WEBVTT - Unifying Through Shared Cultural Identities with Michael Morris

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. This is Master's in

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<v Speaker 1>Business with Barry Ridholds on Bloomberg Radio. This week on

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<v Speaker 1>the podcast another extra special guest. Corey Hofstein is one

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<v Speaker 1>of these really fascinating quants who has just a really

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<v Speaker 1>interesting background. Not only did he stand up a research

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<v Speaker 1>shop from a dorm room in college and started selling

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<v Speaker 1>model portfolios to fund managers, but eventually created a suite

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<v Speaker 1>of first mutual funds and then ETFs, really pioneering the

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<v Speaker 1>concept of return stacking. People have described that in the

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<v Speaker 1>past as portable alpha. He does some really really interesting

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<v Speaker 1>research and gets deep into the weeds on things like

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<v Speaker 1>market structure, liquidly cascades, what really drives returns, how much

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<v Speaker 1>should you be focused on alpha versus beta? But most

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<v Speaker 1>fascinating of all, he is one of those rare quants

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<v Speaker 1>who has the ability to take complex, sophisticated quantitative topics

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<v Speaker 1>and make them very understandable for the average investor. If

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<v Speaker 1>you're at all interested in concepts of things like portable

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<v Speaker 1>alpha or return stacking, or just want to know how

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<v Speaker 1>a quant looks at the world of investing and tries

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<v Speaker 1>to decide where there are opportunities I found this conversation

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<v Speaker 1>to be fascinating, and I think you will also, with

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<v Speaker 1>no further ado, newfound research and returned stacked ETF suites.

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<v Speaker 1>Corey Hofstein, Corey Hofstein, Welcome to Bloomberg.

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<v Speaker 2>Barry, thank you for having me. Very excited to be here.

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<v Speaker 1>I'm excited to chat with you about things besides watches

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<v Speaker 1>and cars in real estate. Let's talk a little bit

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<v Speaker 1>about your background. You get a BS and Computer science

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<v Speaker 1>from Cornell, a master's in computational finance from Carnegie mellon

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<v Speaker 1>quantitative investing. Was was that the plan from the beginning?

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<v Speaker 2>Absolutely not really not No. I grew up in the

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<v Speaker 2>Super Nintendo generation, so I thought as a young man

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<v Speaker 2>that I was gonna make video games for a living.

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<v Speaker 1>Get out. Really I did.

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<v Speaker 2>And I taught myself to program when I was twelve.

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<v Speaker 1>Huh.

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<v Speaker 2>And all throughout late middle school and high school, I

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<v Speaker 2>was programming games for my game Boy and developing game

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<v Speaker 2>engines for the computer. I wrote my own programming language.

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<v Speaker 2>I really thought I was on a path to go

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<v Speaker 2>video games.

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<v Speaker 1>For what was your game of choice? As a kid, I.

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<v Speaker 2>Was a big Zelda fan.

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<v Speaker 1>Okay, I really was.

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<v Speaker 2>And it's funny I haven't played video games in probably

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<v Speaker 2>over a decade.

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<v Speaker 1>Same, And the really funny thing is so here the

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<v Speaker 1>age difference. I remember sneaking out of high school during

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<v Speaker 1>lunch with a buddy to go to the mall to

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<v Speaker 1>first start playing Space Invaders, then Galaxa, then Missile Command,

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<v Speaker 1>like these are all retro games. And then when I

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<v Speaker 1>started as a trader Tuesday nights, the quote server would

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<v Speaker 1>be taken offline and it would become a quake server,

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<v Speaker 1>and we spent and you just get lost in it,

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<v Speaker 1>and suddenly it's eleven o'clock and oh my god, I

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<v Speaker 1>missed dinner. But that's really fascinating. Why didn't you become

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<v Speaker 1>a game programmer?

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<v Speaker 2>As you mentioned, I ended up at Cornell for computer science,

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<v Speaker 2>and as much as I love the curriculum, I looked

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<v Speaker 2>around at the people I was in my classes with

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<v Speaker 2>and I said, oh, don I don't know if this

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<v Speaker 2>is whom I want to spend with, whom I want

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<v Speaker 2>to spend all of my time.

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<v Speaker 1>That's hilarious in a cubicle.

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<v Speaker 2>As it turns out, I like talking to people, I

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<v Speaker 2>like interacting, and I just sort of grew and evolved

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<v Speaker 2>from there. This was the era two thousand and five

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<v Speaker 2>two thousand and six, all of my friends were looking

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<v Speaker 2>to get banking roles. Everyone wanted to go work on

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<v Speaker 2>Wall Street, and so I sort of caught the bug

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<v Speaker 2>and saw, oh, there's this really interesting thing I'm learning

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<v Speaker 2>about called quant right, and I really liked the application

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<v Speaker 2>of math and statistics and computer science to markets, and

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<v Speaker 2>I just caught the bug. And that's where I said, Okay,

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<v Speaker 2>I think that's where I want to spend my career.

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<v Speaker 2>And so graduating right into two thousand and nine, right

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<v Speaker 2>out of the financial crisis, I said, I don't think

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<v Speaker 2>I'm going to get a job. Let me see if

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<v Speaker 2>I can go to grad school continue this education. And

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<v Speaker 2>that's how I ended up at Carnegie Mellon.

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<v Speaker 1>So let's talk a little bit about the timing there.

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<v Speaker 1>You're a Cornell six to nine, you're a Carnegie Mellon

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<v Speaker 1>O nine to eleven, but you start Newfound Research in

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<v Speaker 1>eight Well, what was this a dorm room? It is

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<v Speaker 1>the next Dell computer.

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<v Speaker 2>It was. It was very accidental. I never actually intended

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<v Speaker 2>to still be running this business sixteen years later. Truthfully,

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<v Speaker 2>I named it Newfound after a lake my family used

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<v Speaker 2>to visit in New Hampshire. It was truly a throwaway name.

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<v Speaker 2>But in college I was working on some quantitative research

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<v Speaker 2>models and happenstance we were talking about luck earlier got

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<v Speaker 2>introduced to a local asset manager outside of Boston who

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<v Speaker 2>saw what I was working on and said, this is

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<v Speaker 2>really interesting. Would you license these models to me. I'm

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<v Speaker 2>a broke college student who needs some beer money. Yeah,

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<v Speaker 2>And he said, I don't have any cash to pay

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<v Speaker 2>you with, but I'll pay you in basis points. I

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<v Speaker 2>did not know what a basis point was. I said, sure, man, whatever,

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<v Speaker 2>I'm going to grad school.

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<v Speaker 1>But by the way, most college kids pay for beer

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<v Speaker 1>money through quantitative model diviso.

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<v Speaker 2>That's right.

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<v Speaker 1>I mean, I think that's a generational thing, and why not?

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<v Speaker 2>Why not?

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<v Speaker 1>I don't know what a basis point is.

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<v Speaker 2>I didn't even know what a basis point was. And

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<v Speaker 2>so we get this contract written and I go off

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<v Speaker 2>to grad school, assuming I would go work at a

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<v Speaker 2>big bank doing sales and trading in some quant role.

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<v Speaker 2>And he ended up running a strategy based on my

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<v Speaker 2>research models that went from zero to several billion dollars.

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<v Speaker 1>Get out of here and a couple of basis points on.

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<v Speaker 2>That is a lot to add up, and it afforded

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<v Speaker 2>me the opportunity. It was interesting because this was a

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<v Speaker 2>big transition time in Wall Street where a lot of

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<v Speaker 2>the jobs I had been trained for when I went

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<v Speaker 2>through that graduate school program, who, by the way, today

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<v Speaker 2>looks nothing like the program I went through. It was

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<v Speaker 2>all about pricing credit default swaps. No it trades credit

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<v Speaker 2>default swaps anymore. So I'm looking on the other side

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<v Speaker 2>of this and I'm seeing all the jobs I wanted

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<v Speaker 2>to apply for disappear. And my father was an entrepreneur.

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<v Speaker 2>I always had the idea that I would do something entrepreneurial.

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<v Speaker 2>And I said, you know, young, naive, brash, twenty year old,

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<v Speaker 2>I said, well, I got a business that's already paying me.

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<v Speaker 2>Why don't I just keep doing this? And that's where

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<v Speaker 2>the journey began.

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<v Speaker 1>Right out of grad school, you just continued. Did you

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<v Speaker 1>even look at jobs? Did you apply.

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<v Speaker 2>Places I did not?

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<v Speaker 1>You just said, ah, I could be my own boss.

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<v Speaker 2>That's what happens in your early twenties. You have that

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<v Speaker 2>sort of brash arrogance.

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<v Speaker 1>That's amazing. So you have this one set of model,

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<v Speaker 1>it's generating revenue. What was the next step? How did

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<v Speaker 1>you turn this into a sort of quirky idea that is,

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<v Speaker 1>creating a little bit of revenue into an actual business.

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<v Speaker 2>Yeah, so that was that was a lot of stumbling

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<v Speaker 2>in the dark, candidly. So on the other side of

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<v Speaker 2>that contract is I got paid basis points, but I

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<v Speaker 2>had a confidentiality agreement with this firm, And so as

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<v Speaker 2>those assets grew, I'm now a young twenty year old

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<v Speaker 2>going out trying to go to other asset managers saying, hey,

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<v Speaker 2>I have this quantitative research. It helps power billions of

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<v Speaker 2>dollars of decisions. And they'd say, well, who are your clients?

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<v Speaker 2>And I'd say, I can't tell you.

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<v Speaker 1>You gotta trust me on this.

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<v Speaker 2>And you gotta trust me. And as you know, again

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<v Speaker 2>a young twenty year old, I'm sure I got laughed

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<v Speaker 2>out of a lot of offices. And there's a very

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<v Speaker 2>long story here that's better told over beers. But as

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<v Speaker 2>it turns out, the reason that asset manager was able

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<v Speaker 2>to raise so much money was because they had taken

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<v Speaker 2>signals I had sent them, turned them into rant a

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<v Speaker 2>back test, miscalculated that back test, and then ran around

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<v Speaker 2>telling everyone it was a live strategy.

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<v Speaker 1>Oh really, So it sounds like trouble.

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<v Speaker 2>Sounds like trouble. So to about twenty thirteen, I was

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<v Speaker 2>doing a lot of this research. I had sort of

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<v Speaker 2>started to move into more subadvisory index provider roles and

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<v Speaker 2>all of a sudden SEC comes knocking. And by the way,

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<v Speaker 2>at that point, that client was at thirteen billion dollars.

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<v Speaker 1>Wait, so your you just provide the model. You have nothing,

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<v Speaker 1>what's soever to do with how they marketed, who the

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<v Speaker 1>clients are, how they run it.

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<v Speaker 2>It's just a model, yes, and by and by the agreement,

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<v Speaker 2>I wasn't I wasn't even supposed to be in the

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<v Speaker 2>equation at all. I've never been introduced. No one knew

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<v Speaker 2>who I was. Somehow, no one in due diligence ever

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<v Speaker 2>asked them about any of this, right, And so thirteen

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<v Speaker 2>billion dollar firm gets a knock from the SEC, and

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<v Speaker 2>the SEC says, okay, you're calling this a live track record,

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<v Speaker 2>show us the audious.

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<v Speaker 1>The trade cracks record and it only goes back to nine.

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<v Speaker 2>And then you can imagine everything unraveled from there. And

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<v Speaker 2>so in twenty thirteen, I'm staring down my largest client.

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<v Speaker 2>All of a sudden it becomes obvious this is fraud.

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<v Speaker 1>Now by the way, how did the fund actually perform

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<v Speaker 1>when it was live?

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<v Speaker 2>Quite well, right, I mean that's why I gathered so

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<v Speaker 2>many assets.

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<v Speaker 1>So that's the crazy thing, is what led the Because

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<v Speaker 1>normally the SEC gets called in when somebody's losing money

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<v Speaker 1>and they're pissed, not hey, we're making money, but I'm

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<v Speaker 1>not sure I love this marketing.

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<v Speaker 2>Just a routine exam. You know, you run an RIA.

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<v Speaker 2>The SEC just comes knocking every once in a while

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<v Speaker 2>to say, hey, you just want to make sure the

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<v Speaker 2>compliance programs all set up. It happens every once in

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<v Speaker 2>every couple of years. And at that point they were

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<v Speaker 2>due for their routine exam. They had gone from nothing

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<v Speaker 2>to twelve billion. It was time for the SEC to

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<v Speaker 2>come kick the tires with what should have been a

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<v Speaker 2>very routine This is you know, dot the ice across

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<v Speaker 2>the t's. Oh no, it turns out you've got a

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<v Speaker 2>fabricated track record that, by the way, you miscalculated your

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<v Speaker 2>back test and it's an inflated fabricated track.

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<v Speaker 1>Well that's really a problem. That's really they ever come

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<v Speaker 1>knocking to you and said, hey, we uh.

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<v Speaker 2>It wasn't just knocking, because what happened.

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<v Speaker 1>Is, oh that subpoena is frightening, isn't it.

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<v Speaker 2>It was a subpoena, and as a twenty I guess

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<v Speaker 2>I must have been twenty three twenty four at the time.

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<v Speaker 2>Getting a subpoena from the SEC.

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<v Speaker 1>I'll get that'll wake you up.

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<v Speaker 2>Yeah, that'll that'll get.

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<v Speaker 1>The ice coffee, go right to the subpena.

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<v Speaker 2>And the gentleman who ran the firm that was my

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<v Speaker 2>client was was so convincing to the industry that he

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<v Speaker 2>had done nothing wrong during the SEC investigation. He grew

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<v Speaker 2>the business from twelve billion to twenty five billion to.

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<v Speaker 1>Get out of here.

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<v Speaker 2>Yes, wow, yes. And so during that time it's even

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<v Speaker 2>more basis points. Oh they stopped paying me that they did,

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<v Speaker 2>they stopped paying me. Needless to say, the SEC ran

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<v Speaker 2>a very aggressive investigation. I got subpoena. My life got

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<v Speaker 2>caught up in this SEC investigation, and I said, all right,

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<v Speaker 2>I've got two choices. I can leave this industry and

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<v Speaker 2>go go move to Silicon Valley. I got a computer

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<v Speaker 2>science degree. There's some good stuff going on out there.

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<v Speaker 2>Or I can plant my flag and prove to people

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<v Speaker 2>I did nothing wrong research here. And so that's actually

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<v Speaker 2>when I started blogging I started writing a weekly research

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<v Speaker 2>quantitative research report, just to say hey, look there's there's

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<v Speaker 2>something real here. Had a couple of employees. We started

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<v Speaker 2>publishing our research, getting out there more and slowly use

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<v Speaker 2>that the transition to be, you know, we're more active

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<v Speaker 2>on social media. Started the podcast a few years later,

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<v Speaker 2>just tried to try to say there's no there's nothing,

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<v Speaker 2>there's no fraud here. We were not the problem.

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<v Speaker 1>Hey, it's just a model, and we get we solved

0:11:31.480 --> 0:11:33.880
<v Speaker 1>it to them that the problem is what they did

0:11:33.920 --> 0:11:38.120
<v Speaker 1>with it. How did the SEC investigation resolve with you guys?

0:11:38.160 --> 0:11:38.760
<v Speaker 2>No issues?

0:11:38.920 --> 0:11:39.120
<v Speaker 1>Right?

0:11:39.200 --> 0:11:41.679
<v Speaker 2>Right? So they I mean anyone who's gone through this,

0:11:41.720 --> 0:11:44.600
<v Speaker 2>so I suspect the vast majority of people have not you. Eventually,

0:11:44.640 --> 0:11:46.640
<v Speaker 2>the SEC never says you're.

0:11:46.559 --> 0:11:49.480
<v Speaker 1>All right, You're okay. They just they stopped calling.

0:11:49.559 --> 0:11:51.800
<v Speaker 2>And then you ask for a letter that says, hey,

0:11:51.840 --> 0:11:54.080
<v Speaker 2>can I get some resolution, And they say we've determined

0:11:54.120 --> 0:11:57.280
<v Speaker 2>we're you know, we're not pursuing further inqueries into you.

0:11:57.320 --> 0:11:59.600
<v Speaker 2>And so I've got a nice letter framed from the

0:11:59.640 --> 0:12:01.480
<v Speaker 2>SEC that that says precisely that.

0:12:01.600 --> 0:12:03.960
<v Speaker 1>So framed framed on the wall.

0:12:04.080 --> 0:12:06.320
<v Speaker 2>Yeah, the other side did not end so well as

0:12:06.320 --> 0:12:08.960
<v Speaker 2>you can imagine they were bankrupt a year later and

0:12:09.000 --> 0:12:11.760
<v Speaker 2>twenty five billion dollars flew out to the wind.

0:12:12.200 --> 0:12:15.040
<v Speaker 1>Wow. So that's an amazing story. I had no idea

0:12:15.080 --> 0:12:19.360
<v Speaker 1>about that. I want to just go back a little

0:12:19.440 --> 0:12:25.600
<v Speaker 1>bit to Carnegie Mellon. You graduate with this quantitative background,

0:12:27.320 --> 0:12:29.880
<v Speaker 1>you went into your own shop. What did your classmates do?

0:12:29.920 --> 0:12:30.600
<v Speaker 1>Where did they go?

0:12:31.280 --> 0:12:33.760
<v Speaker 2>They went all over? A lot of them went to

0:12:33.840 --> 0:12:37.520
<v Speaker 2>big banks, A lot of them went to buyside hedge funds.

0:12:37.840 --> 0:12:42.520
<v Speaker 2>Some of them went to places like Citadel to trade

0:12:42.960 --> 0:12:46.360
<v Speaker 2>options market makers. I mean they really when you when

0:12:46.360 --> 0:12:49.000
<v Speaker 2>you talk about what is quant right, what you what

0:12:49.080 --> 0:12:54.160
<v Speaker 2>you learn? You learn everything from how to price structured products,

0:12:55.040 --> 0:12:57.160
<v Speaker 2>You learn the math that can help you with with

0:12:57.320 --> 0:13:00.000
<v Speaker 2>market making operations, you learn the technology. It's a really

0:13:00.200 --> 0:13:02.400
<v Speaker 2>broad field. And so what ends up happening is people

0:13:02.440 --> 0:13:04.960
<v Speaker 2>just sort of scatter to all parts of the industry.

0:13:05.520 --> 0:13:09.920
<v Speaker 1>Huh. I know you are not especially keen on back.

0:13:09.720 --> 0:13:12.840
<v Speaker 2>Testing now, definitely not keen on it.

0:13:12.960 --> 0:13:16.960
<v Speaker 1>So here's the question. How much did this experience affect

0:13:17.040 --> 0:13:21.120
<v Speaker 1>the way you look at back testing honest back testing,

0:13:21.200 --> 0:13:27.120
<v Speaker 1>really looking at the numbers versus exaggerating returns and making

0:13:27.280 --> 0:13:29.440
<v Speaker 1>up the claim that something's live when it's not.

0:13:30.080 --> 0:13:32.880
<v Speaker 2>I think my view of this has changed over time.

0:13:33.040 --> 0:13:35.760
<v Speaker 2>I've become I've always been very skeptical a back test

0:13:35.800 --> 0:13:38.640
<v Speaker 2>for all the reasons quants normally are. I think quants

0:13:38.640 --> 0:13:42.559
<v Speaker 2>perhaps did a disservice to this industry and making it

0:13:42.720 --> 0:13:46.320
<v Speaker 2>easier to show people back tests, right. I have a

0:13:46.400 --> 0:13:49.760
<v Speaker 2>theory unfounded. No one's ever confirmed this, but I always

0:13:49.760 --> 0:13:52.920
<v Speaker 2>sit around and wonder, why does Blackrock pay MSCI so

0:13:53.080 --> 0:13:56.480
<v Speaker 2>much money and indexing, you know, when Blackrock could clearly

0:13:56.559 --> 0:13:58.040
<v Speaker 2>run all these strategies themselves.

0:13:57.800 --> 0:14:00.880
<v Speaker 1>The historical track record now and it's so that's live.

0:14:01.080 --> 0:14:04.560
<v Speaker 2>Really Arrah Finra, one of the other regulators prohibits you

0:14:04.600 --> 0:14:08.360
<v Speaker 2>from showing a back test for a mutual funder in ETF.

0:14:08.880 --> 0:14:12.560
<v Speaker 2>But if it's an index DTF, which is a regulatory term,

0:14:12.600 --> 0:14:15.120
<v Speaker 2>if it's truly an index DTF, you were allowed to

0:14:15.160 --> 0:14:18.720
<v Speaker 2>show the index, presuming it's a third party index provider.

0:14:19.000 --> 0:14:20.960
<v Speaker 2>So what black Rock can do is say this is

0:14:21.000 --> 0:14:24.720
<v Speaker 2>an index ETF, it's index to this MSCI or SMP

0:14:24.920 --> 0:14:27.600
<v Speaker 2>smart beta product, and by the way, here's the thirty

0:14:27.640 --> 0:14:30.080
<v Speaker 2>year back tests. And of course that back test outperforms

0:14:30.080 --> 0:14:32.680
<v Speaker 2>the market. And I think that helped fuel the smart

0:14:32.680 --> 0:14:35.240
<v Speaker 2>beta boom of the twenty tens, and so I don't

0:14:35.240 --> 0:14:37.920
<v Speaker 2>think there's anything implicitly wrong with back tests if done well.

0:14:38.000 --> 0:14:40.440
<v Speaker 2>I think the problem is back test became a marketing.

0:14:40.120 --> 0:14:42.680
<v Speaker 1>Tool, Yeah, no doubt about it, and the SEC rules

0:14:42.680 --> 0:14:47.160
<v Speaker 1>on back tests have just changed to the point that

0:14:47.240 --> 0:14:49.360
<v Speaker 1>when I show a chart of the S and P

0:14:49.480 --> 0:14:53.800
<v Speaker 1>five hundred or or VTI like, I have to be

0:14:53.920 --> 0:14:57.880
<v Speaker 1>really circumspect in how I describe it. Here's how the

0:14:57.880 --> 0:15:01.280
<v Speaker 1>total market return has performed over the past thirty years.

0:15:01.640 --> 0:15:06.520
<v Speaker 1>That's about the most I can say versus, Hey, you know,

0:15:06.600 --> 0:15:10.520
<v Speaker 1>if you have a portfolio with ABCDE, here's what you

0:15:10.560 --> 0:15:13.840
<v Speaker 1>can expect. Like, the pushback we've gotten on some marketing

0:15:13.880 --> 0:15:18.160
<v Speaker 1>materials kind of surprised me. I understand they're trying to

0:15:18.200 --> 0:15:21.480
<v Speaker 1>create like a big no fly zone to avoid the

0:15:21.480 --> 0:15:26.000
<v Speaker 1>sort of problems that the guy who abused your model did,

0:15:26.040 --> 0:15:29.120
<v Speaker 1>but it's kind of like, aside from the fact that

0:15:29.120 --> 0:15:31.760
<v Speaker 1>past performance isn't necessarily relevant to what the world's going

0:15:31.800 --> 0:15:35.600
<v Speaker 1>to look like in the future, that's that's a very

0:15:35.600 --> 0:15:38.280
<v Speaker 1>different thing than Wait, I can't just show a chart

0:15:38.320 --> 0:15:39.400
<v Speaker 1>I don't understand.

0:15:39.040 --> 0:15:41.480
<v Speaker 2>Well, and I'm sympathetic to the point that a lot

0:15:41.520 --> 0:15:45.200
<v Speaker 2>of clients, whether they're advisory clients or my clients who

0:15:45.200 --> 0:15:48.680
<v Speaker 2>would be advisors and institutions, will ask the question, Okay, well,

0:15:48.680 --> 0:15:53.000
<v Speaker 2>how would this have performed during these different market stress scenarios,

0:15:53.480 --> 0:15:55.720
<v Speaker 2>And that's what a back test would, in theory show you,

0:15:56.400 --> 0:15:58.440
<v Speaker 2>And not being able to tell them or show them

0:15:58.760 --> 0:16:00.800
<v Speaker 2>makes it harder for them to do due diligence to

0:16:00.880 --> 0:16:03.720
<v Speaker 2>understand how it may have behaved right. And so there

0:16:03.760 --> 0:16:05.560
<v Speaker 2>are ways in which I think back tests can be

0:16:05.640 --> 0:16:10.520
<v Speaker 2>used appropriately. I understand the blanket no from FINRA, and

0:16:10.640 --> 0:16:13.400
<v Speaker 2>I understand the SEC's position on it because it can

0:16:13.560 --> 0:16:16.240
<v Speaker 2>be used in such a manipulative fashion. But I do

0:16:16.280 --> 0:16:18.280
<v Speaker 2>think it makes it it's easy to abuse, it makes

0:16:18.280 --> 0:16:21.200
<v Speaker 2>it hard to do thoughtful due diligence in certain cases.

