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Viva Las EQ Derivatives… This week Jeff journeys back to the Windy City from Sin City, where he is joined by a special guest, Mutiny’s very own Jason Buck @JasonMutiny. In this episode, they give essential insight into this unique conference for options traders, hedge funds, and insurers. They break down everything you need to know about the event and key takeaways like what was being said, what wasn’t said, and what caught their attention. Jason and Jeff dive into topics like; the vibes at EQD, Russian Energy, Commodity supercycles, Multi-Assets including Hedges/Risk Premia, Backtesting, Puts & Dips, the unknown (unknowns), the smartest guys in Vol, and so much more. But the fun doesn’t end there…we’re putting a part-2 to this discussion on Jason’s Mutiny Investing Podcast! So go check it out on your favorite podcast platform, Apple, Spotify, whatever you got…SEND IT! ________ - - ____

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Check out the complete Transcript from this week’s podcast below:

What happens in Vegas…. Gets Dished on this Pod. Overheard at a Derivatives Conference, Part 1

Jeff Malec  00:07

Welcome to the Derivative by our RCM Alternatives where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Welcome to June you made it through the least fun five months to start here in quite some time. This relentless grind lower in stocks, bonds and crypto I miss the good old fashioned panic stricken Cielos but you know what I don’t miss the chance to go to Vegas and hear the best in the business dish on derivatives. That’s right yours truly attended the EQ derivatives conference in Vegas last week with none other than mutiny funds Jason buck. What was said What wasn’t said what caught our attention. We’re breaking it all down in this two part episode. Part one is right here. And we’re gonna put up Part Two over on Jason’s mutiny investing podcast. Go find that on Stitcher people use stitcher anymore. I don’t know find it on your favorite pod platform Spotify, Apple, whatever you got. Check the show notes for the link. So send it This episode is brought to you by RCMs vix and volatility specialists and its managed futures group. We’ve been helping investors access volatility traders like the ones we just heard from at this conference can help you make sense of gamma, Vega, vana and all the rest. Check out the newly updated vix and volatility white paper at RCM old stock calm under the education slash white papers. And now back to the show. Okay, we are here with Jason Buck mutiny funds. The two of us were just out in Las Vegas at EQ derivatives Conference, which is not sure what it’s trying to be actually but it’s got a lot of option traders, hedge funds, insurers that use option overlays exchanges that sell the options for all those groups to use. So it’s kind of a collection of all these different groups that are using quote unquote derivatives to manage risk and drive returns. Jason where we overall thoughts what was the vibe there in Vegas?

 

Jason Buck  02:20

I think was interesting I wanted to touch on EQ D real quickly too is like I think it’s just like EQ D or EQ driven is the best like source for like, the derivative sides of like hedge funds, or, like you said insurance or was as well. So it’s like, if you want to learn about options, volatility and derivatives, I think EQ D and all their their writing, they used to publish a physical magazine, which was great. And now it’s all online. But that’s probably the best source for learning about like our space in general. And I thought the conference is great. They throw you know, multi conferences all over the world, I think they were just in Barcelona, then we went to the global in Vegas, and I think upcoming they have Australia and Singapore. But the idea is they cover the world of options, derivatives, and a lot of the times primarily through the lens of vol. But as Jeff referenced, it’s like you’re looking at it from multiple perspectives you’re looking at, from the vendors and providers to from, from data to execution, to you know, options and volatility hedge fund managers to the insurance side to which is always fascinating, I think for the rest of us to see people running ridiculous amounts of money. But the overall vibe in general that I got was like the consensus was that we’ve had an orderly sell off here in the s&p. And you know that we haven’t seen this pickup and ball especially fixed strike vol. and they’re talking about just the headwinds, when you have it just an orderly grind down, you know, when the market is grinding down lower than the expected or implied volatility, or Barron’s would expect over the next 30 days. This is when you could see a grind down in the markets and then not a pop in volatility. So that was like the general consensus. And I think we’ll get into like certain trades that have been working and we’ll question if they continue to work like dispersion, everybody’s kind of like, you know, hot on dispersion, and then outside of like vol space, as we’ll get into it. The first talk here is trend following everybody kept mentioning tried probably commodity trend following and how well that’s doing. So it’s interesting to kind of broaden that scope over multiple asset classes in different forms of derivatives. So overall, it was a it was a fantastic two days at the Wynn and just like hearing these different talks from practitioners at every level, was a really interesting way to get some some context on our entire space.

 

Jeff Malec  04:18

And we should say two things. One, we chatted for a minute. After the conference, Jason went back to California I went back to Chicago and so classic day after Vegas style Wharton sweatshirts and hats here. If you’re seeing some video, you know that if you’re listening in the pod, you don’t so they after Vegas vibes here for us. I feel like my voice might be a little scratchy as well.

 

Jason Buck  04:41

And and to clarify, it wasn’t like we were out drinking and partying. It’s just like, talking to people like yelling over that the music in Vegas. It’s like yeah, it’s just the extraversion is what’s making us exhausted and obviously the trip and just the 24/7 nature of any sort of

 

Jeff Malec  04:56

event will speak for yourself. There was a little bit of

 

Jason Buck  04:59

it You’re crushing the tables.

 

Jeff Malec  05:02

So and then I also want to just add when we’re talking about EQ D, it’s a highly institutional crowd, right? This isn’t retail traders trying to learn how to trade options. This is people that have been doing derivatives on the stock indices, mainly, but also rates and everything for dozens of years before, before Jason knew what an option was, before I knew what an option was, right? They’ve been in the game, very long time. And so this is all the pensions in the endowments and the insurers talking to the hedge fund managers and the index providers that provide those products. Yeah, it’s

 

Jason Buck  05:36

like context like, I think Josh Heller, I think it runs like $450 billion, and hedges in Australia for Australian pensions to give you a context there to like some of the insurers were that that size or even potentially larger. But then in the audience, like I just realized, I didn’t have a chance to say hi to Blair Hall, who’s been in this industry for like, longer than I’ve been alive. Yeah, so I saw him across the room at once. And I was like, I need to find him at one of the breaks, but didn’t get a chance to talk to him. So that that gives you a an idea of the context of who’s in the room, and it’s probably a rough count. I think it was less than 200 people but like Jeff said, it’s like institutional insiders in the ball and derivative space. So it’s a really, really, truly interesting crowd.

