while ensuring that when the bad times hit unexpectedly
Speaker 1: that they don't suffer a massive negative shock. Basically, the
Speaker 1: answer is both actually depends how you want to use
Speaker 1: the uh. You know where a hammer, you can use
Speaker 1: this whatever we like to. I think we have clients
Speaker 1: to look at it in both ways. But the goal
Speaker 1: at the end of the day is is that throughout
Speaker 1: the business cycle we want to deliver returns that show
Speaker 1: excess alpha that are on par with what you'd expect
Speaker 1: from an alpha generating hedge fund. But The difference is
Speaker 1: that we want to create most of our returns when
Speaker 1: the overall market is suffering the most and when there's
Speaker 1: the most volatility. So instead of where most the classic
Speaker 1: hedge fund structure of the classic portfolio has these long
Speaker 1: periods when there's a bolt market and people are doing really,
Speaker 1: really well. But that's when we're just trying to stay
Speaker 1: static and not not really make or lose a lot
Speaker 1: of money. Um. But when we end up having that
Speaker 1: twenty brought down draw down a market crash, that's when
Speaker 1: we want to really shine and do do particularly well.
Speaker 1: And uh So, to that effect, you can you can
Speaker 1: think of us as a hedge, but we we like
Speaker 1: to look at ourselves as a hedge that pays you
Speaker 1: to own it through the business stuffle. Right, So you
Speaker 1: mentioned creating value out of chaos, and I'm trying to
Speaker 1: think how to phrase this question. But why did chaos
Speaker 1: or volatility become your thing or your area of expertise
Speaker 1: or focus a long time ago? Uh Now, I train
Speaker 1: myself with the c s A, I PAS the CFA program.
Speaker 1: I worked at Merrill Lynch in my early days, and I,
Speaker 1: like most people, began starting out and value investing and
Speaker 1: I looked at all these different strategies like like value
Speaker 1: and momentum and all these different financial products, and I
Speaker 1: really kind of looked at them the way that an
Speaker 1: alien would looking look at different looking at different return streams,
Speaker 1: whether you're talking about credit or value investing. These are
Speaker 1: mean reversion strategies. And then there are strategies like global
Speaker 1: macro and c t A s that make money off
Speaker 1: of prend or divergencies, divergences and change. So I came
Speaker 1: to this conclusion that really there were only two at
Speaker 1: A classes in actuality, long and short volatility. There's people
Speaker 1: that say is volatility asset classes, saying volatility is the
Speaker 1: only ethic class because in a crisis, people have all
Speaker 1: of these these different strategies in their portfolio. But in
Speaker 1: a crisis, these strategies end up looking a lot like
Speaker 1: a short volatility strategy, a strategy that is that ends
Speaker 1: up doing particularly bad during draw downs, and all of
Speaker 1: these different diversification ends up being correlated with one another,
Speaker 1: and then you end up having a strategy that is
Speaker 1: particularly fragile to change. So institutional investors, individual investors in essence,
Speaker 1: kid themselves into believing that they have all these different
Speaker 1: asset classes when n actuality, they're just crowding into strategies
Speaker 1: that are that are fragile to change in the market,
Speaker 1: and that the true diversification is actually finding strategies that
Speaker 1: are long volatility or strategies that that make money from change,
Speaker 1: and that when you look at the world in this lens,
Speaker 1: there there are really there's really only one asset class,
Speaker 1: and volatility is the only real asset class in a
Speaker 1: sense of replicating returns chris In theory, this idea of
Speaker 1: having assets or having diversification that could pay off in
Speaker 1: both long, heightened and reduced volatility is the premise behind
Speaker 1: a lot of sort of do it yourself at home portfolios,
Speaker 1: like buying a lot of stocks and buying a lot
Speaker 1: of bonds, buying treasuries that you know, maybe pay off
Speaker 1: a little bit a little bit extra money during the
Speaker 1: good times button bad times bit up and are a
Speaker 1: safe haven asset class when we get a surgeon volatility.
