Episode 197

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Published on:

22nd Mar 2024

Jason Buck: Investing Russian Roulette - An Ergodicity Masterclass

In this episode, the ReSolve team is joined by Jason Buck, co-founder and CIO of Mutiny Funds, to delve into a range of topics, from the concept of ergodicity, portfolio construction, and the importance of diversification in investing. They also discuss the intricacies of the capital efficiency and tax implications of various investment strategies.

Topics Discussed

• Jason Buck's explanation of ergodic and non-ergodic concepts using the analogy of Russian Roulette

• The importance of understanding expected value in portfolio construction

• The role of offense plus defense in winning investing championships

• The concept of capital efficiency in using leverage and its implications for investment strategies

• The tax implications of Return Stacking and how to navigate them

• The significance of broad diversification in investment strategies

• The impact of different market conditions on the performance of long volatility managers

• The importance of maintaining line items in the portfolio for risk protection

This episode provides valuable insights into the complexities of investment strategies, portfolio construction, and the importance of diversification, and is a must-listen for anyone interested in understanding the nuances of investing and portfolio management.

This is "ReSolve's Riffs" – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick, and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management Inc.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association ("NFA"). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
Jason Buck:

I realized I didn't really define ergodic

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and non-ergodic quite clearly.

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The easiest way we think about it

that's very visceral is, if you

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think about Russian roulette, right?

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Would you rather be one of six people

playing Russian roulette or would you

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rather play Russian roulette six times

in a row, That's the difference between

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an ensemble and an individual path.

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if I offer you a million bucks to

play Russian roulette once, you

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shouldn't do it, but you're probably,

you might think about taking it.

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But if I gave you a million dollars,

but you got to do all six of the

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same, like in succession, you're

not going to take that shot.

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So that's the difference between,

that means it's non-ergodic when

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your individual path dependency is

different from the ensemble average.

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Rodrigo Gordillo: all right.

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All right.

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Welcome everybody to another

episode of Resolve Riffs.

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And this time we have the one and

only Jason Buck, CIO of Mutiny

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Funds and co founder of Mutiny

Funds, uh, master of all trades.

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He is a galaxy brain that we always

tap into whenever we have any

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thoughts on pretty much everything.

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But today we're going to focus

a little bit on, um, our area of

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expertise, which is investing.

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Jason, it's been a long time, man.

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How you been?

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Not necessary, sure.

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We can go, we can go Bitcoin if you want.

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Jason Buck: I thought we were going to

talk about, I thought I was here to talk

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about Keto, VO2 Max, that sort of thing.

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And apparently you guys shop at the

same, couch outlet for the color of

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your guys couches in the background

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Rodrigo Gordillo: don't get

me started on that, but yes.

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Jason Buck: Not probably not a lot of

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Adam Butler: but we will not get into.

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Rodrigo Gordillo: How you been Jason?

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Jason Buck: Couldn't be better.

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I actually,

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uhhh I didn't mention it while we

were off I was actually last week I

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was, I don't know if either of you

listen David Senra an event really

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cool to meet, you know, a hundred

other great entrepreneurss that are

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big fans of the podcast and everybody

was kind of doing their own thing.

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It was nice.

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Cause like David had vetted them.

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So it's on kind of a high from that.

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And then kind of crashing over the

weekend after all those intense talks.

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So it reminded me of like some of those.

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the collective events or real vision

blacklist where you're in those

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intense conversations like 24/7,

which is, it's really exciting, but

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really exhausting at the same time.

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Rodrigo Gordillo: Oh

yeah, day one is amazing.

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Day two is pretty good.

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Day three, you're like, how

do I hide in the corner?

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Yeah, I remember those.

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it is, uh, draining, right?

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and you're sitting around people that

aren't just first derivative thinkers.

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They're second and third

derivative thinkers.

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So you can't just, go at it half assed.

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You have to, be fully engaged

in those conversations.

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Oh,

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Jason Buck: joy of the privilege that

we're in positions in a lot of times,

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whether it's in hedge funds room or

with other entrepreneurs, I love being

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in those rooms where like you have to

really mind your P's and Q's, you know,

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like when we're sitting around having

a beer with like the in laws or, you

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know, You know, some of your buddies,

you're just kind of shooting the shit.

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You could throw out some macro

opinion or some political opinion

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and everybody just lets it fly.

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But in those rooms, somebody's

like, excuse me, I happen to be

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an expert on that, and then they

deep dive and just crush you.

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And so I always love being

in those kinds of rooms.

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Rodrigo Gordillo: the worst feeling

is a head tilt as you're delivering

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something with a guy that, you

know, brilliant in that space.

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You're like, Oh, here it comes.

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Jason Buck: exactly.

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Rodrigo Gordillo: comes.

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Yeah.

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Well, it's almost like every day

with Butler and Philbrick, honestly.

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Jason Buck: Well, that's why, as you

know, before I said, I was raising

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the cauldron of, of Gen X, just

beating the crap out of each other

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growing up verbally and physically,

so I'm well used to the Kumite.

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Rodrigo Gordillo: Indeed.

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So what, what have you

been working on these days?

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Cause I think.

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You know, honestly, Jason, since the

day I've met you, we've always basically

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said the same thing in different ways

when it comes to the investment side.

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but, uh, you know, I was reading one

of your ahhh blog posts recently that I

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thought was quite insightful in terms of

trying to explain, I guess, ergodicity.

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But, why don't you walk us through

the, the Herschel Walker analogy

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that you guys wrote up recently?

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Jason Buck: Yeah, this is a great essay

written up by my partner, Taylor Pearson.

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but the thing like you're, that.

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Rodrigo's alluding to, we talk about

ergodicity a lot, and, you know, it's

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just a fancy word for sequencing risk

or path risk, right, that we've kind of

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always heard about before, but we try

to attack it in many different ways.

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And, you know, a lot of times people use

sports analogies, but, Herschel Walker was

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actually the, the Herschel Walker trade

was known as the great train robbery.