 

Jeff Malec  06:16

So we’ll jump right in the first and we’re not gonna go panel by panel but we’ll just mention something the first guy Michael Hey, I can’t even remember where he was from didn’t take that down. Sorry. My sock Jen. Talking commodities, right? big topic. All that’s going on there. First, he’s gonna see British not sure what he is. I think he’s British, but he pronounces it, aluminium, aluminium, aluminium, which I love. Yeah. So my big takeaway from him is, whatever is happening in Russia, this is crazy. If anyone thinks we can just shut off Russia and meet anywhere near the demands that Europe needs. He’s saying they’re so reliant on Russian gas, and just totally unrealistic to think that Europe can replace the energy coming out of Russia, within the next 1520 years. I think he said, even if all these perfect pieces came into place to replace all that there’s still be 12% Short of the supply that’s needed. My other takeaway is they’re talking about green inflation, which I hadn’t heard of called that before. Michael co cow, excuse me, Urban Cowboy on Twitter, talks about this a lot in his tweet threads of like, hey, this big push to greener energy is actually going to make the fossil fuels make all that see massive inflation in the interim, because it takes a ton of energy to build that green stuff. He had some great examples on what that takes, I can’t remember him. And you like, but to me, there was also like, I disagreed that a little bit of like, he’s saying, like, okay, it takes whatever, four barrels of equivalent oil to produce one barrel of equivalent oil on a wind farm or something, to build that out to pull the metal out of the out of the earth to build that tower in those blades. But I’m like, that’s a one time cost, right? So it kind of is saying like, right, once it’s built, that’s a sunk cost. And now you’re gonna get the benefit of that over time. So I’ve disagreed with that a little bit.

 

Jason Buck  08:22

Like goes into what, whether it’s aluminum or aluminium, which is interesting to you, like you’re saying, it’s actually it’s actually hard at these conferences to figure out where people are from because people are born in one way, one place to get educated in another country, and they’re working in like a third or fourth country. So you have these like blended accents kind of everywhere, which cool. But like that you said about, you know how dirty it is to actually produce aluminum. You know, whether you’re using freshwater saltwater, you got a pump that in and the energy input costs to make aluminum are always been very difficult. But I think what was, you know, we at least I took notes on things that jumped out at me. And so what was interesting is like, we’re so entrenched in the commodity and commodity trend markets that maybe not a lot jumped out at us. And I’ve seen multiple presentations over the last six months, especially at post Russia, about how everybody thinks, you know, just the supply strides, totally screwed. We have these bullwhip effects that are not going to be you know, they’re going to affect the system for years ahead. And that a lot of people think we’re in a commodity supercycle, but you’ve lived through this enough times to know as a CTA, that, you know, commodity super cycles come and go and they tend to evaporate quicker than people realize. So once again, though, this is a great way to have, you know, trend managers that are doing, you know, all different types of look backs and speed at which they’ll, they’ll adjust to markets. But that’s what he’s trying to show and ended up seeing, you know, multiple presentations on this, that the perturbations in Russia and Ukraine can reverberate throughout the system for years to come not only on the oil side, but particularly obviously everybody’s talking about on the grain side, you know, with winter wheat, etc. And the exportation is like and how screwed does Egypt get or something like that that’s getting all those exports and then are they getting ahead of it with domestic reserves and does that lead to more hoarding and spiking of prices because of lack of float? For, for lack of a better term in the commodity space. So like, good.

 

Jeff Malec  10:04

I was just gonna jump in real quick there. He also was mentioning the massive lack of CapEx in not just oil, right? It’s pretty well publicized like they stopped drilling wells, the shale capex way down. Yep. But in the metals industry, he had tons of charts on showing just there’s been a massive lack of reinvestment in metal mining, and they’ve just been paying out dividends to the investors, to the shareholders. So that’s right, you’ve got the Russian forest, you’ve got just inflation overall, right? People making more money, more money in the system pushing prices up, and then the massive lack of investment in accessing these commodities.

 

Jason Buck  10:40

And that’s part of that, that green inflation is it’s the irony of ESG is nobody’s made investments in the oil companies, the oil companies don’t want to do any capex, which leads to these run up in prices. And then everything ESG the input costs come from the old economy raw materials. So that’s, that’s the part of the irony of that that circular feedback loop with green inflation is like to get to a green world, you’re gonna have to use all the dirty world to get there. And nobody’s putting any money in capex because it ESG over the last decade. So now, this puts us in an interesting conundrum where, you know, we’re kind of getting put into checkmate. And how long that continues. We don’t know.

 

Jeff Malec  11:15

It was also funny, because I’m sitting here thinking, why why are we talking about commodities when we’re talking about equity derivatives, but I think he mentioned that I’m like, Hey, never thought I’d be at this conference. Talking commodities. We’re back, baby. Well, yeah, part of that might start the chicken.

 

Jason Buck  11:29

Yeah, that’s what yeah, that was actually my first note, he said, commodity meetings have doubled in the last six months. So he’s like, in a normal year, let’s say I take 150 calls in the entire year. And the first five months I’ve taken 300 calls. So everybody Yeah, commodities are fresh and hot in people’s mind again.

 

Jeff Malec  11:45

And then you might have stepped out to the hallway or something. But uh, he had a bunch of great charts on like, what the different shapes of the commodity curves look like. He was saying 80% of commodities right now we’re in what he calls convex backwardation. We’re front months or higher. And then convexly moves lower over time, which is a right that’s prices showing there’s tons of lower supply right now. So prices are high because we can’t do it right now. But the expectation over time is will eventually get to that stuff. I had a question for us later on. Like, how how is Kerry doing so well? When all these markets are in backwardation? For now, because you’re rolling?