Speaker 1: This arguably has worked well for the last few decades.
Speaker 1: Do you think there's a reason that that won't work
Speaker 1: in the future, and that the assets that seem to
Speaker 1: have thrived in the past during heightened volatility won't do
Speaker 1: so in the future. You know, it's a wonderful topic
Speaker 1: to bring up because for the greater part of thirty years,
Speaker 1: people have looked at the stock bond anti correlation and
Speaker 1: have said, you know, why do I need to be
Speaker 1: invested in something like long volatility or something that that
Speaker 1: is exposed to change when I can just be invested
Speaker 1: in fixed income because I know that bonds will go
Speaker 1: up when stocks go down, and that has been true
Speaker 1: for my entire life. But if we take a longer
Speaker 1: history and look out one one hundred twenty years, and
Speaker 1: I presented this evidence as far back, it's become a
Speaker 1: popular thing to talk about now. But if you look
Speaker 1: at some of Artemiss research dating back to two thousand fifteen.
Speaker 1: Two fourteen, we talked about this at length, stocks and
Speaker 1: bonds have actually spent more time correlated with them one another,
Speaker 1: and they've spent anti correlated. There's been multiple periods in
Speaker 1: history where stocks and bonds have dropped together for two
Speaker 1: to three years at a time. This includes the early
Speaker 1: nine hundreds, periods like in the fifties, and periods like
Speaker 1: in the late seventies. So if I go to an
Speaker 1: average financial advisor, out on the street and I say, what,
Speaker 1: you know, I have a hundred thousand dollars. What should
Speaker 1: I do with my money? That person is likely to say, well,
Speaker 1: you put it in sixty stock bond split and then
Speaker 1: the bonds will protect you when you're stocks too badly.
Speaker 1: And if I have a little bit more money, I
Speaker 1: can go to a very expensive financial advisor and they'll say,
Speaker 1: you know what, we want you to lever the bonds
Speaker 1: against the stocks because that's better on a market with
Speaker 1: risk reward framework efficient frontier. That's something called risk perry.
Speaker 1: But if you look at these portfolios, they performed very
Speaker 1: very well over the last thirty years. But if we
Speaker 1: look out over a hundred years, there are multiple free
Speaker 1: year periods where these portfolios would have had massive drawdowns,
Speaker 1: massive drawdowns in some instances for risk parity, even even
Speaker 1: career ending drawdowns. So this assumption that stocks and bonds
Speaker 1: will always be anti correlated is a very very dangerous assumption.
Speaker 1: And I think all one has to do to prove
Speaker 1: this is look look across history. Now, if yields were
Speaker 1: all the way up at you know, ten, as they
Speaker 1: were in the late seventies, you could sit back and say, well,
Speaker 1: there's room for bonds to perform uh in the event
Speaker 1: stocks drop. But if we think about what it would
Speaker 1: take for treasury bonds to perform as well as they
Speaker 1: did during the last recession, we'd have to have treasury
Speaker 1: yields go all the way down to negative two. I'm
Speaker 1: not saying that that's not possible, but I'm just saying
Speaker 1: that's highly improbable. And if you're this is the baseline
Speaker 1: assumption from which trillions of dollars of asset allocation decisions
Speaker 1: are made upon this, this assumption on the stock bond
Speaker 1: at a correlation. So this this makes alternative forms of
Speaker 1: defense like volatility, like smart global mackerel very very important
Speaker 1: at this particular juncture in the cycle. I think it's
Speaker 1: very important that people understand that the stock bond, the
Speaker 1: assumption that bonds can be a form of defense for you,
Speaker 1: is particularly dangerous at this stage of the market cycle,
Speaker 1: when most yields are at their zero bound. Right. So
Speaker 1: the argument here is that when most people talk about
Speaker 1: being short volatility, there's an assumption that they're explicitly short
Speaker 1: volatility by for instance, you know, buying VIX related exchange
Speaker 1: traded products or something like that. But you're saying that
Speaker 1: there are big parts of the market that are implicitly
Speaker 1: short vall through an assumption of existing relationships like the
Speaker 1: correlation between bonds and stocks. Are there other things that
Speaker 1: you think are implicitly short vall in the market. Absolutely.