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Now, I know Philbrick's not on here.

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You guys aren't big, you

know, American football fans.

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But basically in the eighties

and nineties, uh, Herschel

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Walker was a great running back.

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And when Herschel Walker first

came out, he went, he was

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drafted by the Dallas Cowboys.

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And, you know, over his lifetime

achievements, you know, he's

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got hall of fame numbers.

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He put like up over, I think

like 8, 000 rushing yards, close

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to like 5, 000 receiving yards.

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And this was a time when, running

backs didn't do really do receiving.

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So he was really this multi

tool player that people thought

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was a true game changer.

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I think he had about 61 touchdowns ish.

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So, you know, he plays for

Dallas for like three years is

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absolutely crushing it.

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And the Minnesota Vikings think,

we need to get Herschel Walker.

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This one player is going to change

the fate of our organization.

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And now we're going to

win some Super Bowls.

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So in the trade for Herschel Walker,

the Dallas Cowboys received, if I recall

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correctly, eight draft picks and five

players for one player in Herschel Walker.

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And it was like three first

round draft picks, like three

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second round draft picks.

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It was pretty insane.

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So Minnesota Vikings get Herschel Walker.

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turns out the kind of top ticked

him, you know, unfortunately for him.

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And after three years, they traded

him on, I believe to the Eagles and

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then they traded him on the Giants.

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So it was kind of like, kind of, you

know, he put up those great numbers the

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first year and then, and kind of like

languished a little bit after that.

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And they call it the great train robbery

because of the amount of players that

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Dallas got, but more importantly, they

went out right in that next draft and they

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got people, players like Emmitt Smith.

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And they were able to, this is

:

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And then the early to mid nineties,

the Dallas Cowboys used those trades

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to build a team that won three Super

Bowls in the early to mid nineties.

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So that's why it's called

the great trade robbery.

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Cause it was the most lopsided trade in

history, basically one player for eight

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and, and Dallas was able to win three

Super Bowls while the Minnesota Vikings

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were not able to pull it off at all.

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So it was just an example of, just,

we started the beginning of this,

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you know, referencing being in these

rooms at global macro events or

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entrepreneur events and everything.

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And you guys have seen it a million times.

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Everybody's like, what's your number

one trade, you know, whether it's the

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zone conference, whatever everyone

wants to know, what's your number

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one trade, what's your number one

asset class, you know, show me how

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to make a fortune off of one trade.

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And as I know, you guys

don't think that way either.

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You know, we think, thinking teams or

ensembles or portfolio construction,

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because it's more important.

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Like what if you're wrong?

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And it's more of the average.

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return across that team than any

individual trade or individual

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strategy or individual player.

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But it's a, it's a mistake that we

see time and time and time again.

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And, you know, we could use millions

of different sports analogies.

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Like I've been working with, on the

idea of Tour de France, which may be

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more in your, either you guys cyclists,

I know you're swimmers, not cyclists.

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Rodrigo Gordillo: no other stuff,

runner, you know, Gaelic football.

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But that's not,

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Adam Butler: I feel like, we

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Rodrigo Gordillo: I know of it.

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I followed enough of it to

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Jason Buck: yeah, yeah, you

could, you could track it.

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I mean, you know, I know you'd love

to, you know, put on those uniforms

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and get in your full spandex, you

know, and that way you could be a

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team billboard like the rest of them.

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Yeah, exactly.

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Adam Butler: mind.

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My own bedroom.

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Okay.

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Jason Buck: just a, it's a, it's

a dress up for all these rich guys

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to pretend like they're cyclists

with their big beer bellies.

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It's great.

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and I'm sure you guys have seen

this stuff about, you know,

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bone density and everything.

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It's like being in space or something.

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It's a terrible way to get exercise.

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Plus you end up like a T Rex.

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Anyway, the

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Rodrigo Gordillo: Check, check, check.

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We can talk about, you

want to talk about that?

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You want to do a half

an hour detour on that?

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Jason Buck: Absolutely.

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That's, I thought we

were here for VO2 Max.

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So there's 21 stages

of the Tour de France.

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What's very interesting is the yellow

jersey winner, the overall category

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winner, a lot of times may not win

any stage or just a few stages, but

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it's the person with basically the

best time or the best average speed

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over those 21 stages or 21 days.

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Lately, now they're up to 42

kilometers an hour, which I

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believe about 26 miles an hour.

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It's kind of the average speed

to win the Tour de France.

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And during even that time, there's

been two guys that won the Tour de

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France that didn't even hold the yellow

jersey at all to the very last day.

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So once again, it's

about your average time.

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And if you think about Tour

de France, you have the.

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flats for time trials.

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You've got a little bit of

hilly things for sprints.

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You've got the mountains of the climbers

and there's different jerseys, whether

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it's polka dot green jersey, white jersey

for people that can win those stages.

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Because as a overall winner, you

have to be well rounded, right?

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You have to not lag too far behind

on those sprints, not lag too

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far behind on those mountains.

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Make sure your team can really put

up great numbers in that time trial.

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So you have the ability to, once again,

it's your average ensemble through time.

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You know, it's that multiplicative process

that we always talk about day by day.

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How can you do multiply by the

next day, multiply by the next day.

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and that what ends up with your

Tour de France winner, and you

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don't have to be really outstanding

at any one particular side.

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And then it's fractal in nature too,

because you have a team with you.

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All these domestiques are the ones that

are trying to, you know, maybe, Yeah, you

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can, you can ride behind them to get a

little bit of a windbreak, to kind of rest

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during those tough times, pull you ahead.

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They can chase that Peloton down for you.

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There's a lot of things that are

going in that fractal nature of

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everything we talk about with

ensemble approaches to investing.

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you know, it just takes time and

that multiplicative effect to

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really win that championship.