0:16:21.360 --> 0:16:23.840
<v Speaker 1>I'm trying to get a sense of how your investment

0:16:24.160 --> 0:16:28.880
<v Speaker 1>philosophy developed. I recall reading that you were developing a

0:16:28.920 --> 0:16:33.600
<v Speaker 1>stock screener and you were focused on value based models

0:16:33.800 --> 0:16:37.080
<v Speaker 1>and discovered that they would get justice she'll act during

0:16:37.160 --> 0:16:41.000
<v Speaker 1>downturns as the growth stocks did. Tell us a little

0:16:41.040 --> 0:16:44.960
<v Speaker 1>bit about how screening led you to develop your philosophy

0:16:45.800 --> 0:16:48.480
<v Speaker 1>and what your thoughts are on momentum and trend.

0:16:49.440 --> 0:16:52.840
<v Speaker 2>So very early on in my career, again, I was

0:16:52.840 --> 0:16:55.120
<v Speaker 2>doing a lot of this on my own. I sort

0:16:55.160 --> 0:17:00.320
<v Speaker 2>of self discovered factor investing and was basically you using

0:17:00.440 --> 0:17:04.840
<v Speaker 2>statistical screens to try to find cohorts of stocks that

0:17:04.880 --> 0:17:06.119
<v Speaker 2>would behave in different ways.

0:17:06.600 --> 0:17:08.960
<v Speaker 1>And just to clarify, when you say factor investing, we're

0:17:08.960 --> 0:17:13.160
<v Speaker 1>really talking about FAMA, French factors, not necessarily smart beta

0:17:13.200 --> 0:17:14.200
<v Speaker 1>type stuff.

0:17:14.440 --> 0:17:16.760
<v Speaker 2>All of the above. All the above, I didn't I

0:17:16.760 --> 0:17:18.399
<v Speaker 2>didn't even know what it was at the time. I

0:17:18.480 --> 0:17:20.480
<v Speaker 2>was just trying to say, Hey, if I find a

0:17:20.520 --> 0:17:23.480
<v Speaker 2>basket of stocks and all the CEOs are bald, how

0:17:23.520 --> 0:17:26.680
<v Speaker 2>does that behave right versus oh, these all have positive momentary.

0:17:26.440 --> 0:17:28.840
<v Speaker 1>I got a great ticker for that ets yeah, balt.

0:17:28.880 --> 0:17:31.320
<v Speaker 2>I don't think anyone's used it yet. So I was

0:17:31.359 --> 0:17:33.600
<v Speaker 2>looking at all sorts of things, which is sort of

0:17:33.640 --> 0:17:39.320
<v Speaker 2>classical equity quant type work. And I've always sort of

0:17:39.359 --> 0:17:44.560
<v Speaker 2>had a tilt, just personality wise, towards capital preservation. And

0:17:44.800 --> 0:17:47.480
<v Speaker 2>there was one conversation very early in my career, this

0:17:47.600 --> 0:17:50.680
<v Speaker 2>was actually two thousand and seven, where I was interviewing

0:17:50.680 --> 0:17:53.280
<v Speaker 2>with an asset manager and I pre meeting asked them

0:17:53.280 --> 0:17:55.560
<v Speaker 2>what they thought of the market, and he gave me

0:17:55.600 --> 0:17:59.400
<v Speaker 2>the most bearish prognostication I had ever heard. And again,

0:17:59.440 --> 0:18:01.360
<v Speaker 2>I was very in my career. I didn't live through

0:18:01.400 --> 0:18:05.320
<v Speaker 2>the dot com fallout from a career perspective. I said

0:18:05.320 --> 0:18:06.600
<v Speaker 2>to him, well, what are you going to do? And

0:18:06.640 --> 0:18:09.240
<v Speaker 2>he was a small cap value manager, and he said nothing.

0:18:09.359 --> 0:18:12.840
<v Speaker 2>My job is to provide small cap value exposure. If

0:18:12.880 --> 0:18:17.320
<v Speaker 2>it's not appropriate for the client, the financial advisor should

0:18:17.359 --> 0:18:19.960
<v Speaker 2>make that decision. And so I said, well, I talked

0:18:19.960 --> 0:18:21.840
<v Speaker 2>to some financial advisors and they said, well, how in

0:18:21.840 --> 0:18:23.960
<v Speaker 2>the world should we know when to take our clients

0:18:23.960 --> 0:18:26.960
<v Speaker 2>out of small cap value. That's the manager's job. And

0:18:27.000 --> 0:18:29.920
<v Speaker 2>I said, well, in my opinion, no one's protecting my

0:18:30.040 --> 0:18:34.480
<v Speaker 2>capital here, and so I started really looking into statistical

0:18:34.720 --> 0:18:37.600
<v Speaker 2>models that I thought could help preserve capital. On the downside.

0:18:38.119 --> 0:18:40.520
<v Speaker 2>Value had worked incredibly well in the dot com era,

0:18:41.119 --> 0:18:43.879
<v Speaker 2>but my thought there was there was nothing inherent in

0:18:43.960 --> 0:18:47.399
<v Speaker 2>value itself that was necessarily protective in terms of the

0:18:47.440 --> 0:18:49.800
<v Speaker 2>type of crisis that could unfold. And so I ended

0:18:49.880 --> 0:18:54.040
<v Speaker 2>up discovering trend following and following in love with trend following,

0:18:54.080 --> 0:18:58.240
<v Speaker 2>which is the idea that it sounds naive, but as

0:18:58.359 --> 0:19:01.800
<v Speaker 2>prices have historically gone up, they tend to persist in

0:19:01.840 --> 0:19:03.840
<v Speaker 2>that direction, or if prices start to fall, they tend

0:19:03.920 --> 0:19:05.639
<v Speaker 2>to persist in that direction. And there's a little bit

0:19:05.640 --> 0:19:08.440
<v Speaker 2>of a statistical edge you can use there to try

0:19:08.480 --> 0:19:10.800
<v Speaker 2>to really clip your downside risk.

0:19:11.400 --> 0:19:14.760
<v Speaker 1>The challenge is always the transition from the uptrend to

0:19:14.800 --> 0:19:18.440
<v Speaker 1>the down trend, which is why you have portfolio managers

0:19:18.440 --> 0:19:22.600
<v Speaker 1>and allocators arguing who is responsible. The reality is nobody

0:19:22.600 --> 0:19:27.760
<v Speaker 1>wants that job because it's thankless and practically impossible. Very

0:19:27.760 --> 0:19:30.480
<v Speaker 1>few people seem to have come up with a formula

0:19:30.800 --> 0:19:33.240
<v Speaker 1>that works from one cycle to the next.

0:19:33.600 --> 0:19:37.600
<v Speaker 2>That's absolutely right. There's very few, I would argue, probably

0:19:37.720 --> 0:19:43.640
<v Speaker 2>no consistent predictors of any sort of economic or market cyclicality.

0:19:43.640 --> 0:19:46.880
<v Speaker 2>What you have is maybe some statistical indicators that give

0:19:46.880 --> 0:19:48.879
<v Speaker 2>you a slight bit of an edge. But when you

0:19:48.920 --> 0:19:51.960
<v Speaker 2>talk about just a slight bit of an edge being

0:19:52.000 --> 0:19:54.240
<v Speaker 2>played on, say a big position like the S and

0:19:54.240 --> 0:19:56.800
<v Speaker 2>P five hundred in your portfolio, and you're only going

0:19:56.840 --> 0:19:59.560
<v Speaker 2>to play that edge realistically three or four times in

0:19:59.600 --> 0:20:03.320
<v Speaker 2>your life, that's a very low breadth bet that's going

0:20:03.359 --> 0:20:07.440
<v Speaker 2>to have a really big impact. It's just not smart

0:20:07.760 --> 0:20:09.919
<v Speaker 2>on a math basis to do that, and it's certainly

0:20:09.920 --> 0:20:11.840
<v Speaker 2>not smart from a career risk perspective.

0:20:11.880 --> 0:20:15.359
<v Speaker 1>I'm so happy you said that, because I frequently find

0:20:15.400 --> 0:20:20.959
<v Speaker 1>myself wanting to respond to these claims on Twitter sample

0:20:21.000 --> 0:20:24.400
<v Speaker 1>set of three. Who cares? You know how every time

0:20:24.440 --> 0:20:27.920
<v Speaker 1>you look at the history of recessions, Hey, twentieth century recessions,

0:20:27.920 --> 0:20:30.680
<v Speaker 1>what is it? Twelve fourteen? Even that not a lot

0:20:30.720 --> 0:20:34.840
<v Speaker 1>of numbers. And are you saying the recession in twenty

0:20:35.200 --> 0:20:38.880
<v Speaker 1>twenty is similar to recession in the nineteen fifties. It's

0:20:38.920 --> 0:20:43.560
<v Speaker 1>such a different world. That you mentioned the dot com implosion.

0:20:44.680 --> 0:20:47.119
<v Speaker 1>The reason value held up was that was such a

0:20:47.160 --> 0:20:50.520
<v Speaker 1>sector collapse. What was the NAZAQ one hundred down eighty

0:20:50.560 --> 0:20:53.640
<v Speaker 1>one eighty two percent? And the S and P five

0:20:53.720 --> 0:20:57.399
<v Speaker 1>hundred was down something like a fraction of that, I

0:20:57.440 --> 0:20:59.760
<v Speaker 1>want to say, less than half, And then the Dow

0:21:00.040 --> 0:21:03.360
<v Speaker 1>held up really well, down thirty five percent something like that.

0:21:03.359 --> 0:21:05.200
<v Speaker 2>Well, and if you go back to the history, it's

0:21:05.240 --> 0:21:07.280
<v Speaker 2>because most of those value stocks had already sold off

0:21:07.320 --> 0:21:10.880
<v Speaker 2>forty or fifty percent in ninety nine, right, right, they

0:21:10.880 --> 0:21:11.080
<v Speaker 2>were in.

0:21:11.119 --> 0:21:13.920
<v Speaker 1>The late nineties. Anyway, they did poorly while the money

0:21:13.960 --> 0:21:19.919
<v Speaker 1>rolled into the big cap growth and technology media and

0:21:20.000 --> 0:21:21.320
<v Speaker 1>telecom exploded.

0:21:21.400 --> 0:21:24.480
<v Speaker 2>So this story came out that O value is defensive

0:21:25.560 --> 0:21:28.200
<v Speaker 2>because it has this valuation buffer to it.

0:21:28.520 --> 0:21:30.040
<v Speaker 1>In that one example.

0:21:30.359 --> 0:21:34.080
<v Speaker 2>But people extrapolated that one example, right, They took a

0:21:34.080 --> 0:21:36.639
<v Speaker 2>point and they drew a line, and then what happened

0:21:36.880 --> 0:21:40.800
<v Speaker 2>in two thousand and eight, Well, most naive value portfolios

0:21:40.800 --> 0:21:45.440
<v Speaker 2>are stuffed with financials, right, and value just got destroyed. Right.

0:21:45.840 --> 0:21:49.120
<v Speaker 1>So the obvious question to someone who makes that claim is, well,

0:21:49.119 --> 0:21:52.680
<v Speaker 1>how to value doing the nineteen seventies not especially well?

0:21:52.720 --> 0:21:55.640
<v Speaker 1>Look at the utilities, look at big oil compani as well.

0:21:55.680 --> 0:22:00.240
<v Speaker 1>But that was all about inflation. Okay, but you said

0:22:00.320 --> 0:22:02.680
<v Speaker 1>this is so it's a it's a hedge except when

0:22:02.720 --> 0:22:06.119
<v Speaker 1>there's inflation. What are the other exceptions that I always

0:22:06.119 --> 0:22:09.000
<v Speaker 1>come back to the sample set of three, sample set

0:22:09.040 --> 0:22:11.240
<v Speaker 1>of five. I need a sample set of a you know,

0:22:11.359 --> 0:22:13.840
<v Speaker 1>let's revisit this in the year three thousand. We'll have

0:22:13.960 --> 0:22:16.000
<v Speaker 1>enough data to be able to look at it.

0:22:16.040 --> 0:22:18.440
<v Speaker 2>So I have sort of philosophical view on this, which is,

0:22:18.720 --> 0:22:23.000
<v Speaker 2>if I knew that value worked to protect my capital

0:22:23.040 --> 0:22:27.240
<v Speaker 2>in every single recession, and I thought the market was efficient,

0:22:28.160 --> 0:22:30.439
<v Speaker 2>then I shouldn't be able to predict recessions, because if

0:22:30.480 --> 0:22:33.119
<v Speaker 2>I can predict a recession and I know value works,

0:22:33.600 --> 0:22:36.480
<v Speaker 2>then I've outperformed the market. So you know there's there's

0:22:36.520 --> 0:22:39.360
<v Speaker 2>an inherent limit here based on how efficient you think

0:22:39.400 --> 0:22:41.159
<v Speaker 2>the market is. And I'll tell you I think the

0:22:41.160 --> 0:22:42.320
<v Speaker 2>market's pretty darn.

0:22:42.119 --> 0:22:45.680
<v Speaker 1>Efficient, mostly kind of sort of eventually efficient. It gets

0:22:45.720 --> 0:22:50.080
<v Speaker 1>their event what's the Benjamin Graham quote. In the short run,

0:22:50.160 --> 0:22:52.840
<v Speaker 1>it's a voting machine, but a long run, it's a

0:22:52.840 --> 0:22:58.159
<v Speaker 1>wighing machine. That's the mostly efficient, eventually efficient market hypothesis.

0:22:58.480 --> 0:23:03.080
<v Speaker 1>So so given that, let's talk a little bit about

0:23:03.119 --> 0:23:07.000
<v Speaker 1>things like portable alpha. You've done a lot of work

0:23:07.000 --> 0:23:09.159
<v Speaker 1>in this, a lot of research. First, give us a

0:23:09.240 --> 0:23:12.840
<v Speaker 1>quick definition of isolating beta and alpha. What does portable

0:23:13.280 --> 0:23:13.920
<v Speaker 1>alpha mean?

0:23:14.520 --> 0:23:16.399
<v Speaker 2>If you're all right with it, I'm actually going to

0:23:16.440 --> 0:23:18.880
<v Speaker 2>answer this in a round about fashion type by saying,

0:23:19.359 --> 0:23:21.600
<v Speaker 2>what problem are we trying to solve here? First and

0:23:21.640 --> 0:23:25.320
<v Speaker 2>foremost right, and the problem we're trying to solve with

0:23:25.480 --> 0:23:29.280
<v Speaker 2>terms like portable alpha or return stacking is what I

0:23:29.359 --> 0:23:33.719
<v Speaker 2>would call the funding problem of diversification. It's a bit

0:23:33.760 --> 0:23:35.200
<v Speaker 2>of a mouthful. So what do I mean by that?

0:23:35.960 --> 0:23:40.920
<v Speaker 2>Most clients, whether they're individuals or institutions, have some sort

0:23:40.920 --> 0:23:45.120
<v Speaker 2>of benchmark, a policy portfolio, some strategic acid allocation that

0:23:45.200 --> 0:23:47.640
<v Speaker 2>they start with. They're typically not starting with just a

0:23:47.680 --> 0:23:51.679
<v Speaker 2>blank piece of paper. It's mister and missus Jones. You

0:23:51.720 --> 0:23:54.919
<v Speaker 2>are sixty forty investors, sixty percent stocks, forty percent bonds.

0:23:56.040 --> 0:23:58.479
<v Speaker 2>But we think that we want to go beyond that

0:23:58.560 --> 0:24:02.399
<v Speaker 2>and introduce diversifying assets or diversifying strategies. It's going to

0:24:02.520 --> 0:24:05.240
<v Speaker 2>use gold as an example. Well, to put gold in

0:24:05.280 --> 0:24:08.879
<v Speaker 2>the portfolio, it's not, it's not just addition. Diversification is

0:24:08.880 --> 0:24:10.720
<v Speaker 2>a problem of addition through subtraction.

0:24:11.240 --> 0:24:12.679
<v Speaker 1>What are you selling in order to buy that?

0:24:12.720 --> 0:24:15.680
<v Speaker 2>I need to make room and that creates two problems.

0:24:15.760 --> 0:24:20.640
<v Speaker 2>The first is it creates a return hurdle problem. Whatever

0:24:20.680 --> 0:24:25.360
<v Speaker 2>I'm selling that gold in this example needs to outperform

0:24:26.000 --> 0:24:28.040
<v Speaker 2>to have that portfolio, or at least keep up with

0:24:28.560 --> 0:24:31.200
<v Speaker 2>over the long run for that portfolio to not underperform

0:24:31.200 --> 0:24:33.040
<v Speaker 2>the benchmark. Right, So if you do that.

0:24:33.280 --> 0:24:35.800
<v Speaker 1>So if you do that, you've even if you've gotten

0:24:35.840 --> 0:24:39.000
<v Speaker 1>the same performance, you've reduced the risk because through the

0:24:39.000 --> 0:24:41.199
<v Speaker 1>addition of a diversifying asset.

0:24:41.320 --> 0:24:43.000
<v Speaker 2>Right, But there's a risk there Let's say I think

0:24:43.040 --> 0:24:44.720
<v Speaker 2>gold is going to keep up with stocks over the

0:24:44.720 --> 0:24:47.600
<v Speaker 2>long run, so I sell my stocks to make room

0:24:47.680 --> 0:24:51.160
<v Speaker 2>for gold, and it doesn't turns out my forecast is wrong. Well,

0:24:51.160 --> 0:24:53.720
<v Speaker 2>there's a real opportunity cost there, right, So you've got

0:24:54.000 --> 0:24:57.399
<v Speaker 2>you've got a modeling hurdle rate that you need to

0:24:57.440 --> 0:25:01.919
<v Speaker 2>figure out when you're adding diversifiers. Is behavioral, and this

0:25:02.040 --> 0:25:05.719
<v Speaker 2>is where most people understand stocks and bonds better than

0:25:05.760 --> 0:25:11.200
<v Speaker 2>they understand alternatives or alternative strategies. Alternatives and alternative strategies

0:25:11.240 --> 0:25:14.040
<v Speaker 2>tend to be less tax efficient, more opaque, and so

0:25:15.000 --> 0:25:18.840
<v Speaker 2>just like stocks can have their lost decades, alternatives often

0:25:18.880 --> 0:25:22.439
<v Speaker 2>have their lost decades, and people are very unwilling to

0:25:22.520 --> 0:25:26.359
<v Speaker 2>stick with those diversifying alternatives during lost decades, which means

0:25:26.359 --> 0:25:30.399
<v Speaker 2>that when the diversification benefits eventually come around, their performance chasing.

0:25:30.840 --> 0:25:33.560
<v Speaker 2>And so you see these huge what are called behavior

0:25:33.640 --> 0:25:38.960
<v Speaker 2>gaps in the returns of alternative investment strategy categories because

0:25:38.960 --> 0:25:41.880
<v Speaker 2>investors aren't sticking with them. So the return that they

0:25:41.920 --> 0:25:45.480
<v Speaker 2>realize what's called the investor return, tends to be hundreds

0:25:45.480 --> 0:25:49.199
<v Speaker 2>of basis points behind the actual investment return. So the

0:25:49.280 --> 0:25:51.160
<v Speaker 2>question is how do we solve this. Well, it turns

0:25:51.160 --> 0:25:55.280
<v Speaker 2>out institutions have solved this problem for forty years using

0:25:55.280 --> 0:25:58.960
<v Speaker 2>this concept of portable alpha, which is to say, well,

0:25:59.000 --> 0:26:01.760
<v Speaker 2>instead of making room in the portfolio, can we use

0:26:01.760 --> 0:26:05.920
<v Speaker 2>some financial engineering to take that alternative and just layer

0:26:06.000 --> 0:26:07.520
<v Speaker 2>it on top of our portfolio.

0:26:07.960 --> 0:26:12.440
<v Speaker 1>In other words, you're using the underlying sixty forty as

0:26:12.480 --> 0:26:16.399
<v Speaker 1>a basis for borrowing in order to add a different

0:26:16.440 --> 0:26:17.720
<v Speaker 1>asset class on top of it. Yeah.

0:26:17.760 --> 0:26:19.840
<v Speaker 2>I think actually the easiest way for most people to

0:26:19.920 --> 0:26:22.600
<v Speaker 2>understand this, without getting into the world of derivatives like

0:26:22.640 --> 0:26:24.960
<v Speaker 2>futures and swaps, is to think about buying a house.

0:26:25.840 --> 0:26:27.480
<v Speaker 2>Let's say Eve a million dollars and you want to

0:26:27.480 --> 0:26:29.680
<v Speaker 2>buy a million dollar house. There's really two ways you

0:26:29.720 --> 0:26:31.920
<v Speaker 2>can do that. You can just go buy the house

0:26:31.920 --> 0:26:34.639
<v Speaker 2>for cash, and then over time your return is just

0:26:34.680 --> 0:26:37.359
<v Speaker 2>equal to the return of the house. Or you can

0:26:37.400 --> 0:26:39.320
<v Speaker 2>go to the bank and get a mortgage. Put two

0:26:39.359 --> 0:26:42.879
<v Speaker 2>hundred thousand dollars down, get an eight hundred thousand dollars mortgage.

0:26:43.200 --> 0:26:46.600
<v Speaker 2>You're going to get the return of the house minus

0:26:46.680 --> 0:26:48.600
<v Speaker 2>whatever the cost of financing is, and then you're going

0:26:48.680 --> 0:26:51.440
<v Speaker 2>to have eight hundred thousand dollars in cash with which

0:26:51.520 --> 0:26:54.040
<v Speaker 2>you can do whatever. If you were to take that

0:26:54.040 --> 0:26:57.200
<v Speaker 2>eight hundred thousand dollars in cash and invest it in, say,

0:26:57.359 --> 0:27:00.639
<v Speaker 2>mortgage backed securities, you'd probably offset your cost off financing,

0:27:01.240 --> 0:27:03.760
<v Speaker 2>and your return there would be equal to your return

0:27:04.359 --> 0:27:07.720
<v Speaker 2>of just buying the house, ignoring taxes. But if I

0:27:07.800 --> 0:27:09.199
<v Speaker 2>were to take the eight hundred thousand dollars and then

0:27:09.200 --> 0:27:12.639
<v Speaker 2>invest it and say gold, well, now my return is

0:27:12.640 --> 0:27:14.120
<v Speaker 2>going to be equal to the return of the house

0:27:15.160 --> 0:27:18.760
<v Speaker 2>minus the mortgage plus gold. I've effectively stacked the return

0:27:18.800 --> 0:27:23.080
<v Speaker 2>of gold on top of my house. We do the

0:27:23.119 --> 0:27:28.240
<v Speaker 2>same concept in institutional portfolio management in portable alpha, but

0:27:28.280 --> 0:27:31.040
<v Speaker 2>instead of using a mortgage, you use derivatives like futures

0:27:31.040 --> 0:27:34.199
<v Speaker 2>and swaps, and instead of replacing a house, you're replacing

0:27:35.280 --> 0:27:38.080
<v Speaker 2>exposure like the S and P five hundred or treasuries,

0:27:38.440 --> 0:27:41.439
<v Speaker 2>where historically it's been really hard to beat the market

0:27:41.480 --> 0:27:44.120
<v Speaker 2>and so it's not worth putting capital at work there.

0:27:44.400 --> 0:27:46.040
<v Speaker 1>So, in other words, you're not owning the S and

0:27:46.040 --> 0:27:48.240
<v Speaker 1>P five hundred, you're owning a derivative that gives you

0:27:48.280 --> 0:27:50.720
<v Speaker 1>the right to approaches the SMP five hundred at a

0:27:50.760 --> 0:27:54.720
<v Speaker 1>specific price that's a fraction of what owning all five

0:27:54.760 --> 0:27:57.600
<v Speaker 1>hundred stocks would cost. And then you take that money,

0:27:57.800 --> 0:28:03.960
<v Speaker 1>that capital and buy other diversifiers and theoretically other holdings

0:28:04.000 --> 0:28:06.080
<v Speaker 1>that will generate above market returns.

0:28:06.200 --> 0:28:08.760
<v Speaker 2>Exactly. So you could say, instead of buying a million

0:28:08.800 --> 0:28:11.000
<v Speaker 2>dollars of the S and P five hundred, I'm going

0:28:11.080 --> 0:28:14.119
<v Speaker 2>to take fifty thousand dollars use it as cash collateral

0:28:14.400 --> 0:28:16.960
<v Speaker 2>to buy S and P five hundred futures a million

0:28:17.000 --> 0:28:19.000
<v Speaker 2>dollars of S and P five hundred futures, which will

0:28:19.040 --> 0:28:20.119
<v Speaker 2>give me the total return.

0:28:20.320 --> 0:28:23.040
<v Speaker 1>So that'll be equivalent. You'll get the same minus whatever

0:28:23.080 --> 0:28:24.560
<v Speaker 1>the cost of the derivative.