Speaker 1: One of my papers I talked a little bit about
Speaker 1: the short ball trade as being like an oboros or
Speaker 1: the classic image of a snake devouring its own tail
Speaker 1: um And this is this is how I like to
Speaker 1: visualize modern markets today, this financial outcomy driving markets higher
Speaker 1: and volatility lower. The global short vall trade now represents
Speaker 1: an estimated to trillion dollars in financial engineering strategies. And
Speaker 1: these strategies that I deem as short volatility simultaneous exert
Speaker 1: influence and are influenced by volatility. This includes what I
Speaker 1: would deem about sixty billion dollars of explicit short fall
Speaker 1: exposure and another one point four trillion dollars worth of
Speaker 1: implicit So what do I mean by the difference between
Speaker 1: explicit and implicit short fall? Well s, Explicit short fall
Speaker 1: tends to be the weak hands at the table. These
Speaker 1: are These are traitors or their institutions that are actually
Speaker 1: shorting volatively This is where you're actually going out and
Speaker 1: shorting a vixed future, where you're actually going out and
Speaker 1: you're rolling. Are you doing a by right overwrite program.
Speaker 1: You're actually shorting your shorting calls or your shorting puts
Speaker 1: to earn extra income UM. It involves actually selling a
Speaker 1: derivative UM. I think most people are aware of this,
Speaker 1: but this is actually the smallest component of the short
Speaker 1: alter rate. The much much bigger component of the short
Speaker 1: all trade, the trillion dollar plus component of it, is
Speaker 1: what I call implicit short fall. When you are when
Speaker 1: you are sorting an option, you are taking on the
Speaker 1: assumption of stability, and that assumption of stability expresses itself
Speaker 1: through various risk profiles that can be expressed in uh
Speaker 1: these esoteric Greek terms that we use. But long story short,
Speaker 1: you're taking the assumption of that volatility and markets will
Speaker 1: be stable. You're taking the assumption that there's not going
Speaker 1: to be any jump risk. This is something we've option
Speaker 1: traders are called gamma. You're taking the assumption that there's
Speaker 1: not going to be rising interest rates UM, and you're
Speaker 1: taking assumption that there will be stable cross asset correlations.
Speaker 1: These implicit short fall strategies replicate the payoff of a
Speaker 1: portfolio of short options by creating these similar exposures. So
Speaker 1: these would include strategies like ball targeting funds, which are
Speaker 1: a short gamma in the market, their short volatility and
Speaker 1: their short gamma. These would include strategies like risk parity
Speaker 1: which are implicitly short gamma and short correlation. So even
Speaker 1: though these strategies may not be directly selling volatility, they
Speaker 1: are implicitly replicating the exposure of a portfolio of short options.
Speaker 1: And you know what, one of the greatest examples of
Speaker 1: an implicit short ball trade in history was actually was
Speaker 1: the portfolio insurance debacle of portfolio insurance was implicitly um
Speaker 1: short some of these exposures of a short option portfolio,
Speaker 1: even though it was never actually shorting a put or
Speaker 1: a call option. Um So, I think many of these strategies,
Speaker 1: ranging from the the financial engineering of share by backs,
Speaker 1: to certain risk premious strategies, to certain ball targeting strategies,
Speaker 1: to certain risk parity strategies, which are comprising a very
Speaker 1: large portion of the institutional flows in equity markets today,
Speaker 1: are replicating the payoffs of a short straddle. And this
Speaker 1: presents a layer of embedded and very hidden risk that
Speaker 1: people aren't fully taking into consideration. Chris, I don't want
Speaker 1: to get too philosophical here, but whenever I think about this,
Speaker 1: I start my mind starts to drift beyond mere financial markets,
Speaker 1: and I always think about like, isn't life and living
Speaker 1: in a society implicitly short volatility? I take a job,
Speaker 1: there's no guarantee that that job will last. But as
Speaker 1: long as sort of things more or less function as
Speaker 1: they are, I keep my job, I buy a house.