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And we view the same thing, you know, when

it comes to investing, it's offense plus

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defense wins, investing championships for

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Rodrigo Gordillo: And I think that's

a key point here because we talk a

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lot these days about line item risk.

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And if you think about each one of

those teammates within the Tour de

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France, when you actually, there's

a great, I think it's on Netflix,

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but they follow the Spanish team

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Jason Buck: Yep.

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Rodrigo Gordillo: talk about how they're,

Dealing with the different stages

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and how important it is to have your

anchorman to be able to be at the top.

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When you have your lead guy exhaust

himself in the previous run.

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I mean, it takes a few

days to recover from that.

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Your hemoglobin count and

all that, technical stuff.

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But the point is that you are going

to be a loser after being a big winner

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necessarily, physiologically, and you

need your number two and, your other.

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Players to play integral roles.

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And if you are a typical investor and

you're looking at these, these cyclists

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and deciding whether to invest quote

unquote, in them at any given time,

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you might be calling the best cyclist.

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If you see them underperform on the

third, piece of that tour, right?

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So this is what we see all the time.

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You see the idea of an

ensemble makes sense.

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Then you put the ensemble and you get each

individual item, each individual name.

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They have a poor period.

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You call the worst performing.

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You get more money the best performing and

it just creates a lopsided distribution.

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And it's a problem.

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and yeah, I think your sport analogies,

both of them, you know, bring light, try

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to say the same thing in different ways

that, the real goal here is to minimize

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the team's distribution of outcomes

and maximize the chances of success.

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So I love that, um, that cycling analogy

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Adam Butler: Chris Cole had a really

good, similar analogy to that.

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Rodman in the role that he played

with the Bulls for so many years.

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and I just love how it highlights that

you can have a player who is just so

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unbelievably potentiated or synergizes

so beautifully with a certain group

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of people that, all compliment that

player in different ways, or that player

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compliments them in different ways.

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Together, they are much, much bigger

than any of them would be if they

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were to, be a diaspora that all

went to join other teams, right?

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Together, they are something much

larger than the sum of the individuals.

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And I don't know the Tour de France

nearly as well, but I imagine that entire

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team is what wins the championship.

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It's not the guy who passes

the, end line first, right?

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And similar with, Dennis Rodman, clearly

a very, niche player had a very specific

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role that he played on the team.

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He got rebounds and he kicked it back

out to provide new scoring opportunities

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for the other members of the team.

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He didn't score much on his own.

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he didn't have a lot of, you know,

he's a pretty good defenseman in

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general, but didn't have a lot

of great offensive, qualities.

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but without him, they would have

had far fewer opportunities for the

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other members of the team to score.

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And, you know, if you look at your

portfolio in the same way, you can't

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really in any way, determine the

value of any of the constituents of

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the portfolio outside of the context

of the portfolio as a whole, right?

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I think that's very, very challenging

for many people to recognize and it

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makes the decision making hard because

now you're making decisions in a

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multidimensional context, not in the

context of, is this manager good or bad?

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Okay.

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Rodrigo Gordillo: and what's challenging.

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And I'll ask you a question here.

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Jason in, in my experience anyway.

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When you talk to people about

the different components.

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And then you let them see those

different components in their portfolio.

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They have a tough time with it.

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And we often get questions like, why

don't you guys just wrap it all up in

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a single, like a one shot solution?

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And I would say, because then

nobody understands what's going on.

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That, nobody wants the

one and done solution.

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Because it's really, you want to know

what's going on underneath the hood

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and it's so non correlated to S& P 500.

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So you straddle that.

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You talk a lot about diversity of

strategies, diversity of managers, but you

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have a lot of one, one and done solutions.

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how do you, how do you think

about that problem with investors?

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Jason Buck: Yeah, it's the thing

that, as a group, we've been talking

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about for a lot of years now.

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and so like, Adam was saying, like

with Dennis Rodman, if you're looking

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for players that score, right, you're

never going to pick a Dennis Rodman.

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But if you look at his offensive rebounds

specifically, and then you look at Scottie

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Pippen and Michael Jordan scoring, it's

much higher with Rodman on the court.

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And similarly, like soccer, like,

Liverpool got great because they,

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they got Alisson as a goalkeeper and

then Virgil van Dijk as their sweeper.

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And now they could go all out

high octane offense and then

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they start winning championships.

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Cause it's that, that combination, but,

a lot of people have read Dalio and

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that 16 uncorrelated return streams.

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but as we've always talked about

a million times, especially,

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it's not just uncorrelated.

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If you can get negatively correlated

return streams, that's incredibly

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accretive to the portfolio over time.

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Now, individually, if you look at that

snapshot and that negative line item risk

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of, say, tail risk hedging protection, it

looks like a terrible negative line item.

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You know, we've talked about how do you

get over that, hurdle in many different

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ways and whether that's, you know,

zigzag, zog, like we've talked about,

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you guys talked about skis and bikes was,

you know, I always bring up your guys's

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great example from back in the day.

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you know, it's, how do

you put those together?

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So the way, you know, like you said, I

think about it is, if anybody wants to see

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our line items, we're full open Komodo.

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I like to show all that stuff.

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But more importantly, you

have to get investors buy in.

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And so you have to meet

them where they're at.

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And so part of that is we started at a

very high level, just offense and defense.

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So we describe offensive assets

as everything that people know.

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That's like long GDP from stocks,

bonds, private equity, VC, real estate.

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All of those things are

offensive assets in our mind.

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We then like to pair those with

defensive assets, like long volatility,

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tail risk, commodity trend following,

gold, maybe even cryptocurrency.

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We can argue about that later.

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Other people can argue about that.

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Um, but the idea is like, you

need to pair offense plus defense.

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So that's the way we started about, and

then other ways of thinking offense,

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defense, if you want to get more

sophisticated is implicit short volatility

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trades versus long volatility trades

or breakout versus mean reversion.

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And it's about pairing those kinds

of things together and how the, The

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portfolio compound through time.