0:28:24.200 --> 0:28:26.360
<v Speaker 2>Minus whatever the cost of the derivative is the embedded

0:28:26.400 --> 0:28:28.399
<v Speaker 2>cost of financing, and then I can take the rest

0:28:28.400 --> 0:28:31.880
<v Speaker 2>of that capital and invest it wherever I want. Now,

0:28:31.920 --> 0:28:33.560
<v Speaker 2>you have to be careful here, right, This isn't a

0:28:33.600 --> 0:28:36.679
<v Speaker 2>free lunch. You need to think about the operational risks.

0:28:36.720 --> 0:28:40.240
<v Speaker 2>You need to think about the diversification. This is implicitly leverage.

0:28:40.480 --> 0:28:43.040
<v Speaker 2>Leverage is a tool that accentuates both the good and

0:28:43.080 --> 0:28:46.080
<v Speaker 2>the bad. We want to accentuate the benefits of diversification,

0:28:46.200 --> 0:28:48.200
<v Speaker 2>not double down on the same risk.

0:28:48.320 --> 0:28:52.240
<v Speaker 1>I'm immediate. My immediate thought was, Hey, why can't I

0:28:52.360 --> 0:28:55.960
<v Speaker 1>take that derivative and go all right, if it's going

0:28:56.040 --> 0:28:58.960
<v Speaker 1>to cost me fifty K, why can I go two

0:28:59.160 --> 0:29:02.080
<v Speaker 1>x with three x four? And people do that right,

0:29:03.000 --> 0:29:04.320
<v Speaker 1>which is great until it's not.

0:29:04.440 --> 0:29:06.960
<v Speaker 2>Which is great until it's not right. And so for us,

0:29:07.880 --> 0:29:10.320
<v Speaker 2>when we think about these concept of portable alpha and

0:29:10.360 --> 0:29:13.400
<v Speaker 2>return stacking, we think they are incredibly efficient ways to

0:29:13.440 --> 0:29:17.800
<v Speaker 2>get diversification into your portfolio, to get alternative return streams

0:29:17.840 --> 0:29:21.520
<v Speaker 2>that can both enhance returns and potentially reduce risk. But

0:29:21.640 --> 0:29:24.280
<v Speaker 2>you need to be really careful about what you're introducing,

0:29:25.080 --> 0:29:28.920
<v Speaker 2>particularly because during a liquidity crisis you tend to see

0:29:28.960 --> 0:29:31.240
<v Speaker 2>correlations go to one, and you need to be aware

0:29:31.280 --> 0:29:33.000
<v Speaker 2>of the leverage risk that's embedded.

0:29:33.120 --> 0:29:37.320
<v Speaker 1>So eight oh nine, that sort of portable alpha probably

0:29:37.400 --> 0:29:38.080
<v Speaker 1>didn't do great.

0:29:38.720 --> 0:29:40.640
<v Speaker 2>Yeah, so let's talk about eight oh nine, and let's

0:29:40.640 --> 0:29:42.280
<v Speaker 2>talk about why we don't call this portable alph and

0:29:42.320 --> 0:29:47.120
<v Speaker 2>why we've rebranded it as return stacking. This concept goes

0:29:47.120 --> 0:29:50.000
<v Speaker 2>back to the nineteen eighties with PIMCOH and got really

0:29:50.040 --> 0:29:53.520
<v Speaker 2>popular in the early two thousands. What institutions realized, as

0:29:53.560 --> 0:29:55.880
<v Speaker 2>they said, I mean, you know these stats like the

0:29:55.880 --> 0:29:58.400
<v Speaker 2>back of your hand, it is really hard to beat

0:29:58.440 --> 0:30:01.240
<v Speaker 2>the S and P five hundred. If I have a

0:30:01.360 --> 0:30:04.400
<v Speaker 2>bond benchmark and forty percent of that as treasuries, how

0:30:04.400 --> 0:30:05.920
<v Speaker 2>am I supposed to What am I supposed to do

0:30:06.000 --> 0:30:08.480
<v Speaker 2>with all that dead asset? Well, what I can do

0:30:09.320 --> 0:30:12.400
<v Speaker 2>is I can use derivatives to get that exposure, either

0:30:12.440 --> 0:30:15.280
<v Speaker 2>the SMP five hundred or those treasuries, and then I'll

0:30:15.360 --> 0:30:16.680
<v Speaker 2>use my freed up cash and I'm going to go

0:30:16.720 --> 0:30:19.320
<v Speaker 2>invest in some hedge fund that I think is going

0:30:19.400 --> 0:30:22.920
<v Speaker 2>to give me uncorrelated alpha. Right, maybe the hedge fund

0:30:23.000 --> 0:30:27.640
<v Speaker 2>does relative value volatility trading, something with some sizzle, right right.

0:30:28.280 --> 0:30:30.240
<v Speaker 2>And what's interesting is when you think about it, what

0:30:30.360 --> 0:30:31.920
<v Speaker 2>the math does is I say, okay, I'm getting the

0:30:31.920 --> 0:30:33.920
<v Speaker 2>S and P five hundred beta, and I'm stacking the

0:30:33.920 --> 0:30:35.960
<v Speaker 2>return of this hedge fund on top. And now I

0:30:36.000 --> 0:30:38.080
<v Speaker 2>can sort of That's why it's called portable alph I

0:30:38.080 --> 0:30:40.240
<v Speaker 2>can port the alpha of this hedge fund on top

0:30:40.320 --> 0:30:42.640
<v Speaker 2>of the S and P five hundred instead of fishing

0:30:42.680 --> 0:30:45.320
<v Speaker 2>in the same pond as everyone else. But what happens

0:30:45.400 --> 0:30:46.680
<v Speaker 2>during a crisis.

0:30:47.080 --> 0:30:50.600
<v Speaker 1>Well, everybody has to raise capital because the there's anyone

0:30:50.680 --> 0:30:52.560
<v Speaker 1>with leverage is starting to get margin cross.

0:30:52.640 --> 0:30:54.840
<v Speaker 2>See, you have four big problems that happen in two

0:30:54.840 --> 0:30:57.360
<v Speaker 2>thousand and eight. Your first problem is if you were

0:30:57.480 --> 0:30:59.959
<v Speaker 2>stacking this stuff poorting it on top of the SMPFI

0:31:00.040 --> 0:31:02.360
<v Speaker 2>five hundred and the S and P five hundred lost

0:31:02.400 --> 0:31:05.120
<v Speaker 2>fifty percent from two thousand and seven to the bottom

0:31:05.160 --> 0:31:05.960
<v Speaker 2>in two thousand.

0:31:05.720 --> 0:31:08.280
<v Speaker 1>And nine fifty six and chain fifty six.

0:31:08.120 --> 0:31:12.840
<v Speaker 2>And change, and you only posted five ten percent is collateral.

0:31:13.440 --> 0:31:15.959
<v Speaker 2>You're getting a margin call. So you did better if

0:31:15.960 --> 0:31:17.000
<v Speaker 2>you stacked it on ballns.

0:31:17.200 --> 0:31:17.640
<v Speaker 1>Uh huh.

0:31:17.760 --> 0:31:20.000
<v Speaker 2>Not so wealthy stacked it on equity. So there's one problem.

0:31:20.000 --> 0:31:22.400
<v Speaker 2>Folks who stacked it on equities were getting margin calls. Well,

0:31:22.440 --> 0:31:23.680
<v Speaker 2>what do you do when you get a margin call?

0:31:24.640 --> 0:31:27.320
<v Speaker 2>You rebalance your portfolio. Basically, that's that's what you have

0:31:27.360 --> 0:31:30.520
<v Speaker 2>to do. So what they had they went to all

0:31:30.520 --> 0:31:32.840
<v Speaker 2>the institutions, went to the hedge funds, and the hedge

0:31:32.840 --> 0:31:36.080
<v Speaker 2>funds said, well, well bad news. Not only have we

0:31:36.120 --> 0:31:40.000
<v Speaker 2>lost money too, but we're gating redemptions. You can't have

0:31:40.040 --> 0:31:43.200
<v Speaker 2>your money back. So all of a sudden, they tried

0:31:43.200 --> 0:31:45.959
<v Speaker 2>to rebalance to meet their margin calls, and what they

0:31:46.000 --> 0:31:48.160
<v Speaker 2>had invested their cash and was not giving them their

0:31:48.160 --> 0:31:48.680
<v Speaker 2>cash back.

0:31:48.800 --> 0:31:51.720
<v Speaker 1>And nobody markets this is not portable alpha.

0:31:52.000 --> 0:31:56.239
<v Speaker 2>Right, and so they can't rebalance, they get the margin call,

0:31:56.320 --> 0:31:58.800
<v Speaker 2>they lose the exposure to the beta. The last small

0:31:58.840 --> 0:32:01.200
<v Speaker 2>wrinkle was a lot of this wasn't done with exchange

0:32:01.240 --> 0:32:03.400
<v Speaker 2>drade of futures. It was done with total return swaps

0:32:03.440 --> 0:32:05.920
<v Speaker 2>with banks. And if your counter party was Lehman Brothers,

0:32:07.040 --> 0:32:10.560
<v Speaker 2>even if you handled things perfectly, where does your swap stand?

0:32:10.800 --> 0:32:10.920
<v Speaker 1>Right?

0:32:11.080 --> 0:32:13.320
<v Speaker 2>So as you can imagine post two thousand and eight,

0:32:14.240 --> 0:32:18.080
<v Speaker 2>this concept which was I think if I'm corrected, I

0:32:18.080 --> 0:32:20.840
<v Speaker 2>think it was twenty five percent of major US pensions

0:32:20.840 --> 0:32:23.880
<v Speaker 2>and institutions were implementing portable alpha pre two thousand and eight.

0:32:23.960 --> 0:32:26.720
<v Speaker 2>That that large, that it was a significant amount, and

0:32:26.800 --> 0:32:29.280
<v Speaker 2>at least fifty percent of it when surveyed, we're looking

0:32:29.320 --> 0:32:32.239
<v Speaker 2>to implement portable alpha. Uh huh post two thousand and eight,

0:32:32.280 --> 0:32:35.320
<v Speaker 2>I mean, I think it was called a synthetic risk grenade.

0:32:35.600 --> 0:32:39.000
<v Speaker 2>It just the reputation was destroyed.

0:32:38.520 --> 0:32:43.040
<v Speaker 1>And synthetic risk grenade. That's a great ban a college.

0:32:43.480 --> 0:32:49.920
<v Speaker 2>Absolutely right, absolutely, and and so like many things you

0:32:49.960 --> 0:32:52.840
<v Speaker 2>lived through two thousand and eight, the language was right,

0:32:53.000 --> 0:32:55.800
<v Speaker 2>no derivatives, no shorting, no leverage. I mean that was

0:32:55.880 --> 0:32:59.240
<v Speaker 2>on product brochures at that point, huh, people really didn't

0:32:59.280 --> 0:33:02.200
<v Speaker 2>want to talk about this stuff, and so it sort

0:33:02.240 --> 0:33:07.320
<v Speaker 2>of disappeared. Except there are still institutions that are doing this,

0:33:08.840 --> 0:33:12.040
<v Speaker 2>and they've figured out ways that are much better operationally,

0:33:12.600 --> 0:33:14.800
<v Speaker 2>or they figured out other ways to get the leverage. So,

0:33:14.880 --> 0:33:18.720
<v Speaker 2>for example, private equity, we've seen a huge increase in private.

0:33:18.400 --> 0:33:20.400
<v Speaker 1>Equity trillions, literally trillions.

0:33:20.480 --> 0:33:24.040
<v Speaker 2>Private equity returns are basically just levered public equity returns.

0:33:24.200 --> 0:33:24.760
<v Speaker 1>Uh huh.

0:33:24.800 --> 0:33:27.240
<v Speaker 2>So instead of now me saying, let me get my

0:33:27.400 --> 0:33:29.719
<v Speaker 2>leverage by getting a swap with a bank, I can

0:33:29.760 --> 0:33:32.760
<v Speaker 2>take my public equity get my leverage by taking my

0:33:32.760 --> 0:33:35.600
<v Speaker 2>public equity putting it in private equity. If I put

0:33:35.640 --> 0:33:38.600
<v Speaker 2>twenty cents in, it looks like thirty cents of exposure.

0:33:39.000 --> 0:33:40.920
<v Speaker 2>And I can take some freedop capital and go invest

0:33:40.960 --> 0:33:43.200
<v Speaker 2>in a hedge fund. Now I don't ever get margin

0:33:43.240 --> 0:33:46.800
<v Speaker 2>called anymore and ps on volatility laundering to steal a

0:33:46.880 --> 0:33:49.120
<v Speaker 2>quote from Cliff Astness on the private side, And so

0:33:49.160 --> 0:33:51.960
<v Speaker 2>people have figured out all these very clever ways, and

0:33:51.960 --> 0:33:53.640
<v Speaker 2>I don't mean clever in a bad way, but clever

0:33:53.680 --> 0:33:56.680
<v Speaker 2>ways to keep portable alpha. Because it's a great theoretical

0:33:56.720 --> 0:34:00.480
<v Speaker 2>concept that just had implementation issues in two thousand to

0:34:00.600 --> 0:34:04.600
<v Speaker 2>re implement it very thoughtfully, and folks like Jonathan Clinton,

0:34:04.680 --> 0:34:07.920
<v Speaker 2>who's the CIO of Delta's pension, credits it for taking

0:34:08.040 --> 0:34:12.319
<v Speaker 2>Delta's pension from near bankruptcy to being overfunded in the

0:34:12.360 --> 0:34:15.399
<v Speaker 2>last eight years. He gives full credit to Portable Alpha

0:34:15.400 --> 0:34:16.640
<v Speaker 2>as being the reason why.

0:34:16.719 --> 0:34:20.320
<v Speaker 1>No kidding, that's really that's really interesting. So you mentioned

0:34:20.360 --> 0:34:23.480
<v Speaker 1>private equity. We're not going to talk about private credit

0:34:23.520 --> 0:34:26.880
<v Speaker 1>or private debt. But it's the same sort of continuum

0:34:26.920 --> 0:34:32.480
<v Speaker 1>that Cliff Do I say, complains about volatility laundering. It's like, hey,

0:34:32.520 --> 0:34:34.359
<v Speaker 1>if you don't get a daily mark or a tick

0:34:34.400 --> 0:34:38.319
<v Speaker 1>By tick mark, volatility is irrelevant. We'll let you know

0:34:38.360 --> 0:34:42.160
<v Speaker 1>what it's worth. Sort of sort of thing. But you've

0:34:42.360 --> 0:34:49.480
<v Speaker 1>talked about systematic alternatives. How do you define systematic alternatives?

0:34:49.520 --> 0:34:53.880
<v Speaker 1>And is this the approach that anyone who wants exposures

0:34:53.920 --> 0:34:55.280
<v Speaker 1>to aults should be using.

0:34:56.280 --> 0:34:59.600
<v Speaker 2>So this is where I have my own strong personal view.

0:34:59.640 --> 0:35:04.440
<v Speaker 2>So system matic alternatives to me are active investment strategies

0:35:04.480 --> 0:35:08.200
<v Speaker 2>that are implemented in a non discretionary manner. Right, Probably

0:35:08.200 --> 0:35:10.760
<v Speaker 2>these way to describe systematic tends to be you're using

0:35:10.880 --> 0:35:14.240
<v Speaker 2>computer models to make the decisions and implement the decisions

0:35:14.239 --> 0:35:18.319
<v Speaker 2>on an ongoing basis. These tend to be things like

0:35:19.320 --> 0:35:23.320
<v Speaker 2>strategies that will trade futures contracts long and short based

0:35:23.360 --> 0:35:26.400
<v Speaker 2>on different signals. Those signals might be trend signals, they

0:35:26.480 --> 0:35:29.799
<v Speaker 2>might be carry signals. They might be value or momentum,

0:35:30.239 --> 0:35:34.359
<v Speaker 2>and you're going long and short things like oil or

0:35:34.400 --> 0:35:37.600
<v Speaker 2>gold or Japanese yen, or you might be trading them

0:35:37.600 --> 0:35:40.280
<v Speaker 2>as spreads against one another. And the idea of many

0:35:40.280 --> 0:35:43.719
<v Speaker 2>of these sort of systematic macro strategies is to use

0:35:43.760 --> 0:35:47.040
<v Speaker 2>these signals to capture a lot of the macro trends

0:35:47.080 --> 0:35:51.480
<v Speaker 2>that are unfolding that you know, your big macro traders

0:35:51.680 --> 0:35:55.560
<v Speaker 2>would try to capture in a more discretionary fund. What's really,

0:35:55.800 --> 0:35:58.759
<v Speaker 2>in my opinion, attractive and appealing about them is that

0:35:58.800 --> 0:36:02.840
<v Speaker 2>they tend to be very uncorrelated to equities and bonds

0:36:03.120 --> 0:36:07.279
<v Speaker 2>over the long run, and particularly during a crisis, because

0:36:07.280 --> 0:36:11.840
<v Speaker 2>that's where you often see the opportunities manifest for big

0:36:11.960 --> 0:36:15.440
<v Speaker 2>strong moves, either positive and flight to safety assets or

0:36:15.480 --> 0:36:18.400
<v Speaker 2>the ability to short and profit from things that are crashing.

0:36:18.960 --> 0:36:24.560
<v Speaker 1>Huh. Really intriguing. This kind of ties in with a

0:36:24.640 --> 0:36:27.279
<v Speaker 1>quote of yours that I want to ask later, but

0:36:27.320 --> 0:36:30.160
<v Speaker 1>I might as well bring it back to this risk

0:36:30.239 --> 0:36:34.280
<v Speaker 1>cannot be destroyed, only transformed. Explain.

0:36:34.560 --> 0:36:36.480
<v Speaker 2>I don't think I'm the only person who has said this.

0:36:37.800 --> 0:36:40.080
<v Speaker 2>In fact, I once found a very similar quote in

0:36:40.320 --> 0:36:42.279
<v Speaker 2>an investment book from the nineteen eighty So this is

0:36:42.280 --> 0:36:44.839
<v Speaker 2>not a quote that should be attributed to me. It's

0:36:44.840 --> 0:36:47.040
<v Speaker 2>a general concept, and this is something I actually picked

0:36:47.120 --> 0:36:50.680
<v Speaker 2>up in my graduate school studies when we were going

0:36:50.719 --> 0:36:55.919
<v Speaker 2>through this education of pricing structured products. And what became

0:36:55.960 --> 0:36:58.400
<v Speaker 2>apparent to me is, in many ways, the role of

0:36:58.400 --> 0:37:04.640
<v Speaker 2>the financial industry is to identify risk, extract risk, package it,

0:37:04.719 --> 0:37:06.840
<v Speaker 2>price it, and transfer it to someone who's willing to

0:37:06.880 --> 0:37:10.120
<v Speaker 2>hold it. That is what we do when we raise

0:37:10.160 --> 0:37:14.000
<v Speaker 2>a round of equity financing. Right, you're transferring some risk

0:37:14.080 --> 0:37:18.400
<v Speaker 2>to someone else, so that risk is never really destroyed.

0:37:18.400 --> 0:37:21.920
<v Speaker 2>Everything you do, whether it's in your portfolio or investment

0:37:21.920 --> 0:37:24.680
<v Speaker 2>decisions you make, has a trade off. And sometimes that

0:37:25.080 --> 0:37:28.000
<v Speaker 2>trade off is just an opportunity cost. Sometimes it's very

0:37:28.040 --> 0:37:32.239
<v Speaker 2>explicitly higher volatility or lower downside. But everything we do

0:37:32.880 --> 0:37:35.080
<v Speaker 2>has a trade off. There's really no free launch, right.

0:37:35.160 --> 0:37:38.360
<v Speaker 2>So when I look at something like portable Alpha, I

0:37:38.440 --> 0:37:41.680
<v Speaker 2>say Okay. The opportunity is I don't have to try

0:37:41.680 --> 0:37:43.440
<v Speaker 2>to beat the S and P five hundred by picking

0:37:43.440 --> 0:37:46.759
<v Speaker 2>stocks better, which has historically proven to be largely a

0:37:46.800 --> 0:37:49.960
<v Speaker 2>fool's Errand I can try to beat the SMP by saying, well,

0:37:50.040 --> 0:37:52.520
<v Speaker 2>let me just get the SMP and I think gold

0:37:52.760 --> 0:37:55.520
<v Speaker 2>is just going to be positive over my thirty year horizon.

0:37:55.640 --> 0:37:57.920
<v Speaker 2>Let me just stack some gold on top. Okay, that's

0:37:57.960 --> 0:38:01.040
<v Speaker 2>a win. Where's the risk? Well, again, I'm introduced. I'm

0:38:01.120 --> 0:38:04.800
<v Speaker 2>using leverage. Leverage isn't inherently bad, but there are risks

0:38:04.840 --> 0:38:07.880
<v Speaker 2>that I've now introduced for making this trade off. And

0:38:07.920 --> 0:38:11.440
<v Speaker 2>so yes, I get some diversification benefit, but there's some

0:38:11.680 --> 0:38:14.200
<v Speaker 2>liquidity risks and operational risks I really need to be

0:38:14.200 --> 0:38:15.919
<v Speaker 2>aware of. And so it's to me, it's it's trade

0:38:15.920 --> 0:38:17.040
<v Speaker 2>offs all the way down.

0:38:17.560 --> 0:38:21.040
<v Speaker 1>And it's worked out for places like Delta's pension.

0:38:20.680 --> 0:38:24.440
<v Speaker 2>Funds Delta, there are a large number of public pensions

0:38:24.560 --> 0:38:28.399
<v Speaker 2>as well that have used this ipers Ohio police and

0:38:28.520 --> 0:38:32.200
<v Speaker 2>fire mosers. I mean, this is I want to say,

0:38:32.200 --> 0:38:34.279
<v Speaker 2>like one of the and what's interesting is they don't

0:38:34.280 --> 0:38:37.440
<v Speaker 2>want to talk about it. Oh really, now, the public pensions,

0:38:37.560 --> 0:38:39.520
<v Speaker 2>it's in all their public filings, so you can go

0:38:39.640 --> 0:38:42.000
<v Speaker 2>find this right, but a lot of them don't want

0:38:42.040 --> 0:38:44.239
<v Speaker 2>to talk about it because either hey, this is our

0:38:44.440 --> 0:38:45.840
<v Speaker 2>this is what's working for us, and we need to

0:38:45.840 --> 0:38:49.840
<v Speaker 2>beat our competitors right or again it just portable alpha

0:38:49.880 --> 0:38:53.560
<v Speaker 2>has this bad label to it from two thousand and eight,

0:38:54.120 --> 0:38:57.319
<v Speaker 2>and people don't want to see it, and so they're

0:38:57.400 --> 0:38:58.920
<v Speaker 2>sort of finding ways to hide it.

0:38:59.440 --> 0:39:05.840
<v Speaker 1>So we'll talk about return stacking in a moment, but

0:39:05.920 --> 0:39:08.560
<v Speaker 1>I want to stay with some of the research that

0:39:08.600 --> 0:39:14.440
<v Speaker 1>you did, and let's talk about liquidy cascades, which our

0:39:14.520 --> 0:39:18.759
<v Speaker 1>mutual friend Dave Natick has described a new lens on

0:39:18.880 --> 0:39:22.319
<v Speaker 1>reality that I think people should be thinking about. I

0:39:22.360 --> 0:39:28.440
<v Speaker 1>love that description. Tell us what your liquidity cascade work found.

0:39:29.000 --> 0:39:32.520
<v Speaker 2>So this was research I wrote in twenty twenty after

0:39:32.560 --> 0:39:35.600
<v Speaker 2>coming out of the twenty twenty crisis, and it was

0:39:36.200 --> 0:39:38.919
<v Speaker 2>born from the view that while there was a very

0:39:39.080 --> 0:39:44.319
<v Speaker 2>real exogenous economic event that caused the market to sell off,

0:39:45.040 --> 0:39:47.440
<v Speaker 2>the day to day of what I was seeing happening

0:39:47.520 --> 0:39:52.040
<v Speaker 2>in markets seemed to be endogenous. In other words, there

0:39:52.160 --> 0:39:55.760
<v Speaker 2>was so much volatility and there was so much mispricing

0:39:55.840 --> 0:39:59.920
<v Speaker 2>that didn't seem to be a reaction to fundamental changes

0:40:00.120 --> 0:40:02.600
<v Speaker 2>the world. It just seemed to be, Oh, there's someone

0:40:02.600 --> 0:40:05.120
<v Speaker 2>got liquidated and had to sell immediately, sell down a

0:40:05.200 --> 0:40:07.640
<v Speaker 2>large levered position, and there's someone who couldn't meet a

0:40:07.640 --> 0:40:10.920
<v Speaker 2>collateral call. And so it made me take a step

0:40:10.960 --> 0:40:14.440
<v Speaker 2>back and say, is there something about the market structure,

0:40:14.960 --> 0:40:19.719
<v Speaker 2>the way market micro structure has evolved over time that

0:40:19.880 --> 0:40:22.920
<v Speaker 2>I don't understand that there are some of these maybe

0:40:23.000 --> 0:40:27.160
<v Speaker 2>lurking risks that we've implemented. And so there were three

0:40:28.719 --> 0:40:30.640
<v Speaker 2>I'm gonna call them conspiracy theories for lack of a

0:40:30.640 --> 0:40:32.680
<v Speaker 2>better word, that the hang out there as to what

0:40:32.840 --> 0:40:33.879
<v Speaker 2>has broken.