Speaker 1: There's no guarantee that there's not going to be some
Speaker 1: freak fire or war in the area. But if there is,
Speaker 1: then of course that's completely potentially destroyed. Like isn't aren't
Speaker 1: we all always going to be as long as we're
Speaker 1: functioning members of society sort of all implicitly short volatility? Well,
Speaker 1: you know, Joe, it's it's funny you mentioned this, and
Speaker 1: I could ask this question a lot because I actually
Speaker 1: wear a watch that counts time backwards to my to
Speaker 1: my death, So so that gets some perspective on the
Speaker 1: issue the world. I guess that's right. I look at
Speaker 1: myself as a call option, you know, and I by
Speaker 1: there's an element of of time exposure. That's ticking off.
Speaker 1: We are a short time and that's that's a form
Speaker 1: of short fall. There are ways in our lives that
Speaker 1: we make ourselves and I fragile and in less exposed
Speaker 1: to the whims change. You know, certainly, if by by
Speaker 1: a process of self education and by learning, learning, um
Speaker 1: and reading and continually educating yourself, you are making a
Speaker 1: long volatility trade. By meditating and taking care of your health,
Speaker 1: you're making a long volatility trade. By having lots of
Speaker 1: meaningful connections in your life and knowing a lot of
Speaker 1: individuals um that that can provide good contexts and good
Speaker 1: healthy relationships. These are these are ways to be long volatility.
Speaker 1: But almost certainly most of what we do in life
Speaker 1: has an element of of of short vall exposure, and
Speaker 1: the biggest one of course being time that is the
Speaker 1: only true currency and the most fragile one. So is
Speaker 1: the implication here that overall people should think about the
Speaker 1: role of financial markets and investing sort of differently than
Speaker 1: they do, because I think like basically people see, they
Speaker 1: go about their lives and they make money from their jobs,
Speaker 1: and then to some extent, the role of investing in
Speaker 1: the market is to augment that and to turn their
Speaker 1: savings into even more and to make even more money
Speaker 1: than they would just get from labor income. It sounds
Speaker 1: like the implication is that, for you, since most of
Speaker 1: our lives are going about being short vall that to
Speaker 1: some extent, we should really rethink what the purpose of
Speaker 1: investing money is and that it should be more like
Speaker 1: a general lifeheage. I absolutely think that one of the
Speaker 1: ways to look at savings is to to make yourself
Speaker 1: and I fragile to turbulence, to give yourself options. So
Speaker 1: you know, it's amazing that the US is probably one
Speaker 1: of the only cultures in the world where we assume growth.
Speaker 1: I think my friend Jared Dillian has made this point
Speaker 1: really well, that it's it's always assumed that the stock
Speaker 1: market should always be going up, it's always assumed that
Speaker 1: earnings per share should always be going up. Now, that's
Speaker 1: been a fantastic assumption to bet on over the last
Speaker 1: fifty years, um and maybe a wonderful assumption to been
Speaker 1: on the next fifty years. But it's actually important to
Speaker 1: understand it's it's it's quite unusual in the history of
Speaker 1: most most nations. Most people don't have that philosophy. So
Speaker 1: the concept of being able to provide a sense of
Speaker 1: savings is not necessarily to to lever up your lifestyle,
Speaker 1: but it should be too to give you an ability
Speaker 1: to to be your highest self. The money and saving
Speaker 1: should be a form of of antifragility. Um Cash itself
Speaker 1: provides optionality, So I want to be an in the
Speaker 1: money call option. That's how I'm going to start thinking
Speaker 1: of myself. So I want to get back to that
Speaker 1: short volatility idea, because of course, in February we had
Speaker 1: this volumit getting occurrence where we saw a lot of
Speaker 1: explicitly short voll strategies like VIX related exchange traded notes
Speaker 1: and products blow up, and there was a theory that
Speaker 1: when they blew up, they basically had to hedge, and
Speaker 1: so they started pushing up the VIX index itself, and
Speaker 1: that kind of caused investors to get even more nervous,
Speaker 1: and then the VIX would go up even more and
Speaker 1: the exchange traded notes would have to hedge even more.