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So we'd like to put together tons

and tons of lineups to get that

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uncorrelated issue and that negative

correlation, but it really basically

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boils down to offense plus defense,

And that's what we kind of paired

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together in our cockroach portfolio.

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And then like you're saying, Rodrigo,

we allow people to pick, you know,

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if they just want the defensive

assets that fine, if they just want

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the long volatility, that's fine.

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If they just want the

commodity trend, that's fine.

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But then within that, our Mandelbrot

and fractals, we'd like to Then

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use ensemble approaches to even

those different asset classes.

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So we're just trying to get that

broad diversification because we

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don't believe we have a crystal

ball that can predict the future.

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So I think it's a combination of both

it's, you know, to get the emotional

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buy in and we've talked about this many

times when you're dealing with clients.

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If you can't get that elevator

pitch emotional buy in, to offense

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plus defense, then all your

line item risk doesn't matter.

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And so you are right.

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I think if you could package it up

into a, a one product fits all or total

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:

portfolio solution, I think people do

a lot better just seeing that total

351

:

portfolio solution and their, their, let's

call it their monthly returns on that.

352

:

Then they would see in the line items.

353

:

Cause like you said, then

they're going to nitpick those.

354

:

I know Rodrigo, you're intimately

familiar with , there was a, famous

355

:

tail risk manager that they developed a

product in Canada that added tail risk.

356

:

And during the good times,

people had hated seeing those

357

:

negative line items on there.

358

:

And I think it closed down

after like three or four years.

359

:

So it wasn't even, didn't even

get a chance to live through

360

:

the first like black swan event.

361

:

so it's really about.

362

:

I hate to be, it sounds pedantic to

say it's a, form of babysitter tax,

363

:

but by combining those things into

a total portfolio solution and just

364

:

getting your clients to hold those,

it's much better to figure out a

365

:

way for them to hold those defensive

assets so they will be protected.

366

:

And those things can kind of jump

out of the curtain when they need

367

:

them most, either during, a liquidity

cascade, TM to Corey Hoffstein on that.

368

:

Or, you know, like inflationary

environments where you need those

369

:

commodity trend followers or some

sort of, fiat, default diaspora

370

:

valuation where you need those gold

or potentially cryptocurrencies.

371

:

So it's about combining those in

a way that people need the most.

372

:

But then if people do want a deep

dive, we're more than happy to

373

:

show them all the line items.

374

:

Rodrigo Gordillo: So in the mutiny

fund, you would allow people to

375

:

understand what they're holding.

376

:

And I guess that's interesting because I

wonder if that's behaviorally different.

377

:

The idea that, Hey, we, you can look

through the window, but you can't touch.

378

:

Right.

379

:

This is not your portfolio.

380

:

You can look through the window

and be like, it's your portfolio.

381

:

And you can be like, yeah, I,

this is all generally good, but

382

:

can you take that one item out?

383

:

Like, if you can't do that because

you're in a pooled fund, yeah.

384

:

Look all, look through

the window all you want.

385

:

I am not, I am not selling that fund

manager that is down three years in a row.

386

:

Jason Buck: Right.

387

:

It's, yeah, so it's not a, and sorry,

Adam, I'll let you go, but it's, yeah,

388

:

it's not a choose your own adventure.

389

:

Yeah.

390

:

We don't let you mix and match

kind of in the portfolio.

391

:

You get what you get.

392

:

And I, I steer 99 percent of

our clients to the cockroach

393

:

portfolio because it's just better

for them to hold that longterm.

394

:

They're much more likely to hold it

with all those asset classes in there.

395

:

and then quite frankly, you know, there's.

396

:

10, 000 hedge funds out there and

even more, ETFs and mutual funds.

397

:

If you don't like, our particular brand

of putting those together, there's

398

:

plenty of other options for you.

399

:

So it's like, you can get any

color, model T Ford, as long

400

:

as it's black kind of thing.

401

:

And that's the way we

do the cockroach run.

402

:

Sorry, Adam, go ahead.

403

:

Save me from myself.

404

:

Adam Butler: was, I was just going to

say that It is funny there's so much

405

:

advantage to wrapping all these line

items up into a single, return stream.

406

:

And then, of course, clients

always want to look under the hood.

407

:

And there is some benefit because

usually if you've done it properly,

408

:

you've got Something that you can point

to or that they can point to that is

409

:

working, so there's going to be some

equities in the portfolio, equities are

410

:

rallying, you can kind of say, well,

I mean, you own some equities, right?

411

:

You're not all entirely equities.

412

:

So at this point in time, you're,

you're dragging a little bit relative

413

:

to some arbitrary benchmark, but

there's something there, the line item

414

:

there that's, it's delivering this

excitement that you're hoping for.

415

:

And then there's these other line

items that are not shining right now.

416

:

But that we expect to shine under

different market conditions.

417

:

And so they can, you know, they've

got something to root for, even while

418

:

they're enjoying the slow and steady

rise of of the diversified portfolio.

419

:

Jason Buck: Um, know, educate our

clients that like, there's always a

420

:

part of the portfolio that probably

makes you want to throw up, that all the

421

:

news media is telling you not to own.

422

:

You know, we've talked about this a

million times, but bonds the last few

423

:

years, nobody wanted to own bonds, right?

424

:

But it's part of a broader

diversified portfolio.

425

:

And quite frankly, if all your asset

classes are up and to the right, you

426

:

don't have broad diversification, you

need something you hate in that portfolio.

427

:

So it's really about.

428

:

Educating clients, making sure

you find the right clients.

429

:

And I think that's the more

interesting piece to what we all do

430

:

is trying to find your tribe, right?

431

:

And I, I spent a lot of my time trying

to fire clients as they come in,

432

:

because if they're hot money and they're

looking for the hottest thing, they're

433

:

just not the right clients for us.

434

:

We just have, Very different time horizon

and perspectives, and that's fine.