0:40:33.560 --> 0:40:36.719
<v Speaker 1>The market rationalization rationalizations, Yeah, to.

0:40:36.640 --> 0:40:38.560
<v Speaker 2>Be kind to the people that believe them, And so

0:40:38.600 --> 0:40:40.319
<v Speaker 2>the idea of the paper was I was going to

0:40:40.440 --> 0:40:44.960
<v Speaker 2>explore them as objectively as I could. The big three

0:40:45.080 --> 0:40:48.360
<v Speaker 2>as I saw them, were FED intervention and a decade

0:40:48.360 --> 0:40:51.319
<v Speaker 2>of zero interest rate policy causing people to take on

0:40:51.400 --> 0:40:55.359
<v Speaker 2>too much risk, forcing them up the risk curve there was,

0:40:56.040 --> 0:40:58.399
<v Speaker 2>and then obviously the concept of a FED put being

0:40:58.440 --> 0:41:00.279
<v Speaker 2>tied in there. Then there was the right as a

0:41:00.320 --> 0:41:05.240
<v Speaker 2>passive investing not just active versus passive in the type

0:41:05.239 --> 0:41:08.480
<v Speaker 2>of price discovery that was happening, but truly how we

0:41:08.640 --> 0:41:13.080
<v Speaker 2>trade indexed products at a market micro structure level was

0:41:13.080 --> 0:41:17.160
<v Speaker 2>that changing stocks aren't traded individually anymore. They're traded as

0:41:17.200 --> 0:41:20.840
<v Speaker 2>big baskets the way market makers are. There's now really

0:41:20.880 --> 0:41:22.799
<v Speaker 2>just a handful of big market makers rather than a

0:41:22.840 --> 0:41:25.120
<v Speaker 2>large cohort. Is that making markets more fragile? And then

0:41:26.000 --> 0:41:29.799
<v Speaker 2>the impact of derivatives? Right? And I think we saw

0:41:29.880 --> 0:41:33.480
<v Speaker 2>this as an example for people with game Stop, where

0:41:33.520 --> 0:41:36.640
<v Speaker 2>you had what I would call social gamma, this acceleration

0:41:36.840 --> 0:41:39.239
<v Speaker 2>through Reddit of people buying out of the money call

0:41:39.280 --> 0:41:44.520
<v Speaker 2>options to drive through leverage, the price higher because market

0:41:44.520 --> 0:41:47.319
<v Speaker 2>makers were forced to hedge. Right. Do you see that

0:41:47.719 --> 0:41:49.520
<v Speaker 2>less specifically at game Stop, But do you see that

0:41:49.560 --> 0:41:52.800
<v Speaker 2>at a grander scale when you have a huge amount

0:41:52.840 --> 0:41:56.759
<v Speaker 2>of structured products being issued in Asia and Europe, or

0:41:56.840 --> 0:42:01.200
<v Speaker 2>you have all these sort of uses of leverage among institutions?

0:42:01.280 --> 0:42:04.360
<v Speaker 2>Have we gotten again to a point of fragility? And

0:42:04.800 --> 0:42:09.400
<v Speaker 2>what liquidity Cascades ultimately argued was anyone who thinks it

0:42:09.440 --> 0:42:12.759
<v Speaker 2>was just their one thesis was probably wrong it.

0:42:12.960 --> 0:42:15.000
<v Speaker 1>Now I want to just stop you for a second,

0:42:15.040 --> 0:42:18.360
<v Speaker 1>interrupt you for a second and point out how often

0:42:18.680 --> 0:42:25.000
<v Speaker 1>are big complicated situations, you know, Jacques cu'es it's that

0:42:25.160 --> 0:42:27.879
<v Speaker 1>one thing. The world is much more complex than that.

0:42:28.360 --> 0:42:31.480
<v Speaker 1>It's I remember looking at the causes of the financial crisis.

0:42:31.520 --> 0:42:35.200
<v Speaker 1>I found dozens of them. When the inflation surge took

0:42:35.320 --> 0:42:38.440
<v Speaker 1>up in twenty one and twenty two, like people wanted

0:42:38.440 --> 0:42:42.439
<v Speaker 1>to point a finger, there were dozens of factors, including

0:42:42.640 --> 0:42:45.800
<v Speaker 1>consumers who said, oh, that's fifty percent more. Yeah, I

0:42:45.800 --> 0:42:48.719
<v Speaker 1>don't care, I'm gonna buy one. Consumers drove inflation as

0:42:48.800 --> 0:42:51.960
<v Speaker 1>much as fiscal stimulus and all these other things. So

0:42:52.560 --> 0:42:57.120
<v Speaker 1>how how broad a conclusion did you reach that it's

0:42:57.200 --> 0:42:58.200
<v Speaker 1>never just one thing?

0:42:59.239 --> 0:43:02.400
<v Speaker 2>To your point, I think people look into a world

0:43:02.480 --> 0:43:07.000
<v Speaker 2>of incredibly complex nonlinear relationships and they want a single

0:43:07.440 --> 0:43:10.280
<v Speaker 2>linear explanation and it's just not possible.

0:43:10.400 --> 0:43:14.120
<v Speaker 1>That's the narrative fallacy. They want to clean little storyline

0:43:14.120 --> 0:43:16.960
<v Speaker 1>in a bow, and that's not how the universe.

0:43:16.600 --> 0:43:18.799
<v Speaker 2>Wor all of these things interact. And so what I

0:43:18.880 --> 0:43:22.239
<v Speaker 2>came out of the research piece with was not my view.

0:43:22.520 --> 0:43:24.480
<v Speaker 2>Actually the intro of the research piece, I said, I'm

0:43:24.480 --> 0:43:26.480
<v Speaker 2>not going to tell you what my view is. I'm

0:43:26.520 --> 0:43:29.000
<v Speaker 2>going to walk through this objectively as I can, and

0:43:29.040 --> 0:43:31.120
<v Speaker 2>I'm going to paint a picture at the end, it's

0:43:31.160 --> 0:43:34.000
<v Speaker 2>up to you as the reader to determine, for lack

0:43:34.000 --> 0:43:37.560
<v Speaker 2>of a better phrase, how full I am right, you know, so.

0:43:37.480 --> 0:43:39.360
<v Speaker 1>What did you find out with those three facts? Or

0:43:39.360 --> 0:43:43.359
<v Speaker 1>those three so the FED, passive and derivatives.

0:43:43.440 --> 0:43:46.200
<v Speaker 2>So with those three factors, what I ultimately argued was

0:43:46.239 --> 0:43:50.400
<v Speaker 2>that they operate in somewhat of a cycle. Right, FED

0:43:50.520 --> 0:43:54.560
<v Speaker 2>zero interest rate policy is in many ways, as explicitly

0:43:54.600 --> 0:43:57.560
<v Speaker 2>stated by the FED, trying to move people up the

0:43:57.600 --> 0:44:00.000
<v Speaker 2>risk curve. And as people moved up the risk curve,

0:44:00.280 --> 0:44:03.400
<v Speaker 2>they were trying to find ways to harvest yield or

0:44:03.440 --> 0:44:07.239
<v Speaker 2>save money, a move into things like passive thing, a

0:44:07.280 --> 0:44:10.959
<v Speaker 2>move into tax efficient vehicles like ETFs. That we're having

0:44:11.040 --> 0:44:13.600
<v Speaker 2>a profound impact on the way things are traded in

0:44:13.640 --> 0:44:17.000
<v Speaker 2>the market. You're having a consolidation of market makers that

0:44:17.160 --> 0:44:22.120
<v Speaker 2>leads to potentially increasing fragility or or lack of liquidity.

0:44:22.200 --> 0:44:24.799
<v Speaker 2>One of the things I thought was really interesting in

0:44:24.800 --> 0:44:27.239
<v Speaker 2>March twenty twenties. People always talk about market makers pull

0:44:27.280 --> 0:44:30.800
<v Speaker 2>the plug right right, markets go crazy. They're not running

0:44:30.840 --> 0:44:33.239
<v Speaker 2>a charity. They're going to pull the plug when things

0:44:33.280 --> 0:44:34.400
<v Speaker 2>aren't going well.

0:44:34.160 --> 0:44:36.799
<v Speaker 1>Or at least lower their their bidass spread wide them out,

0:44:36.880 --> 0:44:37.440
<v Speaker 1>So yeah.

0:44:37.239 --> 0:44:38.440
<v Speaker 2>They're going to wide them out and they're going to

0:44:38.440 --> 0:44:41.480
<v Speaker 2>thin the order book volume. What I thought was interesting

0:44:41.480 --> 0:44:45.960
<v Speaker 2>that people don't often talk about is they're actually capacity constrained.

0:44:46.560 --> 0:44:50.239
<v Speaker 2>They have a balance sheet, and there was I think

0:44:50.239 --> 0:44:54.239
<v Speaker 2>it was Vertu during March twenty twenty that actually was

0:44:54.280 --> 0:44:56.840
<v Speaker 2>trying to raise three hundred and fifty million dollars just

0:44:56.880 --> 0:44:59.040
<v Speaker 2>so they could keep making markets wow because they had

0:44:59.080 --> 0:45:01.920
<v Speaker 2>run out of balance sheet. And you go, well, actually,

0:45:01.920 --> 0:45:04.520
<v Speaker 2>if these institutions are so important to the way our

0:45:04.560 --> 0:45:07.680
<v Speaker 2>markets function, should they have a line to the Fed?

0:45:08.520 --> 0:45:10.280
<v Speaker 1>Yeah, that makes sense, right.

0:45:10.120 --> 0:45:12.239
<v Speaker 2>I've never heard anyone talk about it, right, right, But

0:45:12.320 --> 0:45:14.440
<v Speaker 2>if you need them there and there's only three or

0:45:14.440 --> 0:45:17.680
<v Speaker 2>four key market makers left, right, we need to make

0:45:17.680 --> 0:45:20.840
<v Speaker 2>sure that they have healthy balancees. They are systematically important

0:45:20.840 --> 0:45:21.680
<v Speaker 2>institutions that.

0:45:21.600 --> 0:45:25.720
<v Speaker 1>They need a line somewhere. But the Fed's mandate isn't

0:45:25.800 --> 0:45:29.360
<v Speaker 1>the smooth operation of the NICY. The Fed's mandate is

0:45:29.520 --> 0:45:31.200
<v Speaker 1>low inflation and full employment.

0:45:31.840 --> 0:45:34.680
<v Speaker 2>So it's a little little struck things like that. And

0:45:34.920 --> 0:45:36.800
<v Speaker 2>again I don't think any of them are the cause,

0:45:36.880 --> 0:45:39.600
<v Speaker 2>but you start to see some of this fragility creep up,

0:45:39.719 --> 0:45:42.919
<v Speaker 2>and then as people right are moving up the risk curve,

0:45:42.920 --> 0:45:46.680
<v Speaker 2>They're trying to find ways to also protect themselves, so

0:45:46.719 --> 0:45:49.720
<v Speaker 2>they're taking on more derivative strategies. We saw this massive

0:45:49.719 --> 0:45:53.520
<v Speaker 2>boom and derivatives. We saw an adoption of things leverage

0:45:53.520 --> 0:45:58.040
<v Speaker 2>strategies with parity and trend following and alternatives. And again

0:45:58.080 --> 0:45:59.680
<v Speaker 2>I don't look at the boogeyman and say the market

0:45:59.760 --> 0:46:02.080
<v Speaker 2>sell off and it's risk parody's fault. But I look

0:46:02.120 --> 0:46:05.600
<v Speaker 2>at I say, well, if risk parity and managed futures

0:46:05.600 --> 0:46:08.200
<v Speaker 2>are selling off, and at the same time, you have

0:46:08.239 --> 0:46:12.800
<v Speaker 2>all these massively levered positions via puts that market makers

0:46:12.800 --> 0:46:15.760
<v Speaker 2>are having to hedge, all that can act in coordination

0:46:15.840 --> 0:46:19.759
<v Speaker 2>to make a sell off more violent. And then sort

0:46:19.800 --> 0:46:21.839
<v Speaker 2>of you go full circle to the FED stepping back

0:46:21.880 --> 0:46:24.759
<v Speaker 2>in lowering interest rates and kicking the whole cycle off.

0:46:24.800 --> 0:46:26.400
<v Speaker 2>And so what I painted a picture of at the end,

0:46:26.400 --> 0:46:28.520
<v Speaker 2>the reason I called it a liquidity cascade was I

0:46:28.520 --> 0:46:30.920
<v Speaker 2>painted it was this empty Escher painting.

0:46:30.560 --> 0:46:34.040
<v Speaker 1>Of famous Wall the waterfall, and.

0:46:34.000 --> 0:46:36.640
<v Speaker 2>Then it magically climbs back up and each part of

0:46:36.680 --> 0:46:38.759
<v Speaker 2>this it was the FED sort of is at the

0:46:38.800 --> 0:46:43.480
<v Speaker 2>bottom of the waterfall, and then flight to passive alternative

0:46:43.520 --> 0:46:46.360
<v Speaker 2>sort of investment strategies and the role of derivatives is

0:46:46.400 --> 0:46:49.600
<v Speaker 2>at the top, and then some exogenous effect causes the

0:46:49.640 --> 0:46:52.960
<v Speaker 2>market to crash, the crash becomes more violent, fed steps

0:46:53.000 --> 0:46:54.440
<v Speaker 2>in and the cycle kicks off again.

0:46:54.560 --> 0:47:00.239
<v Speaker 1>So I have so many interesting questions for you. I'm

0:47:00.320 --> 0:47:04.200
<v Speaker 1>kind of fascinated by your the way you look at

0:47:04.239 --> 0:47:08.520
<v Speaker 1>the market structure and what's driving things, because for me,

0:47:08.880 --> 0:47:13.960
<v Speaker 1>the thing I'm looking at during those various processes is,

0:47:14.239 --> 0:47:17.800
<v Speaker 1>and you reference this earlier are is all the individual

0:47:17.840 --> 0:47:21.640
<v Speaker 1>decision making that takes place within the context of some

0:47:22.160 --> 0:47:26.400
<v Speaker 1>financial stress, which, as we've seen, tends to lead to

0:47:27.760 --> 0:47:33.480
<v Speaker 1>cognitive challenges, behavioral problems, bad decision making. That human element

0:47:33.560 --> 0:47:37.120
<v Speaker 1>in the middle tends to react. You know, it's it's

0:47:37.160 --> 0:47:41.359
<v Speaker 1>oversimplifying it, calling it fight or flight. But hey, that's

0:47:41.400 --> 0:47:44.120
<v Speaker 1>what your lizard brain is telling you. And it doesn't

0:47:44.120 --> 0:47:46.239
<v Speaker 1>matter if you're running a billion dollar hedge fund or

0:47:46.360 --> 0:47:50.800
<v Speaker 1>pension fund. Most people are gonna go through the same

0:47:50.880 --> 0:47:55.120
<v Speaker 1>sort of panicky response. It's really interesting that you're focusing

0:47:55.200 --> 0:47:59.400
<v Speaker 1>on the structure and how does the structure accommodate the

0:47:59.440 --> 0:48:00.759
<v Speaker 1>bad behave that we.

0:48:00.680 --> 0:48:04.799
<v Speaker 2>See you are right that there is absolutely panic and

0:48:04.880 --> 0:48:06.879
<v Speaker 2>lizard brain and I don't mean that in any sort

0:48:06.920 --> 0:48:10.480
<v Speaker 2>of derogatory way. If their survival instincts of actually it

0:48:10.560 --> 0:48:12.440
<v Speaker 2>is what it is, I don't think they're irrational. I

0:48:12.440 --> 0:48:15.759
<v Speaker 2>think ergodicity economics would argue you have to protect your

0:48:15.760 --> 0:48:20.239
<v Speaker 2>capital to survive. What So I'll give an example here

0:48:20.440 --> 0:48:22.960
<v Speaker 2>of where I think it's a very specific example, sort

0:48:22.960 --> 0:48:24.560
<v Speaker 2>of like the market maker's example, but it's something that

0:48:24.560 --> 0:48:28.040
<v Speaker 2>happened in March twenty twenty that is obviously wrong. And

0:48:28.680 --> 0:48:33.759
<v Speaker 2>so Vanguard has their mutual funds, and they offer ETFs

0:48:33.800 --> 0:48:36.600
<v Speaker 2>as a share class of their mutual funds. So if

0:48:36.640 --> 0:48:38.759
<v Speaker 2>you buy the mutual fund or the ETF, you are,

0:48:38.760 --> 0:48:41.640
<v Speaker 2>in theory getting the exact same return because it's the

0:48:41.680 --> 0:48:42.880
<v Speaker 2>same underlying pool of.

0:48:42.880 --> 0:48:46.440
<v Speaker 1>Capital minus the tax advantage of the ETF.

0:48:46.440 --> 0:48:51.520
<v Speaker 2>Absolutely yep, their bond fund. During March twenty twenty, there

0:48:51.560 --> 0:48:54.160
<v Speaker 2>was a two day period where the ETF traded I

0:48:54.200 --> 0:48:56.200
<v Speaker 2>believe it was up to a six or seven percent

0:48:56.360 --> 0:49:00.680
<v Speaker 2>discount to the mutual fund. That's a little weird because

0:49:00.680 --> 0:49:02.520
<v Speaker 2>it's the exact same pool of capital.

0:49:02.680 --> 0:49:05.800
<v Speaker 1>Right, So difference being you can only trade mutual funds.

0:49:06.200 --> 0:49:07.759
<v Speaker 1>At the end of the day, you have to make

0:49:07.800 --> 0:49:11.520
<v Speaker 1>a specific phone call to buy or or just reach

0:49:11.560 --> 0:49:13.360
<v Speaker 1>out to whoever your custodian is.

0:49:13.560 --> 0:49:13.759
<v Speaker 2>Yep.

0:49:14.239 --> 0:49:16.200
<v Speaker 1>Whereas the ETFs are quoted.

0:49:16.400 --> 0:49:18.520
<v Speaker 2>In today, but even at the end of day M

0:49:19.320 --> 0:49:22.400
<v Speaker 2>that discrepancy existed. It wasn't just interday that was. That

0:49:22.520 --> 0:49:24.799
<v Speaker 2>was the NAB of the mutual fund versus the price

0:49:24.800 --> 0:49:25.920
<v Speaker 2>of the ETF.

0:49:25.560 --> 0:49:27.799
<v Speaker 1>Which had a higher trading volume. I'm going to guess

0:49:27.840 --> 0:49:28.440
<v Speaker 1>the ETF.

0:49:28.800 --> 0:49:31.880
<v Speaker 2>The ETF certainly had a higher trading volume, but the

0:49:32.320 --> 0:49:38.120
<v Speaker 2>underlying problem is that the bonds weren't pricing. The bond

0:49:38.160 --> 0:49:41.120
<v Speaker 2>market froze up, so when the mutual fund struck NAB

0:49:41.160 --> 0:49:43.680
<v Speaker 2>at the end of the day, the NAB was based

0:49:43.719 --> 0:49:46.759
<v Speaker 2>on ill liquid quotes of bonds that hadn't traded. The

0:49:46.800 --> 0:49:51.359
<v Speaker 2>ETF was basically saying, we don't believe those quotes. We

0:49:51.400 --> 0:49:53.080
<v Speaker 2>think the quote should be much lower, and we're going

0:49:53.120 --> 0:49:53.919
<v Speaker 2>to price much lower.

0:49:53.960 --> 0:49:54.399
<v Speaker 1>That's right.

0:49:54.440 --> 0:49:58.279
<v Speaker 2>There's an interesting free option here. If you are a vanguard.

0:49:58.280 --> 0:50:01.000
<v Speaker 1>By the ETF seldomctual.

0:50:00.320 --> 0:50:03.719
<v Speaker 2>Funds well, so because you can't short a mutual fund.

0:50:03.719 --> 0:50:05.480
<v Speaker 2>The way it would work is you would just always

0:50:05.520 --> 0:50:08.640
<v Speaker 2>hold the mutual fund, wait for a crisis to come around,

0:50:08.719 --> 0:50:11.760
<v Speaker 2>and then jump from the mutual fund to the ETF, right,

0:50:12.320 --> 0:50:15.560
<v Speaker 2>and you basically pick up this free spread based on

0:50:15.640 --> 0:50:19.840
<v Speaker 2>the fact that the mutual fund is priced incorrectly. Stuff

0:50:19.840 --> 0:50:20.840
<v Speaker 2>like that shouldn't happen.

0:50:21.320 --> 0:50:23.880
<v Speaker 1>Why do you say that, I always go back and

0:50:23.920 --> 0:50:29.120
<v Speaker 1>forth with this. It's not like computers and algorithms are

0:50:29.200 --> 0:50:34.080
<v Speaker 1>running this. It's irrational primates who are pushing the cell

0:50:34.239 --> 0:50:35.200
<v Speaker 1>or buy button.

0:50:35.320 --> 0:50:38.120
<v Speaker 2>Let me rephrase that. Things like that don't happen except

0:50:38.160 --> 0:50:41.480
<v Speaker 2>within a crisis, okay, and they represent opportunity in a

0:50:41.520 --> 0:50:47.440
<v Speaker 2>crisis because it is definitively mispriced, and if markets are efficient,

0:50:47.560 --> 0:50:50.120
<v Speaker 2>there shouldn't be miss pricings like that. That's a very

0:50:50.160 --> 0:50:52.920
<v Speaker 2>You shouldn't have two things that are literally the exact

0:50:52.920 --> 0:50:56.520
<v Speaker 2>same basket attached to the same underlying trading six percent apart.

0:50:56.640 --> 0:51:00.719
<v Speaker 2>Unless there's true limits to arbitrage here. You could argue

0:51:00.719 --> 0:51:02.480
<v Speaker 2>you can't short the mutual fund and buy the ETF.

0:51:02.480 --> 0:51:06.040
<v Speaker 2>It's it's hard to arm that spread. But again, anyone

0:51:06.160 --> 0:51:10.000
<v Speaker 2>trading any bond mutual fund could have jumped to Vanguard's ETF,

0:51:10.200 --> 0:51:13.520
<v Speaker 2>waited for the price appreciation, and benefited. And again, in

0:51:13.560 --> 0:51:15.800
<v Speaker 2>a crisis, there's so much information coming at you you

0:51:15.880 --> 0:51:18.400
<v Speaker 2>might not have seen the opportunity. But I look at

0:51:18.440 --> 0:51:20.279
<v Speaker 2>a lot of little things like that, and I go,

0:51:20.560 --> 0:51:24.040
<v Speaker 2>markets mostly function correctly the vast majority of the time.

0:51:24.480 --> 0:51:27.480
<v Speaker 2>But when you see that fragility pop up in a crisis,

0:51:27.600 --> 0:51:30.000
<v Speaker 2>uh huh, just is it pause for concern about how

0:51:30.000 --> 0:51:31.800
<v Speaker 2>things are currently structured? Just a question.

0:51:32.120 --> 0:51:37.439
<v Speaker 1>So I'm not saying it's broken. So to response to that, first, hey,

0:51:37.520 --> 0:51:42.800
<v Speaker 1>give the Nobel Prize Committee props for offering a prize

0:51:42.880 --> 0:51:46.399
<v Speaker 1>to Fama and Schiller the same year. It's like, yeah,

0:51:46.520 --> 0:51:50.279
<v Speaker 1>markets are mostly efficient. Fama is right except when they're not,

0:51:50.600 --> 0:51:54.359
<v Speaker 1>and Schiller's right. So that's number one. Number two. I

0:51:54.400 --> 0:51:58.040
<v Speaker 1>have a vivid recollection of sitting in a canoe with

0:51:58.200 --> 0:52:02.640
<v Speaker 1>Jim Bianco in August of nine, and Bianca was the

0:52:02.760 --> 0:52:07.960
<v Speaker 1>first person to describe the FED response to the crisis

0:52:08.000 --> 0:52:13.239
<v Speaker 1>as the first person I read, and this was really early. Hey,

0:52:13.320 --> 0:52:16.680
<v Speaker 1>the FED has made cash trash. They want you out

0:52:16.680 --> 0:52:20.200
<v Speaker 1>of bonds, they want you into equities. Maybe it's gonna

0:52:20.239 --> 0:52:23.600
<v Speaker 1>take people a while to figure this out. But he

0:52:23.719 --> 0:52:26.879
<v Speaker 1>was the first person to come up with Tina right

0:52:26.960 --> 0:52:30.120
<v Speaker 1>and said, people are gonna have to stampede into equities.

0:52:30.640 --> 0:52:33.520
<v Speaker 1>We're gonna have a rally, and I said, it's funny.