 

Jason Buck  12:25

You’re rolling? You’re rolling up the curve, right? You’re there. The idea with a term structure carrier right is you’re rolling up or rolling down? What I think was interesting what you just said that I definitely missed that part is like, I wasn’t I don’t think I’ve thought enough about this of whether when you’re in backwardation is that curve concave or convex in backwardation? And that’s like what you’re saying when it’s convex, you kind of have that hump rolling down showing it it’s the near term supplies that raise worrying about when it’s concave, then you may have a longer problem in the system. So you just think that that makes it transitory when it’s more of a convex shape to the even backwardation of the term structure.

 

Jeff Malec  12:59

Yeah, that was any head 12 Different, right? Or maybe I guess it’s only eight different so convex concave backwardation, contango, and then all the different what a prices look like or what is the carry look like for each of those in each of those environments, which was cool.

 

Jason Buck  13:14

I think whenever you do have volatile dislocations, like we’re seeing now, especially in the term structure is that is a a target rich environment for carry, right like I think you you have quiet markets when carry can do okay, when it dislocates carry can get really burned on the left tail. But then when it when it resets that higher vol environment and is is more steady, then that’s when carry is going to do exceedingly well. So that’s why I think that term structure commodity term structure carry is doing so well.

 

Jeff Malec  13:42

Right now get in that backwardation you’re selling the more expensive it’s going to revert down to spot. And then just a question I took down here and he was asking why is oil at 1051 10 We’re not destroying demand. I seem to disagree somewhat with that. But he was saying he had some charts tech burden still only 4% globally some metric of it once it’s over 4% that tends to cause recession. But the impact of those higher costs is still below 4% Yeah,

 

Jason Buck  14:16

I think you’re not I mean, maybe it’s that part of his presentation but I’ve seen a lot of commit like a sticking point on the presentation for the last six months. And one of the ones that everybody feels was like the the camel that breaks the straws back is $200 oil so that at 110 115 Like we’re not like we’re not we’re not anywhere near that yet.

 

Jeff Malec  14:33

What What kind of we turn on paper straw that the camera is bad.

 

Jason Buck  14:36

Like I like doing the opposite just to get people to like brains to break for a second.

 

Jeff Malec  14:40

And then this was only a commodity guy can say this he spent coming and saying, Well, high oil is what caused people to skip their mortgage payments in a way which cause the GFC which I hate calling it the GFC and you all have made me morph into that.

 

Jason Buck  14:57

What would you like to call it?

 

 

Jeff Malec  15:00

07-08 financial crisis?

 

Jason Buck  15:02

Yeah, exactly. So everywhere we go, we gotta go short. And but like, you’ve actually been talking a lot about this. And but it is a thought that’s been around for decades is that even or especially from commodity guys is that oil affects markets more than anything. And so like you’ve been saying is like, until we see a sell off in oil, we’re not going to see the s&p like truly rebound. And oil just keeps creeping higher. So, you know, there’s always been a correlation with that. I mean, going back several decades, I mean, we’ll see if it holds up this time or not.

 

Jeff Malec  15:33

And then you mentioned commodity supercycle is the four, the three main ones 1870 to 1913 1946, to 1973 2000 to 2008. When my buddy Jim Rogers started calling it he’s not really my buddy, but we had him on the pot. And then the question, Is this a new one? Right, the the vibe, there was yes. In metals, which for everything we just talked about all this green vacation needs a lot of metals plus, right battery production is enormous cause of that. And oil? Probably not, because once you write eventually there should be some tipping point.

 

Jason Buck  16:11

But the cure for high prices is high prices right with come on back.

 

Jeff Malec  16:20

Moving on, so speaking of multi asset, all those commodities, so there was a panel on okay, how do you tell hedge multi asset it’s pretty well covered, how do you tail hedge in equities by way out at the money puts, although that was also a big theme that that’s not as easy as it looks. So cool panel here was basically getting into the whole, like, we’re in stagflation, which assets do you look at? How do you cover these things? We’ll throw it out to your buddy Corey Hofstede, here that there was onstage said is risk parity broken because of what’s happening in bonds? Which I know drives him crazy. So you have any thoughts on that? Remember what we’re doing?

 

Jason Buck  17:07

Yeah, so Well, there was interesting cross asset panel, but I think even though it’s supposed to be cross asset, I think we’re talking primarily about equity vol. So the general consensus was once again that 10 Six 840 Really? Yeah, that’s been an orderly sell off. So how’s this orderly sell off hand like affected 6040 But once again, the consensus was dispersion is doing well again, another consensus I was interested in intraday trend is back. So intraday trend goes, you know, in and out of vogue, typically, right? Everybody thinks, you know, intraday trends, doing really well again, and then for a few years, they’ll be like, intraday trend doesn’t work anymore, and then they’ll be back again, but everybody seems to like, you know, hate intraday trend. Usually, the two parts I thought that stood out to me and also shout out to a knee chakra from Janice Henderson, I enjoyed him on that panel also was like talking about the difference between contractual versus statistical hedges. So this is where we getting to the cross asset class. And you know, we’ve heard this called many different things, but when he’s talking about contractual hedges, is like say when you’re buying a put on the s&p because you have s&p beta, so you don’t have any basis risk. And then when you talk about statistical hedges, is when we start to take a little bit of basis risk. So that’s when you know 6040, when you’re using bonds to offset your risk and stocks, or you start using, you know, cross asset class, you know, volatility plays, weather, then you start going into bonds, interest rates, FX, you know, all of these different ways to potentially provide hedges against s&p. But now you have basis risk, meaning the there’s not a correlation of one between s&p and these other asset classes, where if you buy that put on s&p, the correlation is one because that’s a contractual obligation. But on the statistical hedges, and this is what they spent most of their time on. What’s been very interesting to us over time is like, you have a conundrum there. Right? If your clients are primarily exposed to s&p 500 Beta, you need those contractual hedges against the s&p 500. But you also when right now, like we’re talking about, we have this orderly sell off, well, overall is high. And so you have to really pay for, you know, these contractual hedges and so it’s fixed like volatile. So we’re even seeing in sell offs, you know, volatility coming down on the price you paid. So if that falls high, you know, it behooves you to look against across assets to find cheaper convexity. But when you do so, then you take the basis risk that you’re not really necessarily protecting against the s&p exposure. But that’s why we’ve seen managers like 36 out there doing exceedingly well in this environment, because they have a cross asset class search for cheap convexity anywhere. And so that’s what I thought was the most interesting piece about that panel. And I stopped there, but I’ll tease the next one. I thought were interesting was interesting that panels are back tests relevant.