435

:

I'm happy to pass them along that

some may be a good fit for them.

436

:

But a lot of times, you know, most

of the time we're not a good fit.

437

:

So, it behooves us to spend our

time on the clients that have been

438

:

searching for what we do, have tried

to build themselves, are looking

439

:

for a solution like what we have.

440

:

and that understand that broad

diversification means, if

441

:

you're benchmarking to 60, 40.

442

:

which is an arbitrary benchmark,

you know, you can be above or below

443

:

that given any month, quarter, year.

444

:

And then like you're alluding to Adam,

as, as we all know too well, it's

445

:

great that like, especially this year,

you know, each month is different.

446

:

Like, one month, stocks are up and

you're like cheering and then you

447

:

rebalance at the beginning of the

month and then bonds are up, stocks

448

:

are down, you know, commodity trends

going up and down, you know, and you're

449

:

getting this broad diversification.

450

:

And then even more granular

than that, you know, we, we use

451

:

global stocks and global bonds.

452

:

And quite frankly, it's been a

pretty shitty 10 year run for

453

:

like, for global diversification.

454

:

But we just feel that's the

right thing to do long term.

455

:

Rodrigo Gordillo: Yeah.

456

:

And I tend to speak about these

strategies, these all weather, all terrain

457

:

strategies, cockroach strategy as multiple

pistons in a motor, that you want to have,

458

:

because they're going to move up and down

in different times and different ways,

459

:

but if you have them in balance, you're

going to have a well, well balanced motor.

460

:

And oftentimes I think people

think non correlation means, well,

461

:

each one of these is going to have

negative correlation to each other.

462

:

So when most definitely there's going

to be, you're going to have your, non

463

:

equity bond exposures be completely

non correlated and always making money.

464

:

But there is no, even at any given day,

any given month, you can see a possibility

465

:

if you have eight different pistons of

seven out of eight of them being down, Or

466

:

if you just think of the major components

of a risk parity portfolio or the all

467

:

terrain portfolio, which includes trend

following that we've written about.

468

:

You know, you have 2022 where you

see, let's say equity bonds, two

469

:

pistons down trend and commodities,

two pistons up making a zero return.

470

:

And that being a great year for a

cockroach type portfolio, right?

471

:

Like you didn't lose 25%.

472

:

And then the next year, the

two that went down, went up.

473

:

And the other two that went up, went down.

474

:

And you're, ish, like flat ish.

475

:

You're offsetting each other.

476

:

This can happen for a prolonged period

of time in an all terrain portfolio.

477

:

Um, but I just think it's, I wonder

whether the nomenclature, like

478

:

cockroach better than all terrain or

all weather, because it feels like

479

:

cockroaches is about not dying and all

terrain is about winning all the time.

480

:

And I think that's where

the disappointment comes.

481

:

have you found, in the last couple of

years has been one of those periods

482

:

where half the pistons have been

down and the other half have been up.

483

:

have you had difficult conversations about

the resilience of a strategy like this?

484

:

Jason Buck: Yeah, I think you're

always going to have those difficult

485

:

conversations in the interim, Because

it's hard, as you know, in this industry,

486

:

we can only get a 20-30 year back test

and, back tests are caveat emptor,

487

:

and you know, future performance is

not indicative of past returns, right?

488

:

Unless, to me, you build really broadly

diversified portfolios like we all do.

489

:

Then you can have a better intuition

pump that this is a little more

490

:

accurate than probably just a

singular short vol strategy, right?

491

:

Like it just hasn't seen the blow up yet.

492

:

So that gives me at least some

confidence in, in what we do.

493

:

by the way, I realized I

didn't, really define ergodic

494

:

and non-ergodic quite clearly.

495

:

The easiest way we think about it

that's very visceral is, if you think

496

:

about Russian roulette, Would you

rather be one of six people playing

497

:

Russian roulette or would you rather

play Russian roulette six times in

498

:

a row, That's the difference between

an ensemble and an individual path.

499

:

Rodrigo Gordillo: Wait, wait a minute.

500

:

That's so good.

501

:

That's

502

:

Jason Buck: Yeah.

503

:

so , ergodic system is where the

504

:

Rodrigo Gordillo: it out to people.

505

:

Jason Buck: Yes.

506

:

The ensemble is the same.

507

:

Exactly.

508

:

Exactly.

509

:

Like if I if I offer you a million

bucks to play Russian roulette once, You

510

:

shouldn't do it, but you're probably,

you might think about taking it.

511

:

Rodrigo Gordillo: Depends

on how desperate you are.

512

:

You might do it, family's hungry.

513

:

Maybe it's like, you know,

it's a period of starvation.

514

:

Everybody's trying to get

along and have some fun.

515

:

If I die, if I get it,

my family's set for life.

516

:

I might take that one shot.

517

:

Jason Buck: right.

518

:

But if I give you

519

:

Rodrigo Gordillo: often

to do all six barrels?

520

:

Jason Buck: exactly, but if I gave you

a million dollars, but you got to do

521

:

all six of the same, like in succession,

you're not going to take that shot.

522

:

So that's the difference between

that means it's non-ergodic when

523

:

your individual path dependency is

different from the ensemble average.

524

:

And this is where I think.

525

:

Expected value gets people caught

up a lot of times, and they don't

526

:

think about expected value in a

portfolio construction construct.

527

:

And so, you know, that's why we

think about most of our life.

528

:

The more interesting things

in our life are non ergodics.

529

:

So that's the way we try to think about,

you know, hedging out some of that risk

530

:

and trying to have those tighter bands

of Expected value and probabilities

531

:

multiplied together, over the longer

term through broad diversification,

532

:

like we were saying with backtests,

you can have a better, hope for that.

533

:

But yes, I think in, to answer your

question, people have questions all

534

:

the time, like people question why we

held bonds for a long time, you know?

535

:

And like we said, maybe, you know, one

day the bonds will come back, maybe they

536

:

won't, we just don't know when, people,

hate having long volatility and tail

537

:

risk until they really, really need it.