0:52:33.760 --> 0:52:35.400
<v Speaker 1>I feel like the two of us are part of

0:52:35.440 --> 0:52:38.960
<v Speaker 1>the six blind men describing the elephant. Because to your

0:52:39.080 --> 0:52:44.439
<v Speaker 1>point about mispricing, I recall saying to him, I don't

0:52:44.480 --> 0:52:47.360
<v Speaker 1>know if you're right. I like that theory. But my

0:52:49.120 --> 0:52:52.279
<v Speaker 1>day job as a market historian is whenever stocks are

0:52:52.320 --> 0:52:55.400
<v Speaker 1>cut in half in the United States, that's a fantastic

0:52:55.560 --> 0:52:58.200
<v Speaker 1>entry point. And if you bring up well, what about

0:52:58.280 --> 0:53:01.280
<v Speaker 1>nineteen twenty nine. Yeah, you didn't get to the bottom

0:53:01.400 --> 0:53:03.759
<v Speaker 1>till thirty two, but even down fifty percent on the

0:53:03.760 --> 0:53:07.799
<v Speaker 1>way down to down eighty seven percent was still a

0:53:07.840 --> 0:53:11.799
<v Speaker 1>great entry point. And that's the exception. Every other time

0:53:11.840 --> 0:53:14.080
<v Speaker 1>you're cut in half in the United States, you have

0:53:14.160 --> 0:53:15.520
<v Speaker 1>to buy with both hands.

0:53:15.840 --> 0:53:17.600
<v Speaker 2>Well, and what's interesting to me there is you and

0:53:17.680 --> 0:53:21.920
<v Speaker 2>Jim are discussing. I love your analogy with the blindman

0:53:22.000 --> 0:53:25.800
<v Speaker 2>and the elephant. Jim is discussing a supply and demand concept,

0:53:25.840 --> 0:53:27.879
<v Speaker 2>and you're discussing a fundamental view.

0:53:28.040 --> 0:53:30.640
<v Speaker 1>Right. I see the world through a behavioral lens. He's

0:53:30.680 --> 0:53:33.560
<v Speaker 1>seeing the world with. There's the FED is going to

0:53:33.600 --> 0:53:37.400
<v Speaker 1>cause a giant increase in demand for equity is regardless

0:53:37.400 --> 0:53:39.440
<v Speaker 1>of what the supply is right, and guess what happens the.

0:53:39.440 --> 0:53:42.919
<v Speaker 2>Prices, and that'll drive prices up, and it causes many

0:53:43.480 --> 0:53:47.160
<v Speaker 2>fundamental people right to say markets are overvalued, missing the

0:53:47.200 --> 0:53:50.840
<v Speaker 2>fact that you had another market structure changed things like

0:53:50.840 --> 0:53:53.080
<v Speaker 2>a four to oh one k that was almost non

0:53:53.080 --> 0:53:55.720
<v Speaker 2>existent in the early two thousands. That's several trillion dollars.

0:53:55.760 --> 0:53:58.600
<v Speaker 2>Now you just have a stamp ped of buying every

0:53:58.640 --> 0:54:02.439
<v Speaker 2>single month and people being forced into markets as a

0:54:02.480 --> 0:54:06.279
<v Speaker 2>retirement vehicle, right, that is their savings account, particularly when

0:54:06.320 --> 0:54:10.080
<v Speaker 2>cash is returning nothing, and you have a dramatic shift

0:54:10.160 --> 0:54:12.000
<v Speaker 2>in supply and demand. And by the way, over the

0:54:12.000 --> 0:54:16.520
<v Speaker 2>same cycle, you saw fewer IPOs, so you're increasing demand

0:54:16.520 --> 0:54:18.960
<v Speaker 2>into public equities with fewer less supply.

0:54:19.400 --> 0:54:22.800
<v Speaker 1>Right at the same time, you have huge buybacks. Right.

0:54:23.239 --> 0:54:25.080
<v Speaker 1>A lot of people don't realize the wilsh of five

0:54:25.120 --> 0:54:28.000
<v Speaker 1>thousand is something like thirty four hundred stocks. It's like

0:54:28.440 --> 0:54:32.600
<v Speaker 1>totally misnamed. And the past twenty years have seen Yeah,

0:54:32.600 --> 0:54:35.160
<v Speaker 1>there's been a lot of stock issue in Silicon Valley,

0:54:35.400 --> 0:54:38.680
<v Speaker 1>but overall, the size of the share float that's out

0:54:38.680 --> 0:54:43.040
<v Speaker 1>there has shrunk another big and I don't know where

0:54:43.160 --> 0:54:45.759
<v Speaker 1>what the endgame of that is. Can you do that perpetually.

0:54:46.160 --> 0:54:50.719
<v Speaker 1>So I don't know what the deep public eyes public markets.

0:54:50.880 --> 0:54:53.320
<v Speaker 2>I don't know what the endgame of any of this is, Caniley,

0:54:53.360 --> 0:54:55.960
<v Speaker 2>But I know you've had folks like Mike green On

0:54:56.280 --> 0:54:58.400
<v Speaker 2>I think he was on even recently, who have strong

0:54:58.480 --> 0:55:01.840
<v Speaker 2>views about what Passive is doing. I don't have particularly

0:55:01.880 --> 0:55:04.600
<v Speaker 2>strong views in any direction. I just like asking the questions.

0:55:04.600 --> 0:55:06.640
<v Speaker 2>Maybe I lob out a little grenade and let other

0:55:06.680 --> 0:55:09.279
<v Speaker 2>people fight over it, but I think they're fascinating and

0:55:09.400 --> 0:55:13.000
<v Speaker 2>worthwhile questions because I think in many cases we just

0:55:13.080 --> 0:55:16.800
<v Speaker 2>accept we have some of the most wonderfully functioning liquid

0:55:16.840 --> 0:55:19.279
<v Speaker 2>markets in the world. We are truly privileged in the

0:55:19.400 --> 0:55:23.440
<v Speaker 2>US to have what we have. I don't think it

0:55:23.560 --> 0:55:26.520
<v Speaker 2>hurts us to ask are we overlooking anything? Is there

0:55:26.520 --> 0:55:31.279
<v Speaker 2>any way in which we are unintentionally designing ourselves into

0:55:31.320 --> 0:55:32.280
<v Speaker 2>a state of fragility?

0:55:32.680 --> 0:55:35.640
<v Speaker 1>It was pretty clear that people should have been asking

0:55:35.640 --> 0:55:38.719
<v Speaker 1>that question in the mid two thousands and just had

0:55:38.760 --> 0:55:43.880
<v Speaker 1>no idea the sort of miss aligned incentives and really

0:55:43.920 --> 0:55:48.520
<v Speaker 1>complex structures that, along with some the really we got

0:55:48.640 --> 0:55:52.360
<v Speaker 1>used to zero. But when Greenspan post nine to eleven

0:55:52.400 --> 0:55:56.359
<v Speaker 1>took rates down to under two percent for three years

0:55:56.360 --> 0:55:59.439
<v Speaker 1>and under one percent for a year that was really

0:55:59.480 --> 0:56:02.719
<v Speaker 1>we hadn't seen anything like that for decades and decades

0:56:03.280 --> 0:56:05.799
<v Speaker 1>and zero. No one knew how to deal with that.

0:56:05.840 --> 0:56:10.759
<v Speaker 1>And then once we started seeing negative you know bonds,

0:56:10.800 --> 0:56:14.000
<v Speaker 1>like well, you lend us money and you pay us

0:56:14.040 --> 0:56:17.200
<v Speaker 1>to hold it, like wait what? And I think that

0:56:17.280 --> 0:56:22.680
<v Speaker 1>caused all sorts of problems around the world, and people

0:56:22.840 --> 0:56:24.480
<v Speaker 1>just didn't know how to contextualize.

0:56:24.560 --> 0:56:27.480
<v Speaker 2>And to your point on behavior, I think something we

0:56:27.480 --> 0:56:30.120
<v Speaker 2>talked about earlier were the sample size here are small.

0:56:30.160 --> 0:56:32.520
<v Speaker 2>I think if you took the market to where it

0:56:32.640 --> 0:56:35.359
<v Speaker 2>was a decade ago and said Fed's bringing rates back down,

0:56:35.440 --> 0:56:38.400
<v Speaker 2>the world's bringing rates back down, people would look backwards

0:56:38.400 --> 0:56:39.920
<v Speaker 2>with the playbook and say, we're going to just do

0:56:39.960 --> 0:56:43.080
<v Speaker 2>all that again, right, and markets would not respond the

0:56:43.120 --> 0:56:45.920
<v Speaker 2>same way. They would probably do everything in an accelerated fashion,

0:56:46.400 --> 0:56:49.560
<v Speaker 2>but you wouldn't get the same result because people's behavior

0:56:49.600 --> 0:56:53.359
<v Speaker 2>would adapt to that previous sample. And so it's it's

0:56:53.520 --> 0:56:55.959
<v Speaker 2>very complex of how these things work.

0:56:56.120 --> 0:56:59.440
<v Speaker 1>A little reflexivity in that. Although you could make the

0:56:59.560 --> 0:57:03.680
<v Speaker 1>argument that in March twenty twenty, down thirty four percent

0:57:03.760 --> 0:57:07.640
<v Speaker 1>and it felt like six weeks, people look back to

0:57:08.080 --> 0:57:10.840
<v Speaker 1>nine and said, oh, I got to be a buyer

0:57:11.200 --> 0:57:14.319
<v Speaker 1>because the last time we saw a big crash, the

0:57:14.360 --> 0:57:17.680
<v Speaker 1>FED rescued the markets, or the FED did this and

0:57:17.880 --> 0:57:20.840
<v Speaker 1>ultimately led to that maybe rescue was too over simple.

0:57:22.120 --> 0:57:26.760
<v Speaker 1>But isn't this why everything eventually gets arbitraged away? Don't

0:57:27.360 --> 0:57:30.800
<v Speaker 1>the playback from the last cycle the playbook not work

0:57:30.840 --> 0:57:33.280
<v Speaker 1>in the next cycle because hey, we've kind of figured

0:57:33.280 --> 0:57:33.720
<v Speaker 1>this out.

0:57:34.200 --> 0:57:36.600
<v Speaker 2>I'm not sure we've ever figured it out, but again,

0:57:36.640 --> 0:57:39.040
<v Speaker 2>I think a lot of this does get does get

0:57:39.080 --> 0:57:41.280
<v Speaker 2>priced in. The whole idea of markets are they're supposed

0:57:41.280 --> 0:57:44.480
<v Speaker 2>to be efficient information discovery machines, and they have proven

0:57:44.560 --> 0:57:49.240
<v Speaker 2>to be tremendously powerful and efficient allocators of capital over

0:57:49.280 --> 0:57:51.360
<v Speaker 2>the long run. It's the best machine we've gotten, so

0:57:51.800 --> 0:57:53.560
<v Speaker 2>I certainly wouldn't bet against that machine.

0:57:53.920 --> 0:57:57.680
<v Speaker 1>Let's talk a little bit about your ETFs and return stacking.

0:57:58.400 --> 0:58:03.120
<v Speaker 1>Starting with the first question is why pivot from pure

0:58:03.160 --> 0:58:07.840
<v Speaker 1>research to managing assets? And why if you're managing assets,

0:58:08.160 --> 0:58:10.480
<v Speaker 1>did you go into the ETF side of it.

0:58:11.880 --> 0:58:14.560
<v Speaker 2>The shift from pure research to managing assets, I think

0:58:14.600 --> 0:58:18.000
<v Speaker 2>is one that a lot of people ultimately make. When

0:58:18.040 --> 0:58:20.720
<v Speaker 2>you're just providing research, you really don't have any control

0:58:20.760 --> 0:58:24.600
<v Speaker 2>over distribution, messaging. Often you don't have control over how

0:58:24.640 --> 0:58:26.840
<v Speaker 2>your research is being used, and if you're the one

0:58:26.960 --> 0:58:30.080
<v Speaker 2>doing the research, you often have the best idea of

0:58:30.120 --> 0:58:32.080
<v Speaker 2>how it should be implemented, or at least you believe

0:58:32.080 --> 0:58:35.880
<v Speaker 2>you do. It's not quite like selling data or raw data.

0:58:35.960 --> 0:58:38.360
<v Speaker 2>You're selling a manipulated form of data that you think

0:58:38.400 --> 0:58:41.920
<v Speaker 2>potentially has some edge or some utility, and you want

0:58:41.920 --> 0:58:44.880
<v Speaker 2>to make sure that gets expressed correctly. And then frankly,

0:58:44.920 --> 0:58:47.720
<v Speaker 2>there's probably a little bit of ego in there, going Okay,

0:58:47.760 --> 0:58:49.560
<v Speaker 2>I want to get closer to the action. I actually

0:58:49.600 --> 0:58:51.600
<v Speaker 2>want to implement the portfolios that I want to implement.

0:58:51.880 --> 0:58:54.680
<v Speaker 2>I think I've got some good ideas for bringing some

0:58:55.080 --> 0:58:59.000
<v Speaker 2>strategies to market. And so over time we went from

0:58:59.240 --> 0:59:03.280
<v Speaker 2>will provide research search to will be an index provider too,

0:59:03.320 --> 0:59:07.520
<v Speaker 2>will be a subadvisor, to we'll launch our own funds

0:59:08.240 --> 0:59:11.919
<v Speaker 2>and I will say to my discredit I originally launched

0:59:11.920 --> 0:59:14.960
<v Speaker 2>a suite of mutual funds right, which was for someone

0:59:14.960 --> 0:59:17.840
<v Speaker 2>who grew up in the world of ETFs and was

0:59:17.840 --> 0:59:22.600
<v Speaker 2>helping run ETF model portfolios. Talk about a dumb business move.

0:59:22.880 --> 0:59:26.400
<v Speaker 1>What motivated you to go mutual funds over ETFs?

0:59:26.600 --> 0:59:30.800
<v Speaker 2>So it was twenty thirteen, and what concerned me about

0:59:31.400 --> 0:59:33.840
<v Speaker 2>standing up ETFs is at the time we didn't have

0:59:35.360 --> 0:59:39.040
<v Speaker 2>firms like ETF architect or our friend West Gray or

0:59:39.080 --> 0:59:43.880
<v Speaker 2>Title that were helping with the administration. My concern of

0:59:43.920 --> 0:59:46.040
<v Speaker 2>setting up my own ETF was that I was going

0:59:46.080 --> 0:59:48.680
<v Speaker 2>to have to handle all the inter date trading of

0:59:48.800 --> 0:59:51.880
<v Speaker 2>the creation of redemption baskets. It was going to require

0:59:51.920 --> 0:59:55.080
<v Speaker 2>me to hire a whole op staff that I candily

0:59:55.080 --> 0:59:57.920
<v Speaker 2>didn't have the experience or know how to manage. And

0:59:57.960 --> 1:00:00.800
<v Speaker 2>I said, versus the mutual fund.

1:00:01.000 --> 1:00:02.720
<v Speaker 1>Which is a little simpler, little clean.

1:00:02.640 --> 1:00:04.720
<v Speaker 2>Which is a little simpler, little cleaner, and there was

1:00:04.760 --> 1:00:07.040
<v Speaker 2>a well trodden path of bringing mutual funds to market.

1:00:07.120 --> 1:00:10.120
<v Speaker 2>So that was twenty thirteen, and again I just didn't

1:00:10.120 --> 1:00:12.520
<v Speaker 2>feel like being the one who was going bush whacking

1:00:12.520 --> 1:00:14.640
<v Speaker 2>to figure out how to do this. I should have.

1:00:15.200 --> 1:00:18.320
<v Speaker 1>How long did it take you to realize, Hey, ETFs

1:00:18.320 --> 1:00:21.280
<v Speaker 1>are a more efficient especially if there's any sort of turnover.

1:00:21.720 --> 1:00:25.560
<v Speaker 1>ETFs are a more efficient model, and I can make

1:00:25.640 --> 1:00:27.600
<v Speaker 1>this work at a similar price.

1:00:27.760 --> 1:00:30.840
<v Speaker 2>So I absolutely knew from day one ETFs were a

1:00:30.880 --> 1:00:33.720
<v Speaker 2>more efficient model. I think it probably took me two

1:00:33.840 --> 1:00:36.880
<v Speaker 2>or three years to say I've chosen the wrong vehicle,

1:00:37.760 --> 1:00:41.800
<v Speaker 2>not just from a tax efficiency perspective, but from an

1:00:42.120 --> 1:00:47.560
<v Speaker 2>appetite perspective. Twenty thirteen, people really started to go, I

1:00:47.560 --> 1:00:50.240
<v Speaker 2>don't even want to talk about mutual funds anymore. If

1:00:50.240 --> 1:00:53.040
<v Speaker 2>it's not in an ETF, don't talk to me. By

1:00:53.120 --> 1:00:56.360
<v Speaker 2>twenty seventeen, twenty eighteen, we were having conversations with firms

1:00:56.400 --> 1:00:59.959
<v Speaker 2>that said, we only invest in ETF's ETF model portfolios only.

1:01:00.280 --> 1:01:01.720
<v Speaker 2>And by the way, I've got a whole spiel on

1:01:01.760 --> 1:01:05.880
<v Speaker 2>this that I think that's just as misguided. Strategy and

1:01:05.960 --> 1:01:09.680
<v Speaker 2>structure need to be aligned, and there are some strategies

1:01:09.680 --> 1:01:12.360
<v Speaker 2>for which the ETF I think is definitively the wrong structure.

1:01:12.800 --> 1:01:17.040
<v Speaker 2>It's a whole different conversation. But I ultimately said, I

1:01:17.160 --> 1:01:18.680
<v Speaker 2>am you look at the flows. You can just look

1:01:18.680 --> 1:01:20.000
<v Speaker 2>at a map of the flows and say I am

1:01:20.040 --> 1:01:23.200
<v Speaker 2>selling into a dying industry. I am in the wrong

1:01:23.280 --> 1:01:26.920
<v Speaker 2>product wrapper. And so I ultimately made the decision to

1:01:27.200 --> 1:01:32.440
<v Speaker 2>shut down every fund and restart the whole company.

1:01:32.600 --> 1:01:36.040
<v Speaker 1>So as opposed to just converting them, you went that way,

1:01:36.160 --> 1:01:39.120
<v Speaker 1>the exit and the relaunch. Yeah, because part by twenty seventeen,

1:01:39.720 --> 1:01:42.120
<v Speaker 1>WES was doing a number of ETFs, a number of

1:01:42.120 --> 1:01:45.480
<v Speaker 1>other people and other organizations made it. I don't want

1:01:45.480 --> 1:01:48.600
<v Speaker 1>to say painless, but less painful to stand up in ETF.

1:01:48.760 --> 1:01:52.240
<v Speaker 2>Absolutely absolutely, Yeah. I ultimately said, I think there are

1:01:52.320 --> 1:01:55.520
<v Speaker 2>decisions I made wrong from a structure perspective, and I

1:01:55.520 --> 1:01:58.080
<v Speaker 2>think there are decisions I made wrong from an actual

1:01:58.600 --> 1:02:01.800
<v Speaker 2>product perspective. And this is where I think things can

1:02:01.840 --> 1:02:04.800
<v Speaker 2>sometimes get a little weird in this industry where a

1:02:04.840 --> 1:02:07.640
<v Speaker 2>guy like me who's a quant wants to always talk

1:02:07.640 --> 1:02:11.040
<v Speaker 2>about investment strategy. But I was listening to a podcast

1:02:11.120 --> 1:02:13.400
<v Speaker 2>the other day, an old podcast from Patrick O'Shaughnessy actually,

1:02:13.440 --> 1:02:15.960
<v Speaker 2>and he said this quote that was basically, an investment

1:02:16.000 --> 1:02:19.120
<v Speaker 2>product is more than the sum of its returns. And

1:02:19.160 --> 1:02:21.560
<v Speaker 2>what he meant by that is when people buy an

1:02:21.640 --> 1:02:25.720
<v Speaker 2>investment product a fund, yes, they're often talking about the

1:02:25.760 --> 1:02:29.560
<v Speaker 2>investment strategy in the returns, but there's also a utility

1:02:29.160 --> 1:02:32.080
<v Speaker 2>that often we don't talk about in this industry. So

1:02:32.720 --> 1:02:37.320
<v Speaker 2>why are high dividend yield products so popular? All the

1:02:37.360 --> 1:02:40.840
<v Speaker 2>math tells us we should not buy high dividend yield stocks.

1:02:40.880 --> 1:02:45.760
<v Speaker 2>They are typically an underperforming style of value, and yet

1:02:45.800 --> 1:02:48.960
<v Speaker 2>there are billions, tens of billions if not hundreds of

1:02:48.960 --> 1:02:53.960
<v Speaker 2>billions of dollars in high dividend yield ETFs because people

1:02:54.000 --> 1:02:58.880
<v Speaker 2>are expressing a utility that they just like getting that

1:02:58.920 --> 1:03:02.160
<v Speaker 2>dividend paid to them ever month. Could they synthetically create

1:03:02.200 --> 1:03:06.120
<v Speaker 2>that their own dividend, Absolutely, but they're lazy for back

1:03:06.160 --> 1:03:07.480
<v Speaker 2>of the lack of a letter word, and they like

1:03:07.480 --> 1:03:10.280
<v Speaker 2>the consistency, and there's utility in that, even though it's

1:03:10.720 --> 1:03:13.840
<v Speaker 2>from a return perspective suboptimal. And that's hard for people

1:03:13.920 --> 1:03:18.280
<v Speaker 2>like me sometimes to look at and say, no, I

1:03:18.320 --> 1:03:20.760
<v Speaker 2>need to teach you to do a better way. Let

1:03:21.200 --> 1:03:23.080
<v Speaker 2>me educate you as to why you're wrong instead of

1:03:23.080 --> 1:03:25.280
<v Speaker 2>saying no. That actually has really good product market fit

1:03:25.680 --> 1:03:28.560
<v Speaker 2>for what the end buyer wants. And so I think

1:03:28.600 --> 1:03:33.720
<v Speaker 2>I had made some poor product design decisions.

1:03:34.280 --> 1:03:38.360
<v Speaker 1>So let's talk a little bit about what return stacking is,

1:03:39.000 --> 1:03:43.960
<v Speaker 1>how it's similar and different to portable alpha. Let's start out.

1:03:43.960 --> 1:03:46.080
<v Speaker 1>You wrote a really well received white paper on the

1:03:46.200 --> 1:03:51.520
<v Speaker 1>entire concept of return stacking. Give us this simple explanation

1:03:51.600 --> 1:03:52.600
<v Speaker 1>of what this is.

1:03:53.040 --> 1:03:55.720
<v Speaker 2>It's all credit goes to my colleigu Rodrigo Gordillo for

1:03:55.760 --> 1:03:58.640
<v Speaker 2>coming up with the phrase return stacking, because I think

1:03:58.640 --> 1:04:01.840
<v Speaker 2>it's it's a more generalized form, but I think it's

1:04:01.880 --> 1:04:05.680
<v Speaker 2>much more approachable than portable alpha. Right, portable alpha, you

1:04:05.680 --> 1:04:08.160
<v Speaker 2>need to understand what alpha is. What is porting do?

1:04:08.760 --> 1:04:12.280
<v Speaker 2>If I say I'm stacking returns, I'm stacking the returns

1:04:12.280 --> 1:04:15.440
<v Speaker 2>of gold on top of the SMP, you can probably

1:04:15.480 --> 1:04:18.000
<v Speaker 2>guess that one plus one equus two. It sort of

1:04:18.000 --> 1:04:20.000
<v Speaker 2>sounds like math, and that's effectively what we're trying to do.

1:04:20.040 --> 1:04:21.919
<v Speaker 2>It goes back to the problem we were talking about

1:04:21.960 --> 1:04:27.160
<v Speaker 2>earlier of trying to solve this addition through subtraction issue

1:04:27.480 --> 1:04:33.360
<v Speaker 2>with diversification. How do I get an industry that disagrees

1:04:33.400 --> 1:04:37.360
<v Speaker 2>on everything except for diversification is good to add more

1:04:37.360 --> 1:04:41.400
<v Speaker 2>diversification to their portfolio? Right? You talk to anyone and

1:04:41.440 --> 1:04:44.040
<v Speaker 2>they'll say, yeah, all else held equal, we want more diversification.

1:04:44.120 --> 1:04:46.840
<v Speaker 2>Then you go look at their portfolio. It's basically the

1:04:46.880 --> 1:04:48.640
<v Speaker 2>S and P five hundred in bonds and there's nothing

1:04:49.840 --> 1:04:52.080
<v Speaker 2>necessarily wrong with that. But the question is can we

1:04:52.160 --> 1:04:57.280
<v Speaker 2>go further to introduce diversifiers that can improve both the

1:04:57.720 --> 1:05:00.360
<v Speaker 2>consistency with which we can achieve our outcomes and the

1:05:00.440 --> 1:05:03.720
<v Speaker 2>return potential. And so return stacking at its core is

1:05:03.760 --> 1:05:07.480
<v Speaker 2>trying to take the institutional concept of portable alpha and

1:05:07.520 --> 1:05:11.200
<v Speaker 2>bring it downstream. Because institutions to implement that concept have

1:05:11.320 --> 1:05:15.040
<v Speaker 2>to buy futures and swaps and manage all these separate accounts.