 

Jeff Malec  19:40

Yeah. So I had it down as three types of hedges the mechanical or structural hedge, right puts the statistical hedge, which is bonds, right? Hey, these have, which I’m going to say always with big air quotes, right? Because it’s really only the last 30 years but over the last 30 years, these have been A rally when equities go down so that you should hold them as a defensive asset in a portfolio. So that’s a statistical correlation that you’re needing and expecting to hold. And then event hedges, which are in search of cheap convexity, wherever it might be of some, alright, Russia dislocates, natural gas or something and you can buy these cheap calls. And Alright, I got a hedge even though it wasn’t tied to anything really in my portfolio. And then one other piece there I’ll say throw out was interesting there that question of is it too late to hedge? And part of part of them were saying on a right on an institutional level? A lot of times, it’s like, no, it’s never too late to hedge we, we have to have it in those portfolios for its payoff profile, right in there, and something we’ve done, and you have to have it there for the ability to hold the risk assets. Right. So you could say it’s too late to hedge but then you should also be reducing your risk asset budget, right? If you want to pile more into those risk assets in the down move, like then you should have the hedges on for sure.

 

Jason Buck  20:59

Yeah, there’s that’s to say there’s trade offs everywhere. Like you can have those hedges on even when they’re expensive, or you can take reduce the hedges, but then you need to reduce your exposure. So or you can take basis risk and use a proxy hedges, which opens you up to basis risk. So it’s conducted all the way around. And that’s it was kind of maybe we’ll get to that later. It’s like my other consensus from the event was veneer been salies old paper about diversifying your diversifiers. That’s what I felt like was also kind of the theme of the generally across the two days we spent there.

 

Jeff Malec  21:29

And then the question, I didn’t ask the one guy in the panel who runs risk premia for fidelity, right of like, there’s some papers out there, once a factor becomes a known factor, it loses its factor ability. So risk premia platform is just allowing institutional investors say I want to get the carry factor, the momentum factor, the value factor, on and on and on risk free, the, you know, or a lot of those can be selling options. So I just want the volatility capture factor. So I wanted to ask, based on that paper, like what’s the degradation from when the academic or when you back test the strategy, which we’ll come back to your back test versus when it’s academic papers written out? Versus once it hits the the factor platform, render some, the more assets go into that, the more it’s going to degrade that signal? After the fact, he kind of admitted might be somewhere between 20 and 30%. At each layer?

 

Jason Buck  22:28

Yeah, as as every arbitrage eventually gets archived away. Right. And by the time they public to the academic literature, and that’s where you’re you’re referencing factors is that that’s what we saw. And as soon as they had the crisp data from Universe Chicago and all the factor research, and it’s been widely published academically, does that disappear? And I think it was like Fluke at Fidelity, but this will give some color to to the event like you were asking that question in one of our breakouts. And then it was interesting, like, you know, obviously, people are speaking their books. So if like, you work at Fidelity, you have to think about how do you educate and speak to Fidelity clients? And so like, for who kept talking about factors, right, and it was interesting, like Jim Carson, and when we’re talking in the hallway to is like, these guys are using, you know, decades old ideas or thinking about markets. He’s like factors or debt, like the idea is backed by like, but they’re speaking to Fidelity clients, and they’re trying to make things legible. So they’re talking about factors and gems, like, What the hell are they talking about with factors like what does that even mean anymore?

 

Jeff Malec  23:20

Although I’ll point out like Cliff Asness and value as a factor, just that simplistic strategy has now doing really well in the last six to 12 months. So you can argue both sides, maybe it does really well now, and then the money flows back in and it starts to underperform.

 

Jason Buck  23:35

Yeah. And I think what, and then what came up at the very end was with, with Mike at parametric portfolio is like, the idea of our back test irrelevant. And there was a kind of a debate between Mike and Farukh. About are they relevant? And like, how do you use them? And as we know, it’s like, there’s so many implicit biases that go into back test, you know, back tests are only a rearview mirror, and they tend not to work in real time. And it’s like the, the, how do we use back tests as crutches or I think about it as a nice intuition pumps, but it’s almost like and then we never present clients a bad back test that goes from the top left to the bottom right, we always show them back test cuts from the bottom left to the top. Right. So it was interesting question, especially as markets change players change in markets, any sort of long term backtests may be irrelevant given given the market structure and market dynamics. So just curious if we didn’t talk about that if he only takes on on backtests

 

 

 

Jeff Malec  24:29

when I started my old firm attain, I built out this great looking spreadsheet, showed how much money we’re gonna make and took it to my father who started a few businesses and said, Dad, what do you think of this business plan? And he just looked at me goes, nobody ever loses money on spreadsheets and right, so that’s the key to back test of like, yes, like you said, they’re always going to be good or you throw them in the trash. And kind of back to my other point of like, what’s the degradation and there were some questions other panels like, what did you write practitioners like, what did you use for slippage on the EC Woody, option, cross correlation, right? All these different things are alike. So I think they’re valuable, but I think they you always have to take them with a grain of salt. The time is right if you, if you go too far in that direction, you say like, Okay, well, we could lose 100% and everything, and you’ll never allocate to anything, right? So if you run out of money, Carlos, you say, Okay, here’s my worst case scenario. I always even does this count those worst case scenarios and say, you could lose way more than that. But eventually you have to put a foot in the water, right? You have to believe in what you’re doing and say, Okay, I like this back test. Right? I’m not trusting it that it’s going to produce a six Sharpe for the indefinite future. But I’m going to trust it to basically give me the the faith to go into this. And then you can control it position sizing and whatnot.