538

:

Then they love having it, you know,

I'm sure when, when stocks, you know,

539

:

eventually tank off, people are going to

hate owning stocks, and then commodity

540

:

trend comes and goes out of fashion,

so these are the kind of life we all,

541

:

we chose to live is, uh, we like to

beat our heads against the wall with

542

:

this broad diversification, but, I

think more importantly for all of us,

543

:

it's not, there's no way for us to even

think or live any other way, right?

544

:

That's the way we think about the future

because I don't have a crystal ball.

545

:

I can't predict the future.

546

:

If I could, you know, then I would

be able to pick what, tell you what

547

:

asset class is going to do great

over the next six months, but I

548

:

don't think anybody possibly can.

549

:

And so that's why the other client,

primarily clients we work with are a lot

550

:

of entrepreneurs, 25 to 45 that sold their

business, had their first liquidity event.

551

:

And like, I always try to tell

them is like, you had to take

552

:

enormously concentrated risk and

you had to get enormously lucky

553

:

to make that kind of wealth.

554

:

Now to keep it, you're going to need

broad, broad, broad diversification

555

:

to preserve and keep that wealth.

556

:

And for a lot of people, that's

very difficult 180 to make.

557

:

So going back to your thing about

explaining what we do or trying to get

558

:

it across to clients, I think it's more

important to get this simple things right.

559

:

Make it very simple about broad

diversification preserves wealth, about

560

:

offense plus defense preserves wealth.

561

:

Those sorts of things.

562

:

If you can't get that, it doesn't

matter about the line items.

563

:

It really doesn't.

564

:

Rodrigo Gordillo: So this is, I had

an interesting discussion with a very

565

:

wealthy individual who I like, I'm

going to use that analogy actually.

566

:

Like you played roulette, you played

it once though, and you got lucky.

567

:

And if they had a couple of failed

attempts, like you played, you got shot

568

:

once your wallet was dead and you had to

come back to life in order to play again.

569

:

But now we want to have a more

consistent rate of return.

570

:

But I was, I was talking to this.

571

:

Very wealthy single family office

and discussing this concept

572

:

of you don't want to lose it.

573

:

Now his view was, Oh no, I have

enough to live off of no matter what.

574

:

Like I don't need hundreds

of millions of dollars.

575

:

So with what I have left, I

should go balls to the wall.

576

:

What do you guys think about,

how do you respond to that?

577

:

and I, I, what, if you're actually

giving proper advice to somebody

578

:

who's got 200 million and that

person lives off of $500,000 a year.

579

:

What's the better advice there?

580

:

Is it to keep it or

581

:

Jason Buck: I'm gonna, I'm gonna,

582

:

Rodrigo Gordillo: all in?

583

:

Jason Buck: I'm gonna jump in before Adam.

584

:

I was about to say, now that you

put a figure on, I was about to say,

585

:

I do know a guy that has a billion

dollars in T bills and lives in Puerto

586

:

Rico and no taxes on those T bills.

587

:

So he can live off of that.

588

:

And he's got plenty more on the other

side for him to go balls to the wall.

589

:

So it really depends on scale.

590

:

That's what, it was a Danny Kahneman, you

know, utility theory, utility maximize.

591

:

It really matters, you know, what your,

what your nut is, what are your living

592

:

expenses, all those sorts of things.

593

:

So I can't really say what somebody

else should do, but what I do think is

594

:

interesting that nobody brings up is

going back to these naming conventions.

595

:

I like, we use cockroach.

596

:

You guys use all terrain,

Ray Dalio used all weather.

597

:

By the way, you crushed it

with the return stacking.

598

:

I think you got to work

on the all terrain.

599

:

So by the way, nobody, everybody

told me not to call it cockroach.

600

:

Everybody's like, don't do that.

601

:

Nobody's, everybody's

going to hate that name.

602

:

And I'm like, will you remember it?

603

:

Cause we know how many people have these

terrible names, like three letter acronyms

604

:

that we can't remember any of them.

605

:

But it's just about, like

you said, survive anything.

606

:

You'll remember it.

607

:

Those sorts of things.

608

:

But getting back to,

what you can live off of.

609

:

Oh, when Harry Brown came up with

his permanent portfolio, which I

610

:

think all of us are doing a somewhat

derivation of, cause Harry Brown kind

611

:

of came up with a four quadrant model

612

:

Rodrigo Gordillo: With what you

could invest in at the time, yeah.

613

:

Jason Buck: Right.

614

:

At the time, the 1970s, he came up

with the four quadrant model that

615

:

we always talk about on the accesses

of, inflation and growth and, kind

616

:

of how that Venn diagram overlaps.

617

:

But what people forget is Harry

Brown also has variable portfolio.

618

:

So he's incredibly smart.

619

:

He said, look, put 80 to 90 percent

of your assets in this permanent

620

:

portfolio that can kind of, uh, you

trundle along in any macro environment.

621

:

And then he's like, I know you're a

human being, so you're going to want to

622

:

take flyers on, you know, specificity

or like things that you think will, are

623

:

going to take off an individual bets.

624

:

And so that's your variable

portfolio is like 10 to 20%.

625

:

Of like your fund money, but

you can't replenish it from

626

:

your permanent portfolio.

627

:

But I think that was a really interesting

thing that never gets brought up.

628

:

People bring up Harry Brown's permanent

portfolio, but they didn't bring up

629

:

the variable portfolio where he really

took into account human psychology and

630

:

our ability to want to bet, to want

to tell our neighbors about our wins.

631

:

Now conveniently we forget to tell

them about our losses, but that's

632

:

how we like to, live in every

day in the, in the real world.

633

:

Sorry, Adam, your, take

should, can they take

634

:

Rodrigo Gordillo: are your

635

:

Adam Butler: Whenever, whenever

someone asks a question like that,

636

:

I always think of, the movie Heat.