1:05:15.720 --> 1:05:19.400
<v Speaker 2>What we've tried to do is prepackage that concept into

1:05:19.480 --> 1:05:20.520
<v Speaker 2>a suite of ETFs.

1:05:21.520 --> 1:05:25.160
<v Speaker 1>So, so you the white paper comes out, Wisdom Tree

1:05:25.240 --> 1:05:27.520
<v Speaker 1>launches a product related to this. Did you have anything

1:05:27.560 --> 1:05:28.040
<v Speaker 1>to do with that?

1:05:28.320 --> 1:05:31.520
<v Speaker 2>So back in twenty seventeen, you and I, I don't

1:05:31.520 --> 1:05:32.760
<v Speaker 2>know if you remember this, You and I were going

1:05:32.840 --> 1:05:37.000
<v Speaker 2>to Baron's round table, uh huh called what's next for ETFs?

1:05:37.440 --> 1:05:41.080
<v Speaker 2>And at that roundtable, I said, uh oh, I said,

1:05:41.520 --> 1:05:45.400
<v Speaker 2>I think what's next for etf are capital efficient ETFs.

1:05:45.960 --> 1:05:49.240
<v Speaker 2>And the example I gave was buy the you know,

1:05:49.280 --> 1:05:52.760
<v Speaker 2>instead of having a stock and bond fund, this fund

1:05:52.840 --> 1:05:56.560
<v Speaker 2>could buy the S and P and overlay with treasury futures.

1:05:56.600 --> 1:05:59.040
<v Speaker 2>And so if you give it a dollar, it's going

1:05:59.120 --> 1:06:01.200
<v Speaker 2>to give you, say, nine dents of the SMP and

1:06:01.240 --> 1:06:04.640
<v Speaker 2>sixty cents of treasury futures, giving you a ninety sixty

1:06:04.720 --> 1:06:06.760
<v Speaker 2>at one point five times lever at sixty forty. And

1:06:06.800 --> 1:06:09.040
<v Speaker 2>the idea there is, okay, you can put two thirds

1:06:09.040 --> 1:06:12.440
<v Speaker 2>of your money in that fund, get a sixty forty exposure,

1:06:12.600 --> 1:06:13.960
<v Speaker 2>and then you can take that one third of your

1:06:14.000 --> 1:06:16.160
<v Speaker 2>cash and do whatever. You can leave it in cash

1:06:16.160 --> 1:06:17.880
<v Speaker 2>if you just like sitting on cash, or you can

1:06:17.880 --> 1:06:23.760
<v Speaker 2>invest it in alternatives implementing portable alpha. Jeremy Schwartz, who's

1:06:23.800 --> 1:06:26.360
<v Speaker 2>a good friend of both of ours, showed that article

1:06:26.400 --> 1:06:28.280
<v Speaker 2>around internally. It was. We had a whole bunch of

1:06:28.320 --> 1:06:31.880
<v Speaker 2>Twitter conversations about it. Next thing you know, he says, Hey, Corey,

1:06:32.040 --> 1:06:34.640
<v Speaker 2>I'm launching a product on this, and the Wisdom Tree

1:06:34.720 --> 1:06:35.840
<v Speaker 2>and TSX fund was born.

1:06:35.920 --> 1:06:40.600
<v Speaker 1>I recall I recall Jeremy subsequently launching that. I hope

1:06:40.600 --> 1:06:44.480
<v Speaker 1>they at least tossed you a bone and consulting something.

1:06:45.080 --> 1:06:47.040
<v Speaker 2>Jeremy had me on a couple of podcasts to talk

1:06:47.080 --> 1:06:47.440
<v Speaker 2>about it.

1:06:47.480 --> 1:06:50.040
<v Speaker 1>There you go. I hope I didn't say anything too

1:06:50.080 --> 1:06:52.320
<v Speaker 1>stupid at that roundtable. I can remember that up on

1:06:52.560 --> 1:06:55.560
<v Speaker 1>sixty Avenue. Yeah, right, get by their offices.

1:06:55.920 --> 1:06:58.720
<v Speaker 2>That's right, it was. And I actually have been using

1:06:58.720 --> 1:07:01.640
<v Speaker 2>my headshot from that pracle since then, which.

1:07:01.800 --> 1:07:03.480
<v Speaker 1>I got a couple of great photos from that.

1:07:03.760 --> 1:07:06.520
<v Speaker 2>So I didn't realize this is like a Pulitzer Prize

1:07:06.560 --> 1:07:09.600
<v Speaker 2>winning photographer who Yeah, took our photos. They're the best

1:07:09.640 --> 1:07:12.280
<v Speaker 2>headshots I've ever had, same saying, and finally I said,

1:07:12.320 --> 1:07:16.280
<v Speaker 2>it's seven years later, I'm officially catfishing people with this photo.

1:07:16.320 --> 1:07:18.320
<v Speaker 2>I don't look anything like this anymore.

1:07:18.440 --> 1:07:21.640
<v Speaker 1>Every now and then I will see something show up

1:07:21.760 --> 1:07:25.000
<v Speaker 1>on a bio at some event for me and I'm like, dude,

1:07:25.040 --> 1:07:30.160
<v Speaker 1>that's twenty years old. I'm not only grayer and twenty

1:07:30.160 --> 1:07:33.360
<v Speaker 1>pounds lighter than then, but like, I look nothing like

1:07:33.400 --> 1:07:36.720
<v Speaker 1>that anymore. It's like, wow, we found that online. So yeah,

1:07:36.760 --> 1:07:38.400
<v Speaker 1>I know exactly what you're telling.

1:07:38.440 --> 1:07:40.080
<v Speaker 2>So I had to get rid of that one. So yeah,

1:07:40.120 --> 1:07:42.280
<v Speaker 2>So that was the birth of the NTSX fund, and

1:07:43.320 --> 1:07:45.960
<v Speaker 2>I was super happy to see Wisdom treat do that

1:07:45.960 --> 1:07:49.200
<v Speaker 2>because I really do believe that this is a whole

1:07:49.280 --> 1:07:52.520
<v Speaker 2>category of products that has not existed really before. There's

1:07:52.560 --> 1:07:56.520
<v Speaker 2>a couple of select examples, but really should be a

1:07:56.640 --> 1:08:00.680
<v Speaker 2>whole part of the industry. Because again, Institute have used

1:08:00.720 --> 1:08:04.680
<v Speaker 2>this concept for forty years and use it very effectively

1:08:05.280 --> 1:08:07.680
<v Speaker 2>to be able to say to an investor, hey, I

1:08:07.760 --> 1:08:10.320
<v Speaker 2>think a strategy like managed futures trend following adds a

1:08:10.320 --> 1:08:13.160
<v Speaker 2>lot of value to your portfolio, and no longer do

1:08:13.200 --> 1:08:15.240
<v Speaker 2>I have to sell some stocks and bonds to make room.

1:08:15.600 --> 1:08:17.120
<v Speaker 2>I can let you keep your stocks and bonds, and

1:08:17.160 --> 1:08:19.400
<v Speaker 2>I'm going to add a ten percent allocation on top.

1:08:20.760 --> 1:08:22.960
<v Speaker 2>When managed futures go through a lost decade like they

1:08:22.960 --> 1:08:25.679
<v Speaker 2>did in the twenty tens, the investor will barely notice

1:08:25.680 --> 1:08:28.840
<v Speaker 2>it and they'll be able to stay in it for

1:08:29.000 --> 1:08:30.400
<v Speaker 2>when man features does well in a year like.

1:08:30.400 --> 1:08:33.679
<v Speaker 1>Twenty So that's the behavioral component of this. How does

1:08:33.720 --> 1:08:37.640
<v Speaker 1>this differ just from straight up leverage? It sounds like

1:08:37.680 --> 1:08:40.240
<v Speaker 1>we're turn stacking has a big leverage component.

1:08:40.320 --> 1:08:44.240
<v Speaker 2>It is. It is absolutely leverage. I think the idea

1:08:44.240 --> 1:08:46.559
<v Speaker 2>here is, again leverage is a tool that accentuates the

1:08:46.600 --> 1:08:49.120
<v Speaker 2>good and the bad. We want to be very thoughtful

1:08:49.640 --> 1:08:52.280
<v Speaker 2>about what we're stacking on top. So if you're a

1:08:52.320 --> 1:08:56.080
<v Speaker 2>sixty forty investor, I certainly would not say use this

1:08:56.160 --> 1:08:58.720
<v Speaker 2>concept to stack more equities, You're probably just going to

1:08:58.800 --> 1:09:01.480
<v Speaker 2>get in trouble. But if you can use this concept

1:09:01.479 --> 1:09:06.639
<v Speaker 2>to stack diversifiers like commodities and gold, historically that hasn't

1:09:06.680 --> 1:09:08.120
<v Speaker 2>been an issue. And in fact, I would point to

1:09:08.160 --> 1:09:10.200
<v Speaker 2>the Bridgewater All Weather Fund right.

1:09:10.040 --> 1:09:12.320
<v Speaker 1>Who takes the twenty five percent gold.

1:09:12.040 --> 1:09:14.640
<v Speaker 2>And takes this concept to the extreme and runs with

1:09:15.360 --> 1:09:18.160
<v Speaker 2>significant amount of notional leverage with the idea they're trying

1:09:18.160 --> 1:09:22.439
<v Speaker 2>to risk balance all the variety of asset classes. And

1:09:22.479 --> 1:09:25.719
<v Speaker 2>it held up incredibly well during two thousand and eight

1:09:25.840 --> 1:09:28.720
<v Speaker 2>despite having so much leverage. And it's because they're using

1:09:28.800 --> 1:09:32.400
<v Speaker 2>leverage to unlock the benefits of diversification rather than using

1:09:32.479 --> 1:09:34.320
<v Speaker 2>leverage to amplify returns.

1:09:34.400 --> 1:09:36.479
<v Speaker 1>Gotcha, that makes a lot of sense. So you currently

1:09:36.880 --> 1:09:41.280
<v Speaker 1>are running five different return stacked ETFs. Do they each

1:09:41.320 --> 1:09:45.080
<v Speaker 1>have a different goal? How do different combinations work? And

1:09:45.120 --> 1:09:47.640
<v Speaker 1>what are we seven hundred eight hundred million dollars.

1:09:47.320 --> 1:09:50.800
<v Speaker 2>Just clipped over eight hundred million dollars launched I guess

1:09:50.840 --> 1:09:54.280
<v Speaker 2>eighteen twenty months ago. So we're very happy and pleased

1:09:54.280 --> 1:09:56.880
<v Speaker 2>with the growth, and I think it speaks to people

1:09:56.960 --> 1:09:59.120
<v Speaker 2>understanding what we're trying to do in this new form

1:09:59.160 --> 1:10:02.559
<v Speaker 2>of diversification, trying to build talking about getting a little

1:10:02.560 --> 1:10:03.920
<v Speaker 2>bit smarter on the product side.

1:10:04.000 --> 1:10:04.400
<v Speaker 1>Mm hmm.

1:10:05.640 --> 1:10:07.479
<v Speaker 2>One of the things I think I underappreciated earlier in

1:10:07.560 --> 1:10:10.680
<v Speaker 2>my career is that advisors and allocators want control in

1:10:10.720 --> 1:10:13.800
<v Speaker 2>their portfolio. And so with this new suite, what we've

1:10:13.840 --> 1:10:15.400
<v Speaker 2>tried to come out with is what I would call

1:10:15.560 --> 1:10:18.400
<v Speaker 2>very much a lego or building block approach, where each

1:10:18.520 --> 1:10:23.000
<v Speaker 2>product is very narrowly focused so that allocators can use

1:10:23.040 --> 1:10:24.920
<v Speaker 2>them how they want. So I'll just give two really

1:10:25.000 --> 1:10:29.479
<v Speaker 2>quick examples. We have one fund that for every dollar

1:10:29.520 --> 1:10:32.000
<v Speaker 2>you invest with US, we'll give you what is effectively

1:10:32.040 --> 1:10:35.760
<v Speaker 2>a dollar of passive large cap US equities plus a

1:10:35.840 --> 1:10:39.439
<v Speaker 2>dollar of a managed future's trend following strategy. We have

1:10:39.520 --> 1:10:41.880
<v Speaker 2>another fund that for every dollar you invest with US,

1:10:42.000 --> 1:10:44.599
<v Speaker 2>will give you a dollar of core US fixed income

1:10:45.439 --> 1:10:48.880
<v Speaker 2>plus a dollar of MANAED futures trend following same MANA

1:10:49.000 --> 1:10:51.880
<v Speaker 2>futures trend following on top, but one gives you the

1:10:51.920 --> 1:10:55.519
<v Speaker 2>S and P one gives you bonds as the bottom layer.

1:10:55.720 --> 1:10:58.600
<v Speaker 1>So that would allow someone to say, I want to

1:10:58.600 --> 1:11:02.000
<v Speaker 1>own both managed future and either I'm bullish and i

1:11:02.040 --> 1:11:05.120
<v Speaker 1>want equity, or I'm conservative and I'm embarish and i

1:11:05.120 --> 1:11:05.719
<v Speaker 1>want bonds.

1:11:05.840 --> 1:11:08.000
<v Speaker 2>I would go the other way, which is you're a

1:11:08.120 --> 1:11:12.280
<v Speaker 2>very aggressive investor, you're let's say a growth client eighty twenty.

1:11:12.600 --> 1:11:16.120
<v Speaker 2>You just have more equities around it's easier to potentially

1:11:16.160 --> 1:11:19.679
<v Speaker 2>overlay your equities than it is on bonds. Or you're

1:11:19.840 --> 1:11:22.559
<v Speaker 2>a very conservative investor, you just have more bonds around,

1:11:23.280 --> 1:11:25.679
<v Speaker 2>or you have a strong view that you can add

1:11:25.760 --> 1:11:29.200
<v Speaker 2>alpha in your bond managers. But you're never going to

1:11:29.240 --> 1:11:31.120
<v Speaker 2>beat the S and P five hundred. So take that

1:11:31.160 --> 1:11:33.400
<v Speaker 2>passive S and P five hundred and buy our fund.

1:11:33.640 --> 1:11:36.200
<v Speaker 2>You get the SMP back with the MANA features on top,

1:11:36.400 --> 1:11:38.599
<v Speaker 2>because you don't want to do it with bonds because

1:11:38.640 --> 1:11:40.639
<v Speaker 2>you think your bond manager is going to add value.

1:11:40.880 --> 1:11:44.400
<v Speaker 2>So again I'm being non prescriptive in the products I'm

1:11:44.400 --> 1:11:46.920
<v Speaker 2>bringing to market. I'm letting people say I like the

1:11:46.960 --> 1:11:50.240
<v Speaker 2>concept of adding an overlay. How I want to express

1:11:50.280 --> 1:11:52.479
<v Speaker 2>and where I want to express, and the size with

1:11:52.520 --> 1:11:55.240
<v Speaker 2>which I want to express. That's a conversation and a

1:11:55.280 --> 1:11:57.719
<v Speaker 2>dialogue we have when we consult with our clients.

1:11:57.800 --> 1:12:00.400
<v Speaker 1>So a couple of questions on that. First, who are

1:12:00.439 --> 1:12:05.400
<v Speaker 1>the typical clients are these institutions? Are they arias who

1:12:05.600 --> 1:12:09.840
<v Speaker 1>wants the sort of return stacking in their either their

1:12:09.840 --> 1:12:12.760
<v Speaker 1>core portfolio or any of their satellite.

1:12:12.320 --> 1:12:15.040
<v Speaker 2>Hold Yeah, it's really funny, so you would think potentially

1:12:15.040 --> 1:12:17.760
<v Speaker 2>with institutions, And we have lots of calls with institutions

1:12:17.800 --> 1:12:19.800
<v Speaker 2>and they all say the same thing, which is, we

1:12:19.880 --> 1:12:22.719
<v Speaker 2>love this and we also do it ourselves. We don't

1:12:22.840 --> 1:12:26.320
<v Speaker 2>need to buy an ETF. Really, they're doing it the

1:12:26.320 --> 1:12:28.280
<v Speaker 2>way they've historically done it, which is they have banking

1:12:28.320 --> 1:12:30.840
<v Speaker 2>relationships and they manage the futures and the swaps, and

1:12:31.160 --> 1:12:34.479
<v Speaker 2>so they don't need a product like an ETF. So

1:12:35.479 --> 1:12:37.559
<v Speaker 2>where we tend to see and have seen all the

1:12:37.560 --> 1:12:42.800
<v Speaker 2>flows is independent arias who are saying, I'm trying to

1:12:42.800 --> 1:12:47.719
<v Speaker 2>figure out how to get diversification. I like alternatives, but man,

1:12:47.960 --> 1:12:50.080
<v Speaker 2>it is hard to say to my client for the

1:12:50.120 --> 1:12:52.599
<v Speaker 2>fifth time when they point to that managed futures fund

1:12:52.640 --> 1:12:54.800
<v Speaker 2>as a line item and they say, why in the

1:12:54.840 --> 1:12:58.240
<v Speaker 2>world do we have this right? And you're saying, well,

1:12:58.400 --> 1:13:00.680
<v Speaker 2>because diversification.

1:13:00.080 --> 1:13:01.640
<v Speaker 1>In the next cycle, right.

1:13:01.840 --> 1:13:05.320
<v Speaker 2>Brian Portnoy says, diversification means always having to say you're sorry.

1:13:06.240 --> 1:13:08.800
<v Speaker 2>And if you are an advisor running a business and

1:13:08.800 --> 1:13:11.160
<v Speaker 2>you're saying sorry to your clients too much, that's a

1:13:11.160 --> 1:13:13.840
<v Speaker 2>great way to get fired. There's just real business risk there.

1:13:14.120 --> 1:13:16.439
<v Speaker 2>And so what we're finding is not only I think,

1:13:16.439 --> 1:13:19.360
<v Speaker 2>do we make a compelling value proposition of Hey, this

1:13:19.439 --> 1:13:22.160
<v Speaker 2>is an interesting way of trying to add returns to

1:13:22.200 --> 1:13:24.719
<v Speaker 2>your portfolio. The portable alpha sense. Do you think managed

1:13:24.760 --> 1:13:27.799
<v Speaker 2>futures generates two hundred three hundred basis points of excess

1:13:27.840 --> 1:13:30.760
<v Speaker 2>returns over time. Why are you picking stocks? Just buy

1:13:30.760 --> 1:13:32.479
<v Speaker 2>the S and P five hundred and add man futures

1:13:32.520 --> 1:13:35.800
<v Speaker 2>on top. But for the diversifiers, they're going, this is

1:13:35.840 --> 1:13:39.680
<v Speaker 2>a great way to introduce my alternatives without giving up

1:13:39.720 --> 1:13:43.000
<v Speaker 2>all the beta and having that return hurdle issue and

1:13:43.040 --> 1:13:44.639
<v Speaker 2>having that behavioral friction issue.

1:13:44.800 --> 1:13:49.920
<v Speaker 1>So you have US equity with managed futures, you have

1:13:50.520 --> 1:13:53.280
<v Speaker 1>US bonds with managed futures. What are the other ETFs?

1:13:53.320 --> 1:13:55.760
<v Speaker 2>We have a US equity plus what we would call

1:13:55.760 --> 1:13:58.799
<v Speaker 2>it a multi asset carry strategy. This is so managed

1:13:58.800 --> 1:14:01.880
<v Speaker 2>futures is typically done with trend following signals. It can

1:14:01.920 --> 1:14:04.280
<v Speaker 2>also be done with what's called the carry signal, which

1:14:04.320 --> 1:14:06.080
<v Speaker 2>is you can sort of think of carry as your yield.

1:14:06.360 --> 1:14:07.880
<v Speaker 2>What's the return you're going to get if the world

1:14:07.960 --> 1:14:12.320
<v Speaker 2>doesn't change, and so carry signals can be powerful predictors

1:14:12.320 --> 1:14:15.160
<v Speaker 2>of total returns. So it's just a different quant signal.

1:14:15.320 --> 1:14:19.600
<v Speaker 2>It behaves differently, trades a similar universe of currencies and

1:14:19.640 --> 1:14:23.040
<v Speaker 2>commodities and equities and rates around the world. So it's

1:14:23.240 --> 1:14:26.320
<v Speaker 2>long short just a different quant signal. So we have

1:14:26.360 --> 1:14:29.240
<v Speaker 2>a US plus that we have a bonds plus that

1:14:29.320 --> 1:14:32.559
<v Speaker 2>multi asse carry. And then the final piece is what

1:14:32.600 --> 1:14:35.040
<v Speaker 2>I consider to be our most flexible portfolio, which is

1:14:35.200 --> 1:14:36.840
<v Speaker 2>just you give us a dollar, We'll give you a

1:14:36.840 --> 1:14:40.080
<v Speaker 2>dollar of as passively allocated as we can global stocks,

1:14:40.640 --> 1:14:43.439
<v Speaker 2>plus a ladder of US treasuries. And the idea there

1:14:43.560 --> 1:14:47.360
<v Speaker 2>is not to say, let's stack bonds on top of

1:14:47.360 --> 1:14:51.120
<v Speaker 2>equities in your portfolio. The idea there is to say

1:14:51.240 --> 1:14:55.320
<v Speaker 2>that is an incredibly powerful capital efficiency tool that allows

1:14:55.400 --> 1:14:58.479
<v Speaker 2>you to stack whatever you want. So let me give

1:14:58.479 --> 1:15:00.960
<v Speaker 2>you a really quick example. Let's say you've got a

1:15:01.000 --> 1:15:04.439
<v Speaker 2>sixty forty portfolio sixty percent stocks, forty percent ponds. If

1:15:04.479 --> 1:15:07.639
<v Speaker 2>you sell ten percent of your stocks and ten percent

1:15:07.640 --> 1:15:10.479
<v Speaker 2>of your bonds and by ten percent of that fund,

1:15:11.080 --> 1:15:13.120
<v Speaker 2>that ten percent of that fund gives you both the

1:15:13.120 --> 1:15:15.719
<v Speaker 2>stocks and bonds back, and now you have ten percent

1:15:15.960 --> 1:15:19.320
<v Speaker 2>leftover in cash with which you can do whatever you want.

1:15:19.520 --> 1:15:22.280
<v Speaker 2>You could have it sit in cash and then sit

1:15:22.320 --> 1:15:24.519
<v Speaker 2>in tea bills, and the return of that portfolio would

1:15:24.520 --> 1:15:26.439
<v Speaker 2>be sort of the same as your sixty forty. But hey,

1:15:26.520 --> 1:15:28.760
<v Speaker 2>now you've got more cash on hand, you can do

1:15:28.800 --> 1:15:32.400
<v Speaker 2>some interesting things about self financing. Actually, because you're technically

1:15:32.400 --> 1:15:34.599
<v Speaker 2>borrowing from yourself. You can use that cash and you've

1:15:34.600 --> 1:15:37.640
<v Speaker 2>actually just taken a loan based on and it's very

1:15:37.720 --> 1:15:40.400
<v Speaker 2>attractive financing rates. The embedded rate of financing in these

1:15:40.479 --> 1:15:42.800
<v Speaker 2>futures is like T bills, So instead of borrowing from

1:15:42.800 --> 1:15:45.360
<v Speaker 2>a bank, you can actually borrow from yourself, or you

1:15:45.360 --> 1:15:48.720
<v Speaker 2>can take that cash and invest in something, hopefully for

1:15:49.160 --> 1:15:52.200
<v Speaker 2>diversification or return. But as long as whatever you're investing

1:15:52.200 --> 1:15:56.480
<v Speaker 2>in outperforms cash, you will have added value to your portfolio.

1:15:56.640 --> 1:16:00.200
<v Speaker 2>So let's say you love managed futures as a strategy,

1:16:00.280 --> 1:16:02.559
<v Speaker 2>but you don't like the way I implement Manch futures.

1:16:03.240 --> 1:16:06.960
<v Speaker 2>You love Cliff Assness at AQR, you love their fund, Well,

1:16:07.000 --> 1:16:10.680
<v Speaker 2>you can buy my Global Stocks and Bonds fund to

1:16:10.960 --> 1:16:13.880
<v Speaker 2>free up the cash to then invest in his Manch

1:16:13.920 --> 1:16:17.479
<v Speaker 2>Futures fund. And what you've effectively done is kept your

1:16:17.479 --> 1:16:21.080
<v Speaker 2>sixty forty hole and stacked his fund on top. And

1:16:21.120 --> 1:16:24.800
<v Speaker 2>so you can now stack whatever alternative asset class or

1:16:24.840 --> 1:16:28.080
<v Speaker 2>investment strategy you want with our tool.