 

Jason Buck  25:47

Well, and then I remember that, actually, it was it was distinctly put Chris Cole actually was the first one to ask a question. Yeah, what what would you what do you what do you do to invalidate the back test? And it was crickets. And then like, Chris and I are texting each other? He asked it like, Chris, you know what they do? It’s like, if it doesn’t prove what your priors were, you throw that one in the trash, like you just said, like, you’re just like, we’re implicit biases, and we don’t even realize it. But that is an interesting conundrum. It’s like what actually would invalidate the back test. And that’s what’s hard to do. Like, we all think, Oh, I’ll have an idea, then I’ll test it. And if it if the test doesn’t work, I’ll invalidate it. But then we always change a parameter to make it work. And then you test in sample out of sample but then real life never works like in sample or out of sample. So that was a it was an interesting question where Chris just silence that room with like, basically, like seven words.

 

Jeff Malec  26:34

And the guy Mike, you mentioned, he did have a nice quote, St. Back tests show that back test don’t work. Yeah, that was great. That was a good one that reminded me of my, one of my favorite lines of 90% of statistics are misleading.

 

Jason Buck  26:46

Yeah. The next panel, I’ll just jump ahead for because I don’t know if you took notes on this. But the next panel was on like the risk of of bonds as a hedge and how to mitigate it. And I didn’t have a lot of notes on this one. But I did write down, can’t remember who actually said it on the panel. I want to say it was Ben bowler, for equity rivers that Bank of America, but he talked about the three free puts that everybody has been seeing for the last two to four decades. And those three free prints with the Fed put bonds as a negatively correlated positive carry hedge and buy the dip mentality. And I just thought that was a succinct way of putting it is like a lot of managers or even investors have only seen for the last 234 decades, these three forms of free puts and moving forward. Are we about to lose all three forms of free butts?

 

Jeff Malec  27:33

Yeah, right. What happens if you lose one of the three? Right? So yeah, I wrote that down somewhat similar, like you bond to get the coupon with a free equity put attached. Right? Right. So that’s like, why not do 6040, you get this huge, huge free benefit to it. And then another way of saying that is a dips became Alpha. Right? If you were willing and able to buy that dip that became your alpha versus just a buy and hold strategy is going to reduce, you know, lose someone and then make it back there, adding on the dips.

 

Jason Buck  28:08

The next panel title was navigating portfolios through unknown unknowns. And we found on the panel actually, the title came from the near Bhansali at longtail alpha, and we’ll get into why it was unknown unknowns where most of the time it felt like we were talking about known unknowns until the yeah till the very end. But it was venir Chris Cole from Artemis, Michael Green from simplify and Jim Carson from Chi. So a lot of our friends on that panel. So obviously, we’re going to probably take more notes on that panel be more interesting, that panel, although I was telling the guys later, I was like, they should just put me on stage like an impressionist and I could basically give all of their speeches. I know I’m also well now, but like, my internet would be hilarious.

 

Jeff Malec  28:44

Let’s do that for another pod later this year, like dressed up in costume. 20 minutes your gym, go? Yeah, exact minutes your mic green.

 

Jason Buck  28:51

Just argue with myself. That was great.

 

Jeff Malec  28:54

Yeah, this was like when we saw this panel. Both of us work a lot with those guys. So this was like, Alright, we gotta go. We got to see these guys on the same stage. A big worry that no one was going to be able to get a word in on the same stage. But they seem to do okay, they seem to respect each other’s time event. And I’ll start with I forget what the setup to the joke was.

 

Jason Buck  29:18

Yeah, it was. Oh, about scoring. So yeah, Chris Chris Cole started with C sharp maybe this will jog your memories like so it started out with Chris Cole talking about his wins above replacement value and thinking about portfolio construction. So the old what Chris has found through doing all this exploration into Chris Cole’s C sharp calls wins above replacement value. portfolio value is like how do you put other things in your portfolio value they’re uncorrelated or negatively correlated that actually improve the returns your portfolio and in what to jump to the conclusion is the only things you should pay for are long volatility and trend following. That’s the only things you could you should pay for for portfolio diversification. And what about wins above replacement values like sometimes you don’t need to be sorry. During the most points if you help the team win so wins above replacement values about the portfolio of the team. And if you help the team either like defensively and not necessarily shows in your offensive statistics you can be a great team player that helps improve the portfolio the great example always is Dennis Rodman, you know, rebounding skills helped double score more points, even if Dennis Rodman score points,

 

Jeff Malec  30:21

right. Yeah. Right. So there’s that driving gear. Yeah, he starts off his next thing. But like, that was interesting, crazy. He’s like, reminded me of myself in college. dating my dating strategy in college, which was don’t score a lot, but always part of the team. He delivered it much better got a big layout of the room. And then I was worried veneer wasn’t gonna get any words in but he got a little bit in. So near

 