637

:

Remember Waingro in the movie Heat, right?

638

:

And, but she, not Pacino, De

Niro's character says, You know,

639

:

you've got plenty put away.

640

:

You don't need this job.

641

:

I recommend you, step back and, you know,

he considers for a second, he says, you

642

:

know, for me, the action is the juice.

643

:

And, I think that for some guys.

644

:

The action is the juice, right?

645

:

Like, it's not about putting money away.

646

:

It's not about having a safety

net for future generations.

647

:

It's not about, wanting to give

it away to, causes you believe in.

648

:

It is the action is the juice, right?

649

:

So it's going to really depend

from person to person, what they

650

:

want to do with that wealth.

651

:

Rodrigo Gordillo: But from an intellectual

perspective, sorry, Jason, go ahead.

652

:

Jason Buck: no, I was going to say

you guys are trend aficionados.

653

:

So, you may remember like the old Ed

Sakota quote that like everybody gets

654

:

what they want out of the markets and

most people want the juice, right?

655

:

Like, it's just like betting on

the ponies or whatever it is.

656

:

Everybody wants some juice.

657

:

And, there's another great movie that

you've guys seen The Gambler with

658

:

Mark Wahlberg and that he's like,

659

:

Adam Butler: years ago.

660

:

Well,

661

:

Jason Buck: I can't

remember the exact numbers.

662

:

Like anybody gets up two to 5

million, you know what you do?

663

:

You buy a house with a 50 year roof on

it, you pay it off free and clear, you

664

:

buy a Japanese shitbox car, and that's

your fortress of fucking solitude.

665

:

And you put like a million

dollars in T bills.

666

:

And he's like, any idiot that doesn't

get that fortress of solitude before

667

:

he wants the juice, that guy's a moron.

668

:

Rodrigo Gordillo: well look, the way I

see it, that's a, I love that by the way.

669

:

but I think.

670

:

Everybody wants the juice, but do

you also have to take the risk?

671

:

Adam Butler: I don't think

everybody wants the juice.

672

:

You know, I think lots of people don't.

673

:

Rodrigo Gordillo: people that tell me that

where they say, look, I got X, I want to

674

:

go for, I want to maximize my returns.

675

:

They're not really willing to put

in hundreds of millions of dollars

676

:

into a single small cap company.

677

:

There's what they're saying is I

want to put it in all equities.

678

:

All right.

679

:

They're put it or private equity.

680

:

Mostly private credit, like they like

the idea maybe of being in the insider.

681

:

But what bothers me about that concept

when we're, let's, let's set the table.

682

:

We're talking about people who are still

investing in equities that on average

683

:

will have a volatility of 15, 20%.

684

:

If you're doing privates, maybe in

reality, your volatility is 20-25

685

:

percent that you're still better off

with a well diversified portfolio.

686

:

If you have access to cheap leverage to

get you to that same level of risk, right?

687

:

If the sharp ratio of an equity

portfolio going back to the, 100

688

:

years is 25 to 30 basis points, right?

689

:

So if you're taking 20 units of risk,

you're going to get six units of return,

690

:

according, if that math is correct, right?

691

:

If I can put together a portfolio

that gives you 60, units, 60 sharp

692

:

points, then you're going to get the

same return for half the volatility.

693

:

Why wouldn't you take that bet every day?

694

:

If you can indeed get access to

enough leverage to get you there.

695

:

And I think you can be most people at

that level will be able to can, and

696

:

nobody's walking them through that.

697

:

I just don't think it exists.

698

:

It's, it's, there's just no,

there's no reason not to do that.

699

:

If

700

:

Adam Butler: I don't know, because I

mean, you and I have observed this For

701

:

many years that we'll go through the

presentation on diversification means

702

:

diversity plus balance, go through

the different economic regimes, go

703

:

through how the different assets

and strategies are fundamentally

704

:

designed to respond in different

ways that are highly complimentary.

705

:

Everyone's nodding through

each of these slides.

706

:

They're, just is the most

obvious thing in the world.

707

:

Once you show it to them.

708

:

And at the end of the Conversation when

it's time to, you know, okay, great.

709

:

how should we move forward on this?

710

:

Well, you know, I'll get back to

you because the reality is there's

711

:

a number of different objectives

that they're trying to meet.

712

:

One of them is, well, I don't want

to look silly and do something that's

713

:

different than my friends because

this might not work out or what my

714

:

friends are doing might work out

way better than anybody anticipates.

715

:

Now I'm way behind.

716

:

I want stuff to be able to talk about

with my friends at, at dinner parties.

717

:

I personally really

like, um, Stock picking.

718

:

I got really excited about new

fundamental trends and love the

719

:

excitement of being part of that.

720

:

Like there's just all these

different dimensions of objectives

721

:

for participating in markets.

722

:

I'm going to go out and say probably a

minority fraction of those motivations

723

:

have anything to do with wealth

maximization or utility maximization.

724

:

You know, most of them are

driven by the limbic system.

725

:

They're often very status oriented.

726

:

And, you know, while stuff makes

sense to the, prefrontal cortex,

727

:

all the rest of their brain is, is.

728

:

Totally asleep as you're going through

all this and getting the nods, you know?

729

:

Rodrigo Gordillo: it's the uh,

Meb Faber hoops, always tapping

730

:

hoops and saying, Hey, whenever

you're ready, fire everybody.

731

:

We can just do the ETF portfolio.

732

:

That's basically 99 percent

correlated to yours, but without

733

:

all the employees and the fees.

734

:

I love that.

735

:

He applied

736

:

Adam Butler: it's like I'm going to

come back to this once I've tried

737

:

and failed at everything else.

738

:

But you know, I've got to try

and fail at everything else

739

:

Rodrigo Gordillo: You know, what, what's

the motivation for hoops to continue to

740

:

do not pay attention to Meb's, suggestion.

741

:

Jason Buck: we love complexity.