Speaker 1: So you have this feedback loop that ended up making
Speaker 1: the whole thing really really painful for a lot of people.
Speaker 1: I think you mentioned one point for trillion dollars for
Speaker 1: your implicit shortfall strategies. So I'm wondering, could we get
Speaker 1: a sort of self reflexive feedback loop in implicit shortfall
Speaker 1: strategies And if we did, how bad would that be
Speaker 1: for the overall market? Well, if we look at the
Speaker 1: cause of this main problem. So today trillions of dollars
Speaker 1: in central bank stimulus share by back systematic strategies are
Speaker 1: based on market volatility as a key decision metork for leverage.
Speaker 1: So what we think we know about volatility is pretty
Speaker 1: much all wrong. Uh you know the MARKO it's modern
Speaker 1: portfolio theory conceives volatility as some external measurement of the
Speaker 1: intrinsic risk and asset. And this is a highly flawed concept,
Speaker 1: even though it's wildly taught in MBA and financial engineering programs,
Speaker 1: because it views volatility as an exogenous measurement of risk.
Speaker 1: So this is extended sort of like the way a
Speaker 1: sports commentator sees strikeouts and shots on goal. It's sort
Speaker 1: of a statistic measuring past outcomes of a game to
Speaker 1: keep score, but that somehow exists externally from the game.
Speaker 1: But the problem is that volatility isn't just keeping score.
Speaker 1: It's a player on the field now massively affecting the
Speaker 1: outcome of the game itself in real time at a
Speaker 1: level that's never been seen before. The last time we
Speaker 1: we saw something like this was leading into and back
Speaker 1: then the short volatility dynamic of portfolio insurance. What's really
Speaker 1: only about two percent of the market today. Today, these
Speaker 1: short volatility strategies comprise upboards of ten of the overall market. Now,
Speaker 1: that doesn't mean that we're likely to have another type
Speaker 1: of crash in a day, but it does make the
Speaker 1: probability of some event like that much much greater. These
Speaker 1: short volatility strategies are like a barrel of nitro glycerin
Speaker 1: sitting in your offices. Now I can walk over to
Speaker 1: your offices in Bloomberg and I can sit back and say, hey, guys,
Speaker 1: you know Joe Tracy, what's what's in that barrel? And
Speaker 1: be like, Oh, it's, uh, just some nitroglycerin. Be like,
Speaker 1: isn't that highly explosive? Could it blow up several city blocks?
Speaker 1: Oh no, it's it's not a big deal. It's been
Speaker 1: there for for years. It's been in factually, we've been
Speaker 1: adding to the stockpile of it for years. The banks
Speaker 1: pay off a healthy yield to store it here, and
Speaker 1: I'm like, my god, this is scary, this could this
Speaker 1: could blow up. And then you just say, well, haven't
Speaker 1: blown up for years on end, and you know what,
Speaker 1: it may never blow up. Risk does not necessariate outcome.
Speaker 1: But if you have a fire that starts somewhere else,
Speaker 1: and that fire gets larger and larger and larger, it
Speaker 1: may touch that barrel of nitricglysra in and what starts
Speaker 1: out as a as a regular fire could explode outwards
Speaker 1: into something that blows up several city blocks. That's what
Speaker 1: happened in where we had a routine market correction. Market
Speaker 1: was down, and then that caused the barrel of nitric
Speaker 1: glycerim known as portfolio in, starts to blow up and
Speaker 1: drop the market. One day, we could see something very similar.
Speaker 1: It's a fundamental credit crunch. Liquidity and leverage crunch intercedes
Speaker 1: with these short volatility strategies the way that they're currently
Speaker 1: composed in the market. Chris, I just want to point
Speaker 1: out that your theoretical story about us having nitroglycer and
Speaker 1: barrels in the office is not as ridiculous as it sounds.