Jason Buck  30:46

near was that laid back for like the first half of the panel, because they even called it before he like veneers. And I gotta get a word in edgewise. He doesn’t know like, what he’s dealing with these guys. But then. So one of the things that Jim started to hit on, that he talks about on Twitter publicly as well, and it was kind of consistent with the whole kind of two days, is that we’re seeing a flattening of ball on crashes. And what I mean by that is flattening of fixed drag ball like ball is coming in. And flattening skew is flattening on crashes, because people are already pre hedged. And so that that skew has been bid up, then when when we see these slight, you know, kind of like dip crashes, people are actually selling off their puts, and we see skew flattening. So once again, it’s the price you pay. So if you’re buying out of the money puts, and you’re paying a high price for them, and you even see the markets come down a little bit, but they didn’t, they didn’t come down more than expected. So realized in popover implied you’re gonna see skew come in and flatten. And so therefore, you’re gonna lose money or potentially, like barely break even on your hedges, even though the markets coming down. And that’s what happens in an orderly sell off. And that’s why I think it was, it was part of the overall, you know, vibe with the whole event. And so he’s saying that basically, as long as as well as continued to be oversupplied, as we’ve seen, like this is going to continue to happen. And then I’ll kind of skip ahead to the back end on for a because what Jim did talk about later, was he thinks we are though like in the fifth innings of people being hedged. And that trope of a hedge market doesn’t crash, is they, they all start talking about this panel, they’re seeing little Inklings that people are starting to take off their hedges so that people that maybe, you know, once they they they’re convinced to do hedging, and then the hedges start not paying off on on on small down moves, then they think hedging doesn’t work. And so they start taking off the hedges, and that leaves the market vulnerable to that crash. And so that’s what he’s saying, we’re starting to see, you know, the green shoots there that people are not relying on hedges anymore, but it was like one of the most hedge markets through that equity volatility of, of March 2020, through election ball. And then into q4 of last year, people were starting to have a lot of hedges on so if we’re gonna see that supply hedges come down or not.

 

Jeff Malec  32:44

And then my green brought it up on the flip side of that equation is the big institutional level shortfall is down a lot, right? You had the XIV and the Civic Si, coming into Feb. 2018. Were a big example of that. I think he’s even talking the CalPERS or who has it in Canada, like a systematic vol selling program that’s coming way, way in after March of 2020. Right? There’s just not the appetite to sell that at scale yet.

 

 

Jason Buck  33:15

We’ll and we’ll maybe talk about that later on insurance panels, same kind of thing. They said they’re not, they’re not selling, you know, vegan size anymore, or even buying vegan size because they have other alternatives and things have changed in the insurance industry from a regulatory perspective. The other thing that Chris Cole to echo that sentiment, I thought he had a good quote. He said, it’s hard to hard, hard to have a bear market in a bull market and fear. Yeah. So they’re saying, If skews been bid up, it’s you know, it’s very hard to have bear market. But I always like to bring up though too, is like, yes, that trope works that a hedge market doesn’t crash. But if we break through that inflection point, there’s always an air pocket after that. So, you know, 90% of the time works all the time until till we have a huge problem after that. So it’s, you know, even though most people want to eventually take off their hedges. That’s the way we don’t necessarily think about markets that way. Because what if there’s that one event, even though it’s maybe worked for last 10 times, there’s nothing that says it’s going to work for the 11th time?

 

Jeff Malec  34:07

Right? It’s almost counterintuitive, right? You should be hedging The further away. Not that not the normal drawdown but the abnormal drawdown. And my green Aikido like long balls, certainly not cheap. And he’s seeing any payoffs from here in the vol space being pretty symmetrical. In terms of the risk for the cost versus the payoff, which I’d argue there again, I’m like, Yes. Assuming it’s a 20 30% drawdown, I don’t think if it’s a 2008 style, right, s&p is down 56%. I would argue it’s still quite asymmetrical.

 

Jason Buck  34:40

Yeah, I thought that was interesting argue about my mic that with the higher skew and then you’re paying high firm implied that, you know, these these shorter sell offs in duration and even in depth, that they’re more like delta one instruments and yeah, so you’re getting that linear path? Well, you’ll take the linear payoff, at least it’s better but like you would prefer convexity. But then Ben ifer talks about later in his panels like he still thinks like the deeper the money or longer term stuff has, you could still find a lot of convexity there. It’s just not paying off yet. It’s like when we if we get a sharper sell off and realize really spikes above implied we’ll see some some serious convexity there and we’ll get into maybe why and what tenors later. But one thing I will touch on today, I don’t know, the next on your notes is they ask them what they all thought the risks were. So you know, it’s I hate when our managers become a macro tourists. But you know, these guys can’t help themselves so so they asked him what they you know, because it started devolve into like the global landscape and what are the macro events they’re worried about. And once again, and we were talking about gray swans or known unknowns in this in this section, which was the bulk of it. And Chris Cole was banging the drum of corporate solvency again, and to his point is like you don’t see real vol in markets till you see just absolute credit default. And so that that reverberates through the system. Mike Greene’s number one risk was China, he still thinks that’s huge, looming risks that we’re losing attention span for. And Jim Carson actually echoed Mike Greene’s on China but then he talked about, you know, fiscal policy, and any sort of fiscal mistakes there. And then you talked about that rise and US dollar and the wrecking ball that the dollar can present. And then what I liked as a veneer came out of left field and said he thinks the big known unknown is Japan.

 

Jeff Malec  36:21

And so he’s kind of an audible gasp in the audience, right? Like, what? Japan? What Why Japan? What did he say? You remember,

 

Jason Buck  36:28

basically, like everybody has been quiet about Japan and the idea of right now and you know, I don’t have any hero trades, but the one I do really like right now, is shorting JGBs. You know, especially because, you know, they’ve, they’ve said they’re going to yield curve control, they’re going to pin it up 50 bips but it’d be interesting if the market can break through there. So it’s just another, you know, Soros etrm kind of experience. But why why I think they trade so interesting is that because everybody got burned for decades on short JGBs. And so you have all this recency bias, with a lot of managers that if you told them, you’re shorting GDP, JGBs people think you’re a lunatic. So I wonder if that’s part of the trade. And so that’s why veneer, there’s

 

Jeff Malec  37:05

those non professionals out here shorting JGBs Japanese government bonds, shorting them short, the bond rates higher. So it’s basically betting that the Japanese central bank can’t keep their rates pinned at 50 bibs and that it’s going to go up to 1% 2%, whatever.

 

Jason Buck  37:23

And the size of the Quebec so you can get there, especially when everybody’s on the other side is always interesting. And I think what

 

Jeff Malec  37:29

US bonds here, like the convexity on that this, to start this year has been huge. Nobody thought coming off that zero bound, right. Any move and rates that get huge convexity though.

 

Jason Buck  37:39

Yeah, I think that veneers point was everybody’s focused on China and Russia. And so like the reverberations that we’re already seeing with China, I mean, Japan’s cracking, that those could reverberate much larger than China, Russia potentially could.