1:16:28.560 --> 1:16:32.200
<v Speaker 1>Huh really really fascinating. The name of the company is

1:16:32.680 --> 1:16:37.000
<v Speaker 1>the Return Stacked ETF Suite. There are five different ETFs

1:16:37.040 --> 1:16:40.000
<v Speaker 1>on it. I have a couple of questions I've been

1:16:40.200 --> 1:16:44.679
<v Speaker 1>saving before we get to our favorite questions, and let's

1:16:44.760 --> 1:16:47.920
<v Speaker 1>start with something that I think is really kind of interesting.

1:16:48.880 --> 1:16:52.960
<v Speaker 1>During the pandemic, you did a video with Jason Buck

1:16:53.120 --> 1:16:57.160
<v Speaker 1>where you were discussing deep in the weeds research into

1:16:57.360 --> 1:17:02.559
<v Speaker 1>NFTs and crypto and degenerate like I in fact, it

1:17:02.640 --> 1:17:04.560
<v Speaker 1>might have come from nadding said, oh, you got to

1:17:04.560 --> 1:17:07.400
<v Speaker 1>watch this. This is hilarious in a good way, not

1:17:07.479 --> 1:17:11.200
<v Speaker 1>a sarcastic way. What was going on with crypto and

1:17:11.320 --> 1:17:14.960
<v Speaker 1>NFT trading during the COVID lockdowns.

1:17:15.240 --> 1:17:16.760
<v Speaker 2>So Jason Buck is a good friend of mine. He

1:17:16.840 --> 1:17:20.120
<v Speaker 2>runs Mutiny Funds, and we started this podcast as he

1:17:20.160 --> 1:17:22.280
<v Speaker 2>has u UN funds Mutiny Funds.

1:17:22.960 --> 1:17:26.800
<v Speaker 1>What wasn't there another pod? Maybe it was he who

1:17:26.880 --> 1:17:29.760
<v Speaker 1>was hosting it was Pirate Capital.

1:17:29.400 --> 1:17:31.880
<v Speaker 2>Or Pirates of Finance, Pirates of Finance, So that was

1:17:32.000 --> 1:17:34.720
<v Speaker 2>Jason and I started that during the pandemic work we

1:17:34.720 --> 1:17:36.200
<v Speaker 2>weren't allowed out of our houses anymore.

1:17:36.200 --> 1:17:38.879
<v Speaker 1>I love that. I love that title of that podcast.

1:17:39.000 --> 1:17:40.559
<v Speaker 2>So that was a fun one for us where we

1:17:40.600 --> 1:17:42.960
<v Speaker 2>just said, you know, that was the era of all right,

1:17:43.000 --> 1:17:45.720
<v Speaker 2>on a Friday afternoon, let's grab a beer, chop it

1:17:45.800 --> 1:17:48.639
<v Speaker 2>up see what's going on in markets. And for folks

1:17:48.680 --> 1:17:51.559
<v Speaker 2>who weren't paying attention to the crypto markets at that time,

1:17:51.600 --> 1:17:56.479
<v Speaker 2>it was an absolutely Cambrian explosion of activity. You had

1:17:56.640 --> 1:18:00.080
<v Speaker 2>all these retail traders who started trading crypto, and and

1:18:00.120 --> 1:18:03.160
<v Speaker 2>the available functionality of what you could build in crypto

1:18:03.240 --> 1:18:06.000
<v Speaker 2>really exploded. So you not only had NFTs, but you

1:18:06.120 --> 1:18:09.960
<v Speaker 2>had all these we're called protocols or applications that were

1:18:10.240 --> 1:18:12.640
<v Speaker 2>doing all this interesting stuff. And it was a fascinating

1:18:12.680 --> 1:18:15.240
<v Speaker 2>world to explore, not only from the what does this

1:18:15.640 --> 1:18:19.160
<v Speaker 2>mean for the future, but there were some incredible trading

1:18:19.200 --> 1:18:22.879
<v Speaker 2>opportunities m hm for people who operated in traditional markets

1:18:22.920 --> 1:18:27.360
<v Speaker 2>that you would see things and say that shouldn't be

1:18:27.520 --> 1:18:31.840
<v Speaker 2>like that, that's wildly mispriced, and in any traditional market

1:18:31.880 --> 1:18:35.559
<v Speaker 2>that wouldn't exist. But okay, I'll put my money where

1:18:35.600 --> 1:18:38.320
<v Speaker 2>my mouth is. And so there was a fun trading opportunity.

1:18:38.360 --> 1:18:40.519
<v Speaker 2>I certainly wouldn't say I maximized it.

1:18:40.720 --> 1:18:44.160
<v Speaker 1>Yeah, but you're a computer science market structure guy, this

1:18:44.240 --> 1:18:45.360
<v Speaker 1>is your sweet spot.

1:18:45.280 --> 1:18:49.080
<v Speaker 2>And it's just fun. Because it was almost by definition

1:18:49.240 --> 1:18:53.479
<v Speaker 2>because of regulatory reasons, lots of parties couldn't get involved.

1:18:53.880 --> 1:18:57.160
<v Speaker 2>You had a market that was being dominated by retail.

1:18:58.280 --> 1:19:01.280
<v Speaker 2>I don't want to say I'll lower in flow, right,

1:19:01.400 --> 1:19:02.920
<v Speaker 2>more momentum driven.

1:19:02.760 --> 1:19:04.480
<v Speaker 1>Low information voters.

1:19:04.520 --> 1:19:07.160
<v Speaker 2>Just the systems weren't set up. There were limits to arbitrage,

1:19:07.200 --> 1:19:10.120
<v Speaker 2>and so you had these situations where you said, oh,

1:19:10.160 --> 1:19:12.040
<v Speaker 2>you can make a good deal of money here. And

1:19:12.080 --> 1:19:15.400
<v Speaker 2>I had friends who dropped their careers in finance and said,

1:19:16.160 --> 1:19:18.360
<v Speaker 2>I used to be a market maker for treasury futures

1:19:18.400 --> 1:19:21.200
<v Speaker 2>and I'm now a market maker for crypto and oh

1:19:21.280 --> 1:19:23.760
<v Speaker 2>now I'm retired two years later because the market's that

1:19:23.920 --> 1:19:26.320
<v Speaker 2>inefficient and all I had to do was port the

1:19:26.360 --> 1:19:29.000
<v Speaker 2>exact same skill set that was a blood bath in

1:19:29.080 --> 1:19:33.439
<v Speaker 2>traditional markets eking for every bip and it's just you're

1:19:33.479 --> 1:19:35.599
<v Speaker 2>just printing money. And it was a very limited window

1:19:35.600 --> 1:19:38.599
<v Speaker 2>that does not exist anymore. But there was this really

1:19:38.880 --> 1:19:43.439
<v Speaker 2>fascinating window of both investor behavior and opportunity in what

1:19:43.560 --> 1:19:45.479
<v Speaker 2>was developing and what it all could become.

1:19:46.400 --> 1:19:50.959
<v Speaker 1>So so I'm assuming you made a couple of shekels trading. Uh,

1:19:51.000 --> 1:19:51.320
<v Speaker 1>we had.

1:19:51.360 --> 1:19:53.519
<v Speaker 2>There were some fun trades, right, there were some fun times.

1:19:54.360 --> 1:19:58.439
<v Speaker 1>How quickly did you realize that window was closing? And

1:19:58.479 --> 1:20:02.519
<v Speaker 1>I'm assuming that was pre f X and SBFU and

1:20:02.600 --> 1:20:04.800
<v Speaker 1>Sam Bankman freed and that that mayhem.

1:20:05.080 --> 1:20:10.799
<v Speaker 2>It was probably during the Luna collapse. Again, I apologize

1:20:10.840 --> 1:20:12.040
<v Speaker 2>for folks who didn't track.

1:20:12.040 --> 1:20:14.920
<v Speaker 1>Luna is a stable coin that was supposed to just

1:20:15.000 --> 1:20:19.000
<v Speaker 1>trade at a dollar. What's his name very famously got

1:20:19.000 --> 1:20:26.400
<v Speaker 1>a tattoo, yes of it novograts and then suddenly the

1:20:26.520 --> 1:20:29.559
<v Speaker 1>rug was pulled out and it turned out to not

1:20:29.640 --> 1:20:30.439
<v Speaker 1>be all it was.

1:20:30.760 --> 1:20:34.120
<v Speaker 2>Yeah, you right, these stable coins which are away for

1:20:34.200 --> 1:20:38.160
<v Speaker 2>people to transact in what are effectively dollars on the blockchain,

1:20:38.560 --> 1:20:41.160
<v Speaker 2>some of which are actually backed by dollars and others

1:20:41.200 --> 1:20:44.240
<v Speaker 2>of which are fractionally backed or backed by a variety

1:20:44.240 --> 1:20:47.439
<v Speaker 2>of assets. And then you had what was called algorithmically

1:20:47.840 --> 1:20:51.240
<v Speaker 2>backed stable coins, and I don't think there's any success

1:20:51.280 --> 1:20:56.000
<v Speaker 2>stories there. They all blew up, right Mark Mark Cuban

1:20:56.040 --> 1:20:58.320
<v Speaker 2>famously lost a bunch of money in one of those

1:20:59.320 --> 1:21:02.320
<v Speaker 2>what was called it was called Iron Finances, was what

1:21:02.360 --> 1:21:05.000
<v Speaker 2>the it was called. And that you know, again, when

1:21:05.000 --> 1:21:08.320
<v Speaker 2>you have nothing backing a coin other than a systematic

1:21:08.320 --> 1:21:09.880
<v Speaker 2>strategy that's going to try to buy and sell the

1:21:09.920 --> 1:21:11.960
<v Speaker 2>coin to keep it within a peg, it just.

1:21:12.200 --> 1:21:15.280
<v Speaker 1>Doesn't that sound like portfolio insurance From the eighty seven

1:21:15.320 --> 1:21:19.479
<v Speaker 1>crash is nothing new old again? Is it just it's

1:21:19.640 --> 1:21:22.400
<v Speaker 1>just amazing that, Oh yeah, we'll find a way to

1:21:22.520 --> 1:21:25.040
<v Speaker 1>just hedge it as the market starts rolling off.

1:21:25.200 --> 1:21:28.400
<v Speaker 2>So you had all this abundance of hot capital in

1:21:28.479 --> 1:21:32.040
<v Speaker 2>this market that suddenly evaporated. You had very loud players

1:21:32.080 --> 1:21:36.160
<v Speaker 2>like three arrows capital that was massively over levered start

1:21:36.240 --> 1:21:40.160
<v Speaker 2>to fall apart. And as that liquidity disappears, so with

1:21:40.280 --> 1:21:43.360
<v Speaker 2>it do the abundant trading opportunities. And so that's where

1:21:43.400 --> 1:21:46.280
<v Speaker 2>it started to become clear to me. It just the

1:21:46.320 --> 1:21:48.880
<v Speaker 2>game was over. It was a game of musical chairs, right,

1:21:48.920 --> 1:21:51.160
<v Speaker 2>and the music had stopped playing, And I was like,

1:21:51.160 --> 1:21:52.760
<v Speaker 2>I'm just going to get out of the room, right,

1:21:53.000 --> 1:21:56.200
<v Speaker 2>because you know you can overtrade these things, no, to

1:21:56.240 --> 1:21:58.080
<v Speaker 2>say the very least. And also it's not my job.

1:21:58.160 --> 1:21:59.559
<v Speaker 2>I actually do have a day job.

1:21:59.640 --> 1:22:04.800
<v Speaker 1>Right, So that was kind of interesting. You're also located

1:22:05.120 --> 1:22:10.479
<v Speaker 1>in Florida, in South Florida. What's it been like being

1:22:10.680 --> 1:22:14.719
<v Speaker 1>a new dad in the midst of the west coast

1:22:14.720 --> 1:22:20.120
<v Speaker 1>of Florida that really got shellacked by three consecutive everybody's

1:22:20.160 --> 1:22:23.439
<v Speaker 1>talking about Helene, but what was a debbie over the

1:22:23.479 --> 1:22:27.200
<v Speaker 1>summer really did some big damage and then the middle one,

1:22:27.280 --> 1:22:30.120
<v Speaker 1>so it was like a triple hit. Yeah.

1:22:30.160 --> 1:22:31.960
<v Speaker 2>I mean, I live in the Tampa area and I

1:22:32.040 --> 1:22:34.479
<v Speaker 2>moved there two years ago, and I should have known

1:22:34.560 --> 1:22:37.240
<v Speaker 2>something was wrong when I originally from Boston and was

1:22:37.280 --> 1:22:42.320
<v Speaker 2>moving from Boston driving down and it was a hurricane

1:22:42.360 --> 1:22:43.840
<v Speaker 2>showed up out of nowhere, and I actually had to

1:22:43.840 --> 1:22:45.920
<v Speaker 2>stop my drive halfway down and just hang out in

1:22:45.960 --> 1:22:48.320
<v Speaker 2>North Carolina. R just heh, well, well it's one of

1:22:48.320 --> 1:22:50.880
<v Speaker 2>those they show up four or five days and you go, Okay,

1:22:50.880 --> 1:22:53.840
<v Speaker 2>I'm watching the path and it became clear, you know,

1:22:54.040 --> 1:22:57.320
<v Speaker 2>all my furniture is getting delivered the day before the

1:22:57.400 --> 1:22:59.840
<v Speaker 2>hurricane's supposed to hit. I've got a pregnant wife who

1:22:59.880 --> 1:23:02.439
<v Speaker 2>is accepting the delivery as I'm driving, you know, the

1:23:02.520 --> 1:23:05.280
<v Speaker 2>car down and and it just I was like I

1:23:05.280 --> 1:23:09.000
<v Speaker 2>should have left at that point. But most importantly, my

1:23:09.080 --> 1:23:12.200
<v Speaker 2>family is safe. Our first floor of our house got

1:23:12.200 --> 1:23:16.120
<v Speaker 2>completely destroyed, my car got totaled. It's all overshadowed by

1:23:16.240 --> 1:23:18.920
<v Speaker 2>how amazing being a father is. It's just it's hard

1:23:18.960 --> 1:23:22.320
<v Speaker 2>to complain about any of that in the grand scheme

1:23:22.360 --> 1:23:25.160
<v Speaker 2>of life of just you know, I got a new kid,

1:23:25.160 --> 1:23:26.480
<v Speaker 2>and it's amazing.

1:23:26.280 --> 1:23:28.160
<v Speaker 1>What what's the rest of the neighborhood look like.

1:23:30.280 --> 1:23:35.000
<v Speaker 2>It honestly is pretty devastating. So down near the water,

1:23:35.479 --> 1:23:37.920
<v Speaker 2>every single restaurant is just gone.

1:23:37.920 --> 1:23:40.280
<v Speaker 1>Just gone, just gone, like wiped off.

1:23:40.160 --> 1:23:43.720
<v Speaker 2>Wiped off. We had we had an eight or nine

1:23:43.760 --> 1:23:44.639
<v Speaker 2>foot storm surge.

1:23:45.080 --> 1:23:47.880
<v Speaker 1>Yeah, so not quite sandy, but pretty close.

1:23:47.720 --> 1:23:50.040
<v Speaker 2>Pretty close. So you can imagine all these beach front

1:23:50.040 --> 1:23:53.320
<v Speaker 2>tiki bars, you know, under nine feet of water, and

1:23:53.320 --> 1:23:54.200
<v Speaker 2>then the tide goes out.

1:23:54.200 --> 1:23:55.280
<v Speaker 1>It's just nothing left.

1:23:55.320 --> 1:23:59.160
<v Speaker 2>It's gone. You know, if you had a two story

1:23:59.160 --> 1:24:01.680
<v Speaker 2>house in our neighborhood, your first floor was gone and

1:24:01.720 --> 1:24:04.479
<v Speaker 2>the second floor is what remains. For those who had

1:24:04.720 --> 1:24:08.560
<v Speaker 2>single story houses, which is the majority, you know, everything

1:24:08.680 --> 1:24:12.439
<v Speaker 2>ends up on the curb. And so driving down our

1:24:12.720 --> 1:24:16.080
<v Speaker 2>neighborhood for the last I guess two months now, it's

1:24:16.200 --> 1:24:20.200
<v Speaker 2>just people's lives are on the curb. And what people

1:24:20.280 --> 1:24:23.679
<v Speaker 2>don't tell you until you live this is that sea

1:24:23.760 --> 1:24:27.479
<v Speaker 2>water is also mixed with sewage water, and so the

1:24:27.520 --> 1:24:31.840
<v Speaker 2>whole place reeks, and all the plants die because they

1:24:31.840 --> 1:24:35.559
<v Speaker 2>become so everyone's garden. So you're just driving around this

1:24:35.640 --> 1:24:38.599
<v Speaker 2>place that looks like a trash hump dump as all

1:24:38.600 --> 1:24:42.360
<v Speaker 2>the plants are dying and it smells awful. I mean,

1:24:42.400 --> 1:24:45.719
<v Speaker 2>but aside from that wonderful place. Alert, are you gonna

1:24:45.960 --> 1:24:47.400
<v Speaker 2>so you were you were renting?

1:24:47.560 --> 1:24:47.760
<v Speaker 1>Right?

1:24:47.920 --> 1:24:48.240
<v Speaker 2>Yes?

1:24:48.320 --> 1:24:50.639
<v Speaker 1>So are you gonna stay there? You can relocate? What's

1:24:50.640 --> 1:24:51.080
<v Speaker 1>the thinking?

1:24:51.280 --> 1:24:54.040
<v Speaker 2>Well, you're asking the wrong person. You should ask my wife.

1:24:54.160 --> 1:24:57.479
<v Speaker 2>I don't. I don't have executive power here. I think

1:24:57.520 --> 1:25:01.120
<v Speaker 2>we will stay in the area. We really love where

1:25:01.160 --> 1:25:04.840
<v Speaker 2>we live. Saint Pete is a wonderful area for us.

1:25:04.840 --> 1:25:08.000
<v Speaker 2>We love raising our sun there for the moment. We'll

1:25:08.000 --> 1:25:09.040
<v Speaker 2>see how it plays out.

1:25:09.200 --> 1:25:11.360
<v Speaker 1>All right, that's really interesting. All right, my last two

1:25:11.439 --> 1:25:15.559
<v Speaker 1>curve ball questions for you. At Cornell, you played rugby.

1:25:15.680 --> 1:25:16.519
<v Speaker 1>Tell us about that.

1:25:17.200 --> 1:25:21.720
<v Speaker 2>Yeah, so I grew up as a lacrosse player, got

1:25:21.760 --> 1:25:24.719
<v Speaker 2>to Cornell, and I mean the lacrosse program there is phenomenal.

1:25:24.800 --> 1:25:25.920
<v Speaker 2>I was never going to make the team.

1:25:26.200 --> 1:25:29.040
<v Speaker 1>I was, I mean a serious, serious program.

1:25:29.160 --> 1:25:31.519
<v Speaker 2>Yeah, and I've always enjoyed being athletics. So I was

1:25:31.560 --> 1:25:33.880
<v Speaker 2>looking around what to do and.

1:25:33.920 --> 1:25:35.679
<v Speaker 1>Where else can I break bones? Besides?

1:25:36.160 --> 1:25:38.840
<v Speaker 2>Yeah, well this is particularly dumb because in high school

1:25:38.880 --> 1:25:42.240
<v Speaker 2>I actually played lacrosse and got a skull fracture. Nice,

1:25:42.280 --> 1:25:45.240
<v Speaker 2>So all the doctor said stopped playing sports. They wouldn't

1:25:45.320 --> 1:25:47.519
<v Speaker 2>let me play soccer anymore because I couldn't head the ball.

1:25:47.479 --> 1:25:50.559
<v Speaker 1>Really yeah, oh so that's the serious skull frack. Oh yeah,

1:25:50.720 --> 1:25:54.439
<v Speaker 1>I broke my nose playing soccer, Yeah, in a collision

1:25:54.600 --> 1:25:57.680
<v Speaker 1>and just remember waking up flat on my back. But

1:25:57.760 --> 1:25:59.639
<v Speaker 1>nobody ever said you should stop.

1:25:59.840 --> 1:26:01.400
<v Speaker 2>Yeah, I know. I had to get a spinal tap.

1:26:01.479 --> 1:26:05.519
<v Speaker 2>I had had brain fluid leaking out my year. This

1:26:05.920 --> 1:26:08.439
<v Speaker 2>was a serious one. So anyway, so I wasn't really

1:26:08.479 --> 1:26:11.840
<v Speaker 2>supposed to play sports, and as I got to college,

1:26:11.960 --> 1:26:13.960
<v Speaker 2>I thought about not playing anything, and there was a

1:26:14.280 --> 1:26:17.560
<v Speaker 2>club rugby team, and I just said, you know, this

1:26:17.600 --> 1:26:19.400
<v Speaker 2>sounds bad, but you're like, you're at an ivy league school.

1:26:19.400 --> 1:26:20.920
<v Speaker 2>It's kind of like an it feels like an ivy

1:26:21.000 --> 1:26:22.640
<v Speaker 2>leaguage sport. Was like, that would just be fun to

1:26:22.720 --> 1:26:26.439
<v Speaker 2>go play rugby, right, And it was a ton of fun.

1:26:26.520 --> 1:26:28.280
<v Speaker 2>And it was incredibly stupid of.

1:26:28.240 --> 1:26:31.519
<v Speaker 1>Me, right, broken fingers and no.

1:26:31.560 --> 1:26:34.479
<v Speaker 2>I survived pretty well. So I was, what's what's you've

1:26:34.479 --> 1:26:36.960
<v Speaker 2>only known me as I've been older. I used to

1:26:37.000 --> 1:26:38.479
<v Speaker 2>probably weigh forty pounds less.

1:26:38.840 --> 1:26:39.800
<v Speaker 1>Oh really, I was.

1:26:39.880 --> 1:26:43.439
<v Speaker 2>Yeah, in college, I was a very thin guy, and

1:26:43.479 --> 1:26:45.879
<v Speaker 2>so they put me way out in the winger position

1:26:45.920 --> 1:26:48.960
<v Speaker 2>where I just ran ropping down the field and so

1:26:49.000 --> 1:26:51.800
<v Speaker 2>I wasn't really massively in the scrums in the ring.

1:26:51.840 --> 1:26:55.960
<v Speaker 1>I gotcha. That's interesting. And and our final curve ball

1:26:56.080 --> 1:27:01.960
<v Speaker 1>question favorite Dungeons and Dragons mind and why? And you

1:27:02.000 --> 1:27:03.400
<v Speaker 1>could guess where that question is?

1:27:03.479 --> 1:27:04.960
<v Speaker 2>Yeah, I can guess for that one.

1:27:05.120 --> 1:27:06.960
<v Speaker 1>This is actually wait, let me give a little color.

1:27:07.439 --> 1:27:10.680
<v Speaker 1>You're in a financial D and D game that's been

1:27:10.680 --> 1:27:11.240
<v Speaker 1>going on.

1:27:11.160 --> 1:27:13.720
<v Speaker 2>For years, so this is funny. Actually, if you'll allow me,

1:27:14.360 --> 1:27:16.880
<v Speaker 2>can I can I bring this into the first your

1:27:16.960 --> 1:27:19.960
<v Speaker 2>last five question? Sure? Because I believe the first of

1:27:20.000 --> 1:27:22.160
<v Speaker 2>your last five questions you ask every guest is what

1:27:22.280 --> 1:27:23.519
<v Speaker 2>content are you consuming?

1:27:23.760 --> 1:27:25.719
<v Speaker 1>Right? What are you watching? Listening?

1:27:25.880 --> 1:27:28.880
<v Speaker 2>And the problem is with a rapidly expanding business and

1:27:28.920 --> 1:27:30.800
<v Speaker 2>a young kid at home, I don't have time to

1:27:30.800 --> 1:27:34.120
<v Speaker 2>watch anything. But what I have carved time out in

1:27:34.200 --> 1:27:38.559
<v Speaker 2>my life for has been this Dungeons Dragons game. It's

1:27:38.600 --> 1:27:40.519
<v Speaker 2>hard to say with the serious face, right, but there

1:27:40.560 --> 1:27:42.960
<v Speaker 2>are seven of us in the industry who started five

1:27:43.040 --> 1:27:46.160
<v Speaker 2>years ago and we play weekly and it's three hours

1:27:46.240 --> 1:27:49.120
<v Speaker 2>and that sounds incredibly nerdy. But for those who have

1:27:49.160 --> 1:27:53.760
<v Speaker 2>never played Dungeons and Dragons is really a collaborative storytelling.

1:27:54.000 --> 1:27:58.840
<v Speaker 2>Right game. We have an unbelievable guy who runs the game,

1:27:58.840 --> 1:28:03.360
<v Speaker 2>who is just this imaginative world builder. So imagine, you know,

1:28:03.360 --> 1:28:05.240
<v Speaker 2>if you like fantasy or sci fi, you can run

1:28:05.280 --> 1:28:09.400
<v Speaker 2>it however you want. He builds these unbelievably complex worlds

1:28:09.520 --> 1:28:12.439
<v Speaker 2>that we get to explore as characters, and he has

1:28:12.479 --> 1:28:15.680
<v Speaker 2>a big narrative arc, but he's constantly adapting to how

1:28:15.720 --> 1:28:18.720
<v Speaker 2>we interact with the world. And then there's the randomness,

1:28:18.720 --> 1:28:20.439
<v Speaker 2>which is when you try to do something, you're rolling

1:28:20.520 --> 1:28:22.720
<v Speaker 2>dice and your success or failures based on the dice.