Speaker 1: Because I used to sit next to Tracy and she
Speaker 1: literally had a mini barrel of oil sitting on her
Speaker 1: desk for a long time. So are sort of like
Speaker 1: internal risk management practices with dangerous substances in the office.
Speaker 1: Is not quite as outlandish as maybe you thought. I
Speaker 1: want to ask one last question I think is right key,
Speaker 1: and it touches on something you said in the very beginning.
Speaker 1: You know, it's very easy to come up with sort
Speaker 1: of naive long volatility strategy strategies. You could uh, you know,
Speaker 1: buy puts that pay off in the event of a
Speaker 1: massive draw down, or you could just go along the vix.
Speaker 1: But we know that these are really costly strategies and
Speaker 1: keeping it very simple like that doesn't really pay off.
Speaker 1: You could really lose a lot of money fast. So
Speaker 1: you talked about how the goal at to this is
Speaker 1: not just to provide a classical hedge, but do you
Speaker 1: actually make money over the whole cycle. So can you
Speaker 1: talk a little bit about how you go about sort
Speaker 1: of identifying long volatility strategies that don't kill you during
Speaker 1: the weight during the low volatility periods. Sure, it's it's hard.
Speaker 1: It's really hard to do, and I think that's why
Speaker 1: why Actually, you know what we spend we have. We've
Speaker 1: spent all day and all night thinking about this. So
Speaker 1: I think it takes it takes a specialist to be
Speaker 1: a little crazy, a little cookie, to focused on this
Speaker 1: day in and day day out, because you know, it's
Speaker 1: it's one of those strategies where you don't see the
Speaker 1: payoffs every day. But there's a couple of different routes
Speaker 1: that you can use to execute this, and and some
Speaker 1: of the tricks that we use UM we look for
Speaker 1: opportunities when we're paid to own connexity, So we're analyzed
Speaker 1: markets every single day using computer algorithms. And when you know,
Speaker 1: if I sit back and said, you know, Joe, would
Speaker 1: you would you like to buy some car insurance? You'd
Speaker 1: be like, and I don't really need car insurance. And
Speaker 1: I'll be like, well, what if I pay you ten
Speaker 1: dollars to own car insurance but you only get it
Speaker 1: for free days? Would you then want to own car
Speaker 1: insurance if I pay you to own it? Be're like, yeah, yeah, sure.
Speaker 1: Well sometimes in markets you're able to to buy portfolio
Speaker 1: insurance very inexpensively or get paid to carry it, but
Speaker 1: you have to be very quick and nimble and UM
Speaker 1: agile to find those opportunities. The other opportunities is you
Speaker 1: know we we if I look at it and you're
Speaker 1: trying to figure out when a forest fire might break out,
Speaker 1: you know, you you don't look at the spark that
Speaker 1: lights the forest fire. You look at a myriad of
Speaker 1: underlying conditions. So we're looking at when numerous or use
Speaker 1: a tremendous amount of data and we crunch a lot
Speaker 1: of that data to understand when is it opportune to
Speaker 1: buy that portfolio insurance and when can we get in
Speaker 1: um into positions where the probabilities are higher, even if
Speaker 1: when we're carrying a negative lead, but it's worth it
Speaker 1: too based on the probability set, and it requires crunching
Speaker 1: a tremendous amount of data. So these are some of
Speaker 1: the techniques that will use in order to find ways
Speaker 1: to carry that exposure efficiently. And it's not an easy
Speaker 1: thing to do. It takes a lot of time and
Speaker 1: expertise and focus and a lot of data and a
Speaker 1: lot of quantitative efforts to be able to manage that process.
Speaker 1: All right, Chris, I'm afraid we're going to have to
Speaker 1: leave it there, but thank you so much for coming on.