 

Jeff Malec  37:53

Two things going back, Jim talked a little bit about which I’ve talked with him on the pod and some others on the point of like, are we in the golden age of options trading? Some people said, Are you kidding? I used to be able to trade options in 1995. I think you’ve said that, like you were trading options from your, but he had some good point to get Robin Hood, you’ve got the technology. But he thinks it’s more of people’s brains have evolved to the place investors brains have evolved to the place where they want this. Non they they’re understanding non linearity more, and they want to be able to bet on multiple different types of outcomes versus just by like, the stock, I want it to go up like, Okay, I like the stock over this time period, this volatility, so people are moving into the 3d space, essentially. A lot of that is bad. We’ve seen in meme stocks and in Robin Hood, and all that have, like, people don’t know what they’re getting into. But I think overall, I agree with them that, yeah, the the kimono is open the lids off whatever the thing is, and people are rushing into this 3d Chess space. And I think a lot of good will come of it right. You can, you can hedge better. And maybe we’re seeing that, like the hedge, you can hedge all these different types of indices a lot better.

 

Jason Buck  39:02

Yeah, I think that Jim has been doing a great job of like banging the drum on this is like, and that’s why he was hating on like the factors and the same people are telling them like a decade old is that everybody? He thinks factors are linear. Yeah, yeah, linear. And everybody’s making binary bets, right? It’s either up or down. And his point is like, you actually get the full distribution through options trading. And like you’re saying, you’re talking 3d now because we add the factor of time. And that’s why it gives you the broader paintbrush, but also gives you the full distribution and this is why he thinks options are the tail that wags the dog, in that sense is like because of the size and the markets and the distributions and how that can move markets as people try to hedge it on, you know, kind of flows over pros kind of idea. Yeah, Jim has always been banging that drum and I think it’s an interesting way to think about markets is like, yeah, we’re we most people are living in a linear world where we should be living or in a two dimensional world we should be living in a three dimensional world.

 

Jeff Malec  39:53

Mike Green talked a little bit about the duration salah or it’s been mostly a duration sell off so far in rates you Thanks them. The interesting thing is what happens next? Right if we still, if we get some higher rates and the longer end and stuff if corporates aren’t he’s saying are already seeing having trouble getting credit, which feeds back into Chris Cole’s thing he said the debt to GDP or corporate bond to GDP are high yield was high yield. Issuance to GDP is the highest it’s ever been highest it’s ever been in this rising rate environment. What does that look like? How many companies can’t make their payments, he was saying like 100% of corporate profits are gonna have to go to just covering that debt. Right, which is unsustainable, so they’ll either shut down or restructure the debt, right, they have to do something.

 

Jason Buck  40:40

And that’s how I’m in Hyman Minsky’s credit cycle. We eventually get to what he called Ponzi finance, where you can’t like you start off being able to service principal and interest, then as as times get better, we then only service interest. And then as times get better, then we can only use debt to service the interest rate debt. So that’s what he called Ponzi finance. And that’s why like Chris is eventually getting too as rates rise. They can’t service their debt at all. And you know, does that lead to cracks in the system and Chris’s contention is that you really need stuff like credit defaults or deflationary bust, to really rock markets. It’s not necessarily any sort of unholy cascades. Yeah, exactly. That liquidity and solvency are more important than anything else.

 

Jeff Malec  41:23

We’re I think, right? The point there is, that’s when people really panic, right? Like, we’re going out of business. I don’t care what it costs, all that sell this piece or that piece. Right. That’s what really drives acceleration.

 

 

 

Jason Buck  41:32

And that’s his argument right now is that yeah, that’s why we see organized a lot because it’s just in financial assets. We’re not seeing like solvency issues. I mean, he thinks they’re under the, under the hood. So we’ll see. And it was interesting. I thought the other interesting piece that Chris brought up, was that he said, you know, basically, inflation subsumes equity ball. So if you think about what Chris and my buddy Cory always talked about, is like, you know, volatile, volatility cannot be destroyed, only transmuted or transformed. And that would be Chris’s contention is that we’re if we’re not seeing a rise in equity, Vol. It’s because inflation is eating up all that volatility. So

 

Jeff Malec  42:06

as you said another way it’s it’s manifesting itself, it’s an inflation instead of inequity ball. Exactly. Yeah. Thank you. Not to cut Yeah, sorry. Then I had under veneer. This is funny. Just, they finally let him talk. That was my note.

 

Jason Buck  42:24

Veneer came around at the hands of veneer talked about the tiger problem, which you know, I’m gonna love. But and hopefully like Taylor jumped on that, too, is like he’s probably gonna write an essay on it, because I knew Taylor would love this tiger problem, but it comes from, like computer science. But the question really around the tiger problem is, what happened? What do you do when you don’t know? And that’s why veneer had that title originally of, you know, navigating portfolios through unknown unknowns. So if like, you can’t know anything, even though the panel is mainly talking about unknown unknowns, veneer got to this in the end is like, you have to diversify your diversifiers which veneer wrote a great paper on, I highly recommend people look it up. And then you have to focus on the consequences. So you want optionality and you don’t want to optimize portfolios. So his point was when you think you know what’s going to happen in the future, people tend to over optimize to efficient frontiers and take on too much leverage. Where if you go from the basis of I don’t know anything, so I’m gonna focus on the consequences and provide myself with robust optionality is that’s how you construct portfolios for these times.

 

Jeff Malec  43:21

It’s why there was the Santa Maria and the pina colada, what was the Pinta? Right? Right? Hey, one of these three might Let’s send them out, which is probably done because they’re all gonna get caught in the same storm where they found each other.

 

Jason Buck  43:40

There are 100 yards away from each other they tired.

 

Jeff Malec  43:43

But I also love veneers said he had some good lines on the Fed heads. These heads of central banks are lawyers, not economists. And he’s saying they have a problem and they can’t solve solve all three at the same time inflation, employment and GDP. Right and like, you push on one live or something else is going to pop up you push on that head, the old whack amole game, and then he finished whether we should all think the Fed for our jobs and long volatility, because Because eventually, right they’re gonna make it make it pay off.