1:28:22.720 --> 1:28:25.280
<v Speaker 2>So the dice play a role in the story. And

1:28:25.360 --> 1:28:27.559
<v Speaker 2>so for me, that's been a really big outlet of

1:28:27.600 --> 1:28:30.519
<v Speaker 2>not only fun with the guys, but that's a lot

1:28:30.520 --> 1:28:33.400
<v Speaker 2>of content consumption in the sense of the story's playing

1:28:33.400 --> 1:28:35.880
<v Speaker 2>out in front of me, but also I get to

1:28:36.040 --> 1:28:38.519
<v Speaker 2>collaborate and be a creative part of the story creation.

1:28:38.600 --> 1:28:41.080
<v Speaker 2>So that's been a really special part of my life

1:28:41.120 --> 1:28:42.040
<v Speaker 2>for the last five years.

1:28:42.080 --> 1:28:45.439
<v Speaker 1>So that'll be our first question. Because you're not really

1:28:45.520 --> 1:28:49.800
<v Speaker 1>watching or streaming much, let's talk about mentors who helped

1:28:49.960 --> 1:28:51.000
<v Speaker 1>shape your career.

1:28:51.439 --> 1:28:55.000
<v Speaker 2>So there, I will say this ties to some of

1:28:55.040 --> 1:28:56.640
<v Speaker 2>the latter questions. I think one of the mistakes I

1:28:56.640 --> 1:28:58.400
<v Speaker 2>made early in my career is not appreciating how much

1:28:58.439 --> 1:29:01.639
<v Speaker 2>of an apprenticeship industry. This is, especially the more niche

1:29:01.680 --> 1:29:06.600
<v Speaker 2>you go into markets. There's just wisdom and experience that

1:29:06.880 --> 1:29:09.799
<v Speaker 2>it's hard to learn for yourself, and it's very easy

1:29:10.120 --> 1:29:12.400
<v Speaker 2>if you don't have that wisdom to knock yourself out

1:29:12.439 --> 1:29:16.400
<v Speaker 2>of the business from a performance perspective. And so I didn't.

1:29:16.439 --> 1:29:19.280
<v Speaker 2>I didn't understand that. I wish I had had more mentors.

1:29:19.320 --> 1:29:21.320
<v Speaker 2>What I will say is on the business side, my

1:29:21.400 --> 1:29:24.640
<v Speaker 2>father and my business partner are both phenomenal entrepreneurs, and

1:29:24.680 --> 1:29:26.240
<v Speaker 2>I learned a ton on the business side from them.

1:29:26.640 --> 1:29:31.400
<v Speaker 2>I will say I've been very fortunate reading and interacting

1:29:31.439 --> 1:29:34.599
<v Speaker 2>with folks like Cliff Astness and Auntie ielman In who

1:29:34.600 --> 1:29:37.720
<v Speaker 2>have been, you know, huge idols of mine and what

1:29:37.760 --> 1:29:40.759
<v Speaker 2>they've contributed to the industry and just been very open

1:29:40.840 --> 1:29:44.360
<v Speaker 2>to communicating with me. I would say, from an actual

1:29:44.520 --> 1:29:47.800
<v Speaker 2>practitioner perspective, have been big mentors.

1:29:47.840 --> 1:29:52.280
<v Speaker 1>Really really interesting both of them. At AQR. Yes, what

1:29:52.400 --> 1:29:54.160
<v Speaker 1>about books? What are some of your favorites? What are

1:29:54.160 --> 1:29:55.000
<v Speaker 1>you reading right now?

1:29:55.479 --> 1:29:58.160
<v Speaker 2>So again, not a lot of time to read. I

1:29:58.360 --> 1:30:00.920
<v Speaker 2>just got done listening to all Lord of the Rings

1:30:00.960 --> 1:30:04.480
<v Speaker 2>on audio. I do it to a lot of audio books.

1:30:04.160 --> 1:30:07.280
<v Speaker 1>And how was that on audio? As a post?

1:30:07.320 --> 1:30:12.400
<v Speaker 2>So Andy Serkis, who played Gollam, who's a phenomenal voice actor,

1:30:12.400 --> 1:30:14.680
<v Speaker 2>read all the books and he is so good at

1:30:15.000 --> 1:30:18.959
<v Speaker 2>like when he did Gandolf it sounded like Ian McKellen.

1:30:19.240 --> 1:30:21.080
<v Speaker 1>Really, he's doing voices.

1:30:21.120 --> 1:30:25.479
<v Speaker 2>He's doing voices, and it's just you know, again, if

1:30:25.479 --> 1:30:26.840
<v Speaker 2>you're not into that type of book, you're not going

1:30:26.920 --> 1:30:29.280
<v Speaker 2>to enjoy it. But he brings it to life with

1:30:29.360 --> 1:30:32.400
<v Speaker 2>such vibrancy that it's not someone just reading the book.

1:30:32.400 --> 1:30:35.519
<v Speaker 2>It's like he is. He's singing the songs, he's playing

1:30:35.560 --> 1:30:38.200
<v Speaker 2>the characters, he's giving it to you like a play.

1:30:38.800 --> 1:30:40.680
<v Speaker 2>It was just really, I mean, I got through all

1:30:40.720 --> 1:30:43.439
<v Speaker 2>three books very quickly, and I wish I had I

1:30:43.479 --> 1:30:46.040
<v Speaker 2>had more. So that's one I did just recently. And

1:30:46.040 --> 1:30:48.680
<v Speaker 2>I tend to do audio books because it's easier for

1:30:48.720 --> 1:30:50.040
<v Speaker 2>me when I go out for a walk or a

1:30:50.120 --> 1:30:52.800
<v Speaker 2>run to listen to that than it is for me

1:30:52.840 --> 1:30:54.120
<v Speaker 2>at the end of a day to say I'm gonna

1:30:54.120 --> 1:30:55.680
<v Speaker 2>get through ten pages of a book and then fall

1:30:55.720 --> 1:30:56.720
<v Speaker 2>asleep drooling on it.

1:30:58.000 --> 1:31:02.240
<v Speaker 1>I know what that is like our final two questions

1:31:02.479 --> 1:31:05.519
<v Speaker 1>what sort of advice would you give to a recent

1:31:05.560 --> 1:31:10.040
<v Speaker 1>college grad interested in a career in quantitative investment.

1:31:10.800 --> 1:31:13.759
<v Speaker 2>So I'll go back to what I just said, which

1:31:13.840 --> 1:31:16.840
<v Speaker 2>was and I was interesting. I was just at a

1:31:16.880 --> 1:31:19.439
<v Speaker 2>symposium at the College of Charleston, which is put on

1:31:19.640 --> 1:31:21.519
<v Speaker 2>for their students, and I said the same thing to

1:31:21.560 --> 1:31:24.519
<v Speaker 2>their students, which is, I'm loath to give advice. But

1:31:24.800 --> 1:31:27.160
<v Speaker 2>my experience was I wish I had a mentor. I

1:31:27.200 --> 1:31:30.200
<v Speaker 2>wish I had understood that for where I was trying

1:31:30.240 --> 1:31:32.559
<v Speaker 2>to go, I would have gotten there a lot faster

1:31:33.120 --> 1:31:36.720
<v Speaker 2>if I had found a hands on mentor and understood

1:31:36.720 --> 1:31:40.000
<v Speaker 2>that this is an apprenticeship industry. Whether you are looking

1:31:40.040 --> 1:31:43.639
<v Speaker 2>to do deep quant research or looking to build product

1:31:43.880 --> 1:31:47.400
<v Speaker 2>or run an ria, every side of it has so

1:31:47.400 --> 1:31:51.080
<v Speaker 2>many complicated facets that you have to navigate, from the

1:31:51.200 --> 1:31:55.560
<v Speaker 2>regulatory side to understanding the behavior of your clients, understanding

1:31:55.600 --> 1:31:59.000
<v Speaker 2>the markets and the microstructure and who's operating in them.

1:31:59.320 --> 1:32:02.080
<v Speaker 2>That trying to cover that all on your own, there's

1:32:02.120 --> 1:32:04.640
<v Speaker 2>a great chance you don't survive it. And so to me,

1:32:04.840 --> 1:32:08.120
<v Speaker 2>I wish I take that back. I've had a phenomenal career.

1:32:08.160 --> 1:32:11.879
<v Speaker 2>I'm very lucky. I wouldn't change a thing, but I

1:32:11.880 --> 1:32:15.080
<v Speaker 2>if I was doing it another path, I would have said, Man,

1:32:15.120 --> 1:32:16.839
<v Speaker 2>maybe I should have just gone to work at AQR

1:32:16.960 --> 1:32:20.439
<v Speaker 2>for a while. That might have jumped me forward, you know,

1:32:20.479 --> 1:32:22.240
<v Speaker 2>instead of stumbling in the dark for so long.

1:32:22.720 --> 1:32:25.000
<v Speaker 1>Except you would still be at AQR. If you worked

1:32:25.000 --> 1:32:26.760
<v Speaker 1>at AQR, the you.

1:32:26.720 --> 1:32:28.920
<v Speaker 2>Know what, I'm firsall, they wouldn't have hired me. Well,

1:32:29.360 --> 1:32:30.960
<v Speaker 2>they have a lot smarter people than me.

1:32:31.400 --> 1:32:35.759
<v Speaker 1>I'm kind of sad about the demise of Twitter because

1:32:36.880 --> 1:32:41.080
<v Speaker 1>it was this, at least in finance and finn twit

1:32:42.360 --> 1:32:46.840
<v Speaker 1>there was this ability to have conversations with people, whether

1:32:46.920 --> 1:32:49.759
<v Speaker 1>it was in public or just slipping into someone's DM

1:32:49.840 --> 1:32:55.759
<v Speaker 1>and chatting. That seems to have kind of faded away.

1:32:55.960 --> 1:32:59.840
<v Speaker 1>But like the twenty tens was a golden era of

1:33:01.600 --> 1:33:05.600
<v Speaker 1>I don't even know what else to call it, networking, mentorship, connections.

1:33:06.439 --> 1:33:09.000
<v Speaker 1>Just hey, you're right working on this, I did some

1:33:09.040 --> 1:33:10.639
<v Speaker 1>research on this. You might want to take a look

1:33:10.680 --> 1:33:14.080
<v Speaker 1>at it. Oh thanks, that's really like there was a

1:33:14.840 --> 1:33:22.720
<v Speaker 1>very level playing field of not even mentorship, just encouragement

1:33:23.000 --> 1:33:25.519
<v Speaker 1>from people. I kind of feel a little bit of

1:33:25.520 --> 1:33:27.559
<v Speaker 1>a loss that that's gone away. I don't know how

1:33:27.600 --> 1:33:29.639
<v Speaker 1>you like you were right in the thick of this,

1:33:29.960 --> 1:33:32.759
<v Speaker 1>as well as so many other people we know in common.

1:33:33.280 --> 1:33:36.200
<v Speaker 2>I'm still very active on Twitter, but it's a very

1:33:36.760 --> 1:33:40.920
<v Speaker 2>curated thing for me. What I find is, I like

1:33:41.000 --> 1:33:45.200
<v Speaker 2>I'm I'm in groups, for example, of forty to fifty

1:33:46.360 --> 1:33:49.360
<v Speaker 2>quants who can't disclose who they are and they don't

1:33:49.400 --> 1:33:51.840
<v Speaker 2>want to share a lot publicly, but you've built up

1:33:51.880 --> 1:33:54.719
<v Speaker 2>this trust with them that you can ask these questions

1:33:54.720 --> 1:33:56.960
<v Speaker 2>of things you're working on and get feedback from people

1:33:57.000 --> 1:33:59.240
<v Speaker 2>all across the industry in a way that I'm still

1:33:59.240 --> 1:34:01.920
<v Speaker 2>not sure I could find anywhere else. One of the

1:34:01.960 --> 1:34:05.200
<v Speaker 2>things I've noticed is back in the mid twenty tens

1:34:05.240 --> 1:34:07.920
<v Speaker 2>early twenty tens, the community was just smaller, and so

1:34:07.960 --> 1:34:10.759
<v Speaker 2>you could have a lot of conversations in public. As

1:34:10.840 --> 1:34:14.479
<v Speaker 2>Twitter grew and grew and grew, just the request for

1:34:14.560 --> 1:34:17.080
<v Speaker 2>your time became more and more. It used to be

1:34:17.120 --> 1:34:21.000
<v Speaker 2>I might have one some young person reaching out to

1:34:21.000 --> 1:34:23.800
<v Speaker 2>ask me a question. Now it might be twenty times

1:34:23.800 --> 1:34:26.320
<v Speaker 2>the volume, and it's just it's hard to be as

1:34:26.400 --> 1:34:29.160
<v Speaker 2>responsive and have the intimate connections I think you had

1:34:29.160 --> 1:34:30.560
<v Speaker 2>when it was a smaller community. So I know a

1:34:30.600 --> 1:34:33.200
<v Speaker 2>lot of people who there are Twitter has its problems,

1:34:33.200 --> 1:34:35.080
<v Speaker 2>but a lot of people who bemoan the loss of

1:34:35.080 --> 1:34:37.720
<v Speaker 2>that prior experience. I think it was a small community

1:34:37.800 --> 1:34:40.880
<v Speaker 2>aspect that has disappeared, and it's hard to rebuild that

1:34:40.960 --> 1:34:42.320
<v Speaker 2>unless you build your own WALLT.

1:34:42.120 --> 1:34:45.439
<v Speaker 1>Guying, There's no doubt that that's part of it. I've

1:34:45.479 --> 1:34:49.400
<v Speaker 1>also found that I spend much less time in like

1:34:49.520 --> 1:34:53.080
<v Speaker 1>the main open channel, and now everything is for me.

1:34:53.240 --> 1:34:57.920
<v Speaker 1>He has been lists driven, whether it's economics or markets

1:34:58.200 --> 1:35:01.000
<v Speaker 1>or I even create a create a separate list just

1:35:01.040 --> 1:35:05.640
<v Speaker 1>for charts and put a bunch of guys who were

1:35:05.680 --> 1:35:10.160
<v Speaker 1>technically oriented, and it like a lot of the worst

1:35:10.200 --> 1:35:13.440
<v Speaker 1>aspects of Twitter go away when you're in a curated

1:35:13.520 --> 1:35:16.040
<v Speaker 1>list of people who are like minded.

1:35:15.760 --> 1:35:18.120
<v Speaker 2>But you lose a bit of the serendipity discovery. Yes,

1:35:18.160 --> 1:35:21.080
<v Speaker 2>exactly right, and so then you're going, well, I hope

1:35:21.120 --> 1:35:24.120
<v Speaker 2>someone retweets something interesting so I can discover a new person.

1:35:24.400 --> 1:35:25.880
<v Speaker 2>And they're absolutely trade offs. Two.

1:35:25.960 --> 1:35:28.720
<v Speaker 1>I mean, so it wasn't summer of twenty four, it

1:35:28.720 --> 1:35:31.240
<v Speaker 1>was summer of twenty three. I went out to dinner,

1:35:31.360 --> 1:35:37.440
<v Speaker 1>I come back home and there was a password requests

1:35:37.920 --> 1:35:40.760
<v Speaker 1>made a change on Twitter that I hadn't make, and

1:35:40.800 --> 1:35:42.799
<v Speaker 1>I go to say, this is a me, They've already

1:35:43.000 --> 1:35:47.000
<v Speaker 1>given the account away to somebody else, like they're stupid.

1:35:47.120 --> 1:35:52.200
<v Speaker 1>First of all, making two factor authentication an option just

1:35:52.240 --> 1:35:55.760
<v Speaker 1>so idiotic. And it took three months to get the

1:35:55.800 --> 1:36:00.280
<v Speaker 1>account back, and I finally got it back, and some

1:36:00.360 --> 1:36:03.040
<v Speaker 1>of our mutual friends said, hey, you're not going to

1:36:03.080 --> 1:36:06.559
<v Speaker 1>recognize the place you missed, Like it's like when at

1:36:06.600 --> 1:36:10.120
<v Speaker 1>the last inning of a baseball game when everybody files

1:36:10.160 --> 1:36:12.479
<v Speaker 1>out and you're in there, you're in the bathroom and

1:36:12.520 --> 1:36:14.400
<v Speaker 1>you come back and where did everybody go?

1:36:14.640 --> 1:36:16.920
<v Speaker 2>I'll tell you during that period I had some fantastic

1:36:16.920 --> 1:36:19.400
<v Speaker 2>conversations with you over DM, so I you know, I

1:36:19.439 --> 1:36:20.479
<v Speaker 2>miss whoever that was.

1:36:22.120 --> 1:36:26.000
<v Speaker 1>It's really kind of you know, it's it's so weird

1:36:26.040 --> 1:36:30.320
<v Speaker 1>to feel like I never felt a loss when Facebook

1:36:30.960 --> 1:36:36.320
<v Speaker 1>changed the whole to use Corey Doctor's phrase incation of

1:36:36.560 --> 1:36:41.800
<v Speaker 1>places like eBay and Amazon and Google like it's annoying.

1:36:41.960 --> 1:36:46.000
<v Speaker 1>I don't love what's happened to Apple, although they're still

1:36:46.200 --> 1:36:49.639
<v Speaker 1>functional useful for me. Twitter is the first one where

1:36:49.680 --> 1:36:54.679
<v Speaker 1>it's like, man, this was really special in our space,

1:36:55.439 --> 1:37:00.080
<v Speaker 1>and then it's just gone away, And you know, there

1:37:00.120 --> 1:37:02.040
<v Speaker 1>are a lot of reasons to not be happy with

1:37:02.200 --> 1:37:07.479
<v Speaker 1>Elon Musk, not the least of which are the never

1:37:07.600 --> 1:37:11.160
<v Speaker 1>ending promises for products that don't seem to arrive with

1:37:11.280 --> 1:37:15.599
<v Speaker 1>any sort of reasonable timeline. But man, firing eighty percent

1:37:15.640 --> 1:37:19.679
<v Speaker 1>of the engineers and leaving a you know, a smoking

1:37:19.760 --> 1:37:25.639
<v Speaker 1>hulk behind, it's really kind of disappointing. I understand why

1:37:25.640 --> 1:37:30.880
<v Speaker 1>people don't love Twitter. I still have this like nostalgic

1:37:30.960 --> 1:37:33.639
<v Speaker 1>feel for when it was good. It was so good.

1:37:34.520 --> 1:37:37.120
<v Speaker 1>It's all right, all right? And our final question, what

1:37:37.160 --> 1:37:39.120
<v Speaker 1>do you know about the world of investing that would

1:37:39.120 --> 1:37:42.439
<v Speaker 1>have been useful to know when you were first launching

1:37:42.479 --> 1:37:44.120
<v Speaker 1>in eighth nine.

1:37:45.600 --> 1:37:48.559
<v Speaker 2>There's a phrase I have been repeating a lot in

1:37:48.600 --> 1:37:51.520
<v Speaker 2>the last year and a half at my own business,

1:37:52.080 --> 1:37:55.599
<v Speaker 2>which is, why are we playing the game on hard mode?

1:37:56.120 --> 1:37:59.639
<v Speaker 2>Play the game on easy mode? I mean that both

1:37:59.760 --> 1:38:06.000
<v Speaker 2>in the investment strategies we choose to pursue and the

1:38:06.040 --> 1:38:09.160
<v Speaker 2>products we want to bring to market. I'm not going

1:38:09.240 --> 1:38:10.880
<v Speaker 2>to talk so much to the products here, so I'm

1:38:10.880 --> 1:38:12.880
<v Speaker 2>happy to go into that on the investment strategy side.

1:38:13.080 --> 1:38:15.080
<v Speaker 2>I wish someone had just sat me down early in

1:38:15.120 --> 1:38:20.040
<v Speaker 2>my career and said low breadth bets you don't get

1:38:20.080 --> 1:38:23.599
<v Speaker 2>to repeat a lot. Don't do those type. Don't try

1:38:23.640 --> 1:38:25.719
<v Speaker 2>to time the market. I mean, like every young person

1:38:25.760 --> 1:38:27.479
<v Speaker 2>I spent a whole of course, I'm going to be

1:38:27.479 --> 1:38:28.840
<v Speaker 2>the one to crack the market and figure out how

1:38:28.840 --> 1:38:31.640
<v Speaker 2>to time it. It's a dumb low breadth bet. You

1:38:31.640 --> 1:38:33.240
<v Speaker 2>don't get to repeat a lot. It's like trying to

1:38:33.240 --> 1:38:35.559
<v Speaker 2>flip the coin three times in your life and guess

1:38:35.600 --> 1:38:38.680
<v Speaker 2>heads all three times. It's just very unlikely and when

1:38:38.680 --> 1:38:40.560
<v Speaker 2>you're wrong, there's a lot of damage. All right, So

1:38:41.080 --> 1:38:43.519
<v Speaker 2>be smarter about the type of strategy you're going to pursue.

1:38:44.280 --> 1:38:47.280
<v Speaker 2>By the way, the SMP five hundred is the hardest

1:38:47.400 --> 1:38:50.720
<v Speaker 2>universe to try to actively pick stocks in. Maybe don't

1:38:50.760 --> 1:38:53.280
<v Speaker 2>try to pick stocks there. Go play the game on

1:38:53.439 --> 1:38:57.559
<v Speaker 2>easy mode where there's a proven opportunity, rather than saying

1:38:58.120 --> 1:38:59.800
<v Speaker 2>having the ego to say no, I'm going to be

1:38:59.840 --> 1:39:01.960
<v Speaker 2>the to figure it out. There are people who can

1:39:02.000 --> 1:39:05.200
<v Speaker 2>beat the market. But even if I'm smart enough to

1:39:05.240 --> 1:39:07.840
<v Speaker 2>figure it out or can find that edge, why not

1:39:08.000 --> 1:39:10.479
<v Speaker 2>find it somewhere where it's easier. And so I think

1:39:10.520 --> 1:39:13.680
<v Speaker 2>for me, I wish earlier in my career someone had

1:39:13.680 --> 1:39:15.920
<v Speaker 2>really beaten into me. Are you just playing the game

1:39:15.920 --> 1:39:19.840
<v Speaker 2>on hard mode just because you want to? Or is

1:39:19.840 --> 1:39:22.000
<v Speaker 2>there an easier way to do this? At the end

1:39:22.000 --> 1:39:24.840
<v Speaker 2>of the day, you're trying to meet this objective. What

1:39:24.920 --> 1:39:26.080
<v Speaker 2>is the easiest way to meet it?

1:39:26.640 --> 1:39:31.280
<v Speaker 1>Huh? Really interesting, Corey, thank you for being so generous

1:39:31.400 --> 1:39:34.840
<v Speaker 1>with your time. We have been speaking with Corey Hofstein.

1:39:35.280 --> 1:39:38.679
<v Speaker 1>He is not only the CEO and CIO of Newfound Research,

1:39:39.040 --> 1:39:44.439
<v Speaker 1>but portfolio manager of Returned stack etf Suite. If you

1:39:44.680 --> 1:39:48.439
<v Speaker 1>enjoy this conversation, well, check out any of the previous

1:39:48.479 --> 1:39:52.200
<v Speaker 1>five hundred and forty we've had over the past ten years.

1:39:52.560 --> 1:39:57.280
<v Speaker 1>You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever

1:39:57.360 --> 1:40:00.840
<v Speaker 1>you find your favorite podcast. And check out my new

1:40:00.880 --> 1:40:06.000
<v Speaker 1>podcast At the Money, short single topic conversations with experts

1:40:06.439 --> 1:40:09.600
<v Speaker 1>about subjects that affect your money, earning it, spending it,

1:40:09.960 --> 1:40:13.120
<v Speaker 1>and investing it At the Money, in the Master's in

1:40:13.160 --> 1:40:18.000
<v Speaker 1>Business podcast feed, or wherever you find your podcasts. I

1:40:18.040 --> 1:40:20.000
<v Speaker 1>would be remiss if I did not thank the Crack

1:40:20.280 --> 1:40:23.759
<v Speaker 1>staff who helps us put these conversations together each week.

1:40:23.960 --> 1:40:27.600
<v Speaker 1>My audio engineer is Meredith Frank. Anna Luke is my producer.

1:40:27.640 --> 1:40:30.880
<v Speaker 1>Sean Russo is my researcher. Sage Bauman is the head

1:40:30.880 --> 1:40:34.439
<v Speaker 1>of podcasts here at Bloomberg. I'm Barry Retolts. You've been

1:40:34.439 --> 1:40:40.920
<v Speaker 1>listening to Masters in Business on Bloomberg Radio.