Speaker 1: That was really great, Yeah, thank you. It's been been
Speaker 1: a pleasure. I really appreciate it. So, Joe, I love
Speaker 1: that conversation, and I'm going to start thinking of myself
Speaker 1: as a call up and hopefully in the money call
Speaker 1: call option. I really like it too. I think that
Speaker 1: the you know, we've seen a lot of in the
Speaker 1: post crisis period, the emergence of a lot of popular
Speaker 1: like perma bearer types. You say, oh, everything is going
Speaker 1: to blow up eventually because the fed and run for
Speaker 1: the hills. And I feel like Chris had a slightly
Speaker 1: more interesting perspective, and in particular his idea of well,
Speaker 1: we're sort of uh, you know, implicitly short volatility all
Speaker 1: over the place, and so the idea of seeing investing
Speaker 1: as a reason to at least sort of get flat
Speaker 1: volatility or more long volatility, the way he framed it,
Speaker 1: I think made a lot of sense. Yeah, And I
Speaker 1: think his point is that those volatility strategies, the low
Speaker 1: vall strategies, tend to feed on themselves, and they tend
Speaker 1: to sort of naturally cause the market to double down
Speaker 1: on those positions. And so basically, maybe before the era
Speaker 1: of low interest rates and central banks and lots and
Speaker 1: lots of path some funds. You used to have markets
Speaker 1: and investors that were sort of self limiting. Once things
Speaker 1: got out of whack, eventually there'd be a correction and
Speaker 1: things would get evened out for a little bit. And
Speaker 1: I feel like what Chris is implying is that that
Speaker 1: doesn't happen that much anymore. Stuff just stays sort of
Speaker 1: imbalanced for much longer than it used to, and that
Speaker 1: means that when it does finally correct, the correction is
Speaker 1: more painful than it used to be. Yeah, it does
Speaker 1: feel like maybe as investors overall are sort of sleep
Speaker 1: walking into some big risks that they're not thinking of
Speaker 1: because they think they have them all taken care of.
Speaker 1: So they buy an index fund. So they're thinking, Okay,
Speaker 1: I'm going to diversify away idiosyncratic risk of investing in
Speaker 1: jewel stocks, and I'm going to buy a bunch of bonds,
Speaker 1: so I'm going to diversify away macro risk because I
Speaker 1: have some bonds. And then it's like, all right, I
Speaker 1: bought this, said it, forget it by a little bit
Speaker 1: every month, and then look at my portfolio when I retire, Like,
Speaker 1: maybe it's not quite so simple, and maybe it's impossible
Speaker 1: to just sort of people just sort of naively think
Speaker 1: that they've taken care of what they need to do
Speaker 1: to be good risk managers. Right, Okay, Well should be interesting, that,
Speaker 1: shouldn't it. Yeah, No, absolutely, And you know, the one
Speaker 1: thing I'll say though in the meantime is that we
Speaker 1: have had these blow ups, but they so far it's
Speaker 1: worth noting that the market gets by them. Like we
Speaker 1: had the exchange traded products blow up earlier this year,
Speaker 1: and we talked about it, but we didn't, you know,
Speaker 1: and then it's sort of flushed out of the system
Speaker 1: and it was okay. So I think the jury is
Speaker 1: still out on whether the system is still you know,
Speaker 1: sort of so filled with nitroglycerin that the big one
Speaker 1: will come and there'll be this massive unwind. But maybe
Speaker 1: we'll find out more in the next year or two.
Speaker 1: Hopefully nothing and we'll have Chris. He could come back
Speaker 1: and do a victory left the night choke lyscer in
Speaker 1: metaphor is a little bit unnerving, there are right, ye,
Speaker 1: a bit to us to home. This has been another
Speaker 1: episode of the All Thoughts podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe wisn'tal. You could follow me on Twitter at the Stalwart,
Speaker 1: and you should follow our producer on Twitter. He's to
Speaker 1: for foreheads and he's at foreheads T, as well as
Speaker 1: the Bloomberg head of podcast, Francesco Levie at Francesco Today.
Speaker 1: Thank you for listening.