 

Jason Buck  44:11

And then I’ll give uh, I don’t know if this is talking out of school, but I think he’s talking about it publicly. I’ll give him more colors like for those that don’t know. Veneer is also a helicopter pilot, a jet pilot, and dabbles in writing screenplays. So once again vying for most interesting country snowboarder. Yeah, exactly. It’s so like, that’s what you and I love talking about is like, Why do our long ball guys always take like enormous risk in their personal lives?

 

Jeff Malec  44:36

Yeah, Nolan Smith on the pod couple weeks ago, right? He does like this. Mountain biking, flips and aerials and stuff, veneer, right. And he actually had a good thing. He’s like, Well, on the plane, there’s four stages of flight and there’s a checklist and so to his point of like, there’s known unknowns. What happens if an engine fails? In these like when I was flying out here, I’m like, how many engines? We’ll leave. We’ll leave that one Babe and hit He flew out on a two engine jet.

 

Jason Buck  45:02

And then and then it for those. Chris Cole loves to be a rock climber. My favorite one that I It blows my mind is Bastian blesta likes to do ice climbing and then I’m paddleboarding on on fruit, like, across frigid lakes in the Swiss Alps. I mean, like, it’s yeah, it’s that one’s like, crazy man.

 

Jeff Malec  45:20

And then the question, I asked him stupid question of like, around kind of hedge mark, hedge market crash. And then later on, I wanted to say the question, I wanted to ask him to my mind, if we took all four of you guys, right out of this room into the poker room, and you’re playing poker against each other? Who’s Who’s coming out ahead? That would have been a better question, right?

 

Jason Buck  45:43

That’s really interesting. Now you got me thinking? Oh, I think any of my answers if anybody listens to this, they’re gonna be upset about but I was thinking like, who’s gonna be best? Not necessarily at the mathematics of the hand, because I think

 

Jeff Malec  45:57

there’s gonna be like a race player and kind of playing. Yeah. And like, making you right, like pushing veneers, like, super tight, holding back. Yeah, waiting for the top pair. And then I’m thinking like,

 

Jason Buck  46:11

who’s gonna be best at like playing the player? Because that’s what they’re eventually going to get to? Is the psychology of it. And my first leap was to actually make green on that.

 

Jeff Malec  46:19

Yeah. Yeah. And then Chris would be somewhere in the middle. He’d be dynamic, right? He’d be like, sometimes site. Yeah, sometimes aggressive. That’d be fun.

 

 

Jason Buck  46:28

Then I was also thinking, though, on your sense, like, Jim could throw everybody off because he’d be talking the whole game.

 

Jeff Malec  46:38

Over here, look over here,

 

Jason Buck  46:39

near might get bored. I don’t know. Like, yeah. Interesting. We

 

Jeff Malec  46:43

jump in the time machine and go back and ask that.

 

Jason Buck  46:46

Yeah, that’s great. Harper, like you said, it’s like, we know all these players and even you know, especially on this panel, but even throughout the few days is like, kind of know what they’re gonna say. So I only wrote down things that kind of jumped out at me that were unusual. So I apologize for not giving broader swath to like their actual arguments, because I think you can find those in other places, or if you follow exactly what they are.

 

Jeff Malec  47:08

I just think and got touched on another panel. One thing I wrote down of, like the Mike Green brought up the big reduction in the number of option market makers, right, like it’s just a handful of firms. What does that do that carries liquidity cascade paper? Right, what does that do in some sort of Cascade some sort of liquidity event? They don’t have, right? They’re not a public utility. They don’t have to guarantee liquidity to the market.

 

Jason Buck  47:32

Yeah, so that was that’s a good one because actually, to get more color on that the second day at lunch, my dream Christina and I were having this conversation. And it’s twofold that and if you haven’t read Chris Citymeals Amber’s paper recently about this topic as well as like not only you consolidate it down to like four banks at like the OTC option level so that’s that’s a that’s a worry that you have to consolidate for banks then like you’re saying we’ve consolidated and like for market makers and electronic options you know, whether it’s SIG Wolverine optiver and Citadel and so like when should it like on the on the electric electronic listed markets they can pull liquidity at anytime? And then what happens to the OTC Where do you think counterparty risk and we’re down to like four banks and then maybe they’re having the same trades on average we saw they’re still not talking to each other with the market goes blow up where they’re all like, adding incredible leverage to that system. So

 

Jeff Malec  48:22

yeah, we saw their fastest out the door wins, right?

 

 

 

Jason Buck  48:26

Goldman’s always the fastest out the door. We’re out here. Hey, guys, let’s stick into this together as they’re running out the door.

 

Jeff Malec  48:38

This next one was benchmarks and volatility.

 

Jason Buck  48:41

Yeah. So I have a few notes on this because I thought was interesting. It’s once again, much more like institutional panel. But I thought was interesting is good. Like they were talking about liquidity primarily, right. Stacy Gilbert that runs 10s of billions. Is that right?

 

Jeff Malec  48:56

Yeah. But yeah, she was super smart. Oh, yeah. I pulled it up. Yeah. Yeah. Maybe 40. Some billionaires.

 

Jason Buck  49:02

Yeah. Stacy Gilbert, Glen Mead was talking about during the crisis, the world goes to indexes for liquidity. And so I wrote that down because we think about this often, as we talked about the beginning of this is like the idea of your contractual risk that you’re tied to s&p beta with buying s&p puts, or you can take basis risk and go out and look for convexity and other other marketplaces to hedge your s&p risk. But the interesting thing is like, do you need to do that if the world’s instrument for liquidity is s&p, so like Wayne Himmelstein? I’ve talked about this a lot. It’s like, this is why he believes in s&p index options is because that is a global source of liquidity. And when liquidity dries up, and the world crashes, everybody rushes into the s&p 500, whether it’s SPX or SPX options, even even the options is like it’s the m

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