742

:

But also like, as, as I told Adam

once, you never go full quant . Like,

743

:

Rodrigo, you never go full rational

when you're trying to do sales, right?

744

:

You're trying to show these rational

layouts and this is what you

745

:

guys do all so well, but people

buy into emotionality, right?

746

:

And it's, it's not really sexy and

it's not really that emotional.

747

:

And that's maybe when it comes to, closing

the sales, it's difficult, when you're

748

:

doing something so different, right?

749

:

Like, so if everybody else is like

doing 64, like Adam said, and all

750

:

their neighbors are trying to,

whatever they're doing, or, you You

751

:

know, chasing these different real

estate deals, whatever, they want

752

:

to be like their neighbors, right?

753

:

They, they like to keep up with the

Joneses or be similar to have, or like

754

:

you said, to have something to talk about.

755

:

Not a lot of people are necessarily, just

as disagreeable as Adam and I are, right?

756

:

Like they like to agree with their

friends and neighbors and have,

757

:

have fun conversations and, not

say, excuse me, excuse me.

758

:

I have a, you know, be that turd in

the punch bowl at all the parties.

759

:

So I think, I think

that's a big part of it.

760

:

I think the other thing is if.

761

:

You know, somebody's got that kind of

money, like we said, that concentration

762

:

risk, if they can sock away, even it's

only 10 million dollars into something

763

:

that's much safer, whether that's T bills

or some sort of permanent portfolio style

764

:

product, then they can take that risk.

765

:

Like, so for a lot of things

wrong with Elon Musk, one of

766

:

the things I do appreciate is

that he's still going for it.

767

:

Like I can understand some

people like it's great.

768

:

A lot of people make a bunch of money

and then they get ultra conservative

769

:

and they get ultra scared of losing it.

770

:

And that's why I think even more so,

like when we were growing up, people

771

:

were just living truth profligate, right?

772

:

Like, especially the wall street was

known as greed is good, all that stuff.

773

:

It's interesting to me that, What is it?

774

:

Bill Perkins book, Die With

Zero is becoming more popular.

775

:

As people in our industry and

people in all the industries

776

:

are just hoarding money because

everybody's so afraid of losing it.

777

:

You almost have a different

problem these days.

778

:

And then quite frankly, like

you said, what would you do

779

:

if somebody made 200 million?

780

:

The whole point is the three of us

here talking don't have 200 million.

781

:

This is why we're on a podcast talking.

782

:

This is why we have products to sell.

783

:

We're trying to get there.

784

:

So I, you know, somebody with 200

million is not going to listen to you.

785

:

For the most part.

786

:

Unless, like Adam said, they went up

200 million, they lost 200 million,

787

:

now they built back up another 100 or

200 million, they got the scar tissue,

788

:

then now they go, yeah, maybe I should

be a little more circumspect about it.

789

:

But if it's their first go

around, it's not really likely.

790

:

Rodrigo Gordillo: Yeah.

791

:

Adam Butler: I also think there's a,

an actualization component too, right?

792

:

Like you reach a certain wealth

threshold and it's not about, can

793

:

I secure a future for my family.

794

:

can I secure, you know,

wealth security for me?

795

:

it's how can I put a dent

in the universe, right?

796

:

It's I want to, I want to, I want

to find meaning with my wealth.

797

:

I want to invest in projects that are

going to make the world better or, be

798

:

exciting in some other way that, that

is, adding in some positive some way to.

799

:

To the world, there's something

about all weather or cockroach or

800

:

whatever, which is retrenching, right?

801

:

It's, it's a defensive

attitude to the world.

802

:

And I, obviously I personally espouse

that, people should take a meaningful

803

:

chunk of their wealth and, commit it

to that kind of strategy, because.

804

:

You do want to truncate that really awful

negative potential downside of bankruptcy

805

:

with, no optionality on getting out of it

or your family, your family's destitute.

806

:

You've got all these future

liabilities for your children, etc.

807

:

Right?

808

:

Like there's, there's a certain amount

you want to protect, but once you've

809

:

reached a point where you can protect

that, I definitely get the idea of

810

:

wanting to project your will on the

world to create positive, some outcomes.

811

:

And to use your wealth

for good in that way.

812

:

Rodrigo Gordillo: again, I know you're

playing devil's advocate here, right?

813

:

But you can create a well

diversified portfolio.

814

:

That creates 2x the wealth

or half the volatility

815

:

Adam Butler: But it's not the

816

:

Rodrigo Gordillo: and then use that.

817

:

Adam Butler: to say, right?

818

:

And I don't, I think we're really,

I mean, we're not really arguing.

819

:

I'm just saying, yes, if wealth

maximization is your only objective,

820

:

there are ways to do that, that are more

efficient than most people choose, but

821

:

most people with that level of wealth,

their objective is not really wealth

822

:

maximization, it's self actualization

823

:

Jason Buck: Yeah, I think Adam's saying

824

:

Adam Butler: they're projecting

their will on the world.

825

:

Jason Buck: Yeah, he's saying

something incredibly prescient.

826

:

I wouldn't say it's more like Defensive.

827

:

The way I think about it is

like, we have a, an, I don't know

828

:

philosophy right about the future.

829

:

And if you don't know, you should really

require a broad diversification and at a

830

:

cocktail party, it's great to know things.

831

:

It's great to talk about the future and

the perversity of the worlds we live

832

:

in whenever we're at these events or

speaking on stage, et cetera, at any

833

:

of these global macro events, it's,

everybody's telling me about the future.

834

:

Tell me what they know, you

know, throw that out there.

835

:

And then I'm just standing

there going, I don't know.

836

:

I don't, I really don't know.

837

:

I don't, I don't have a crystal ball.

838

:

And like, that's not sexy.

839

:

Like you're saying, it's not like

you can call it self actualization.

840

:

You can call it make a

dent in the universe.

841

:

It's just not sexy.

842

:

Right.

843

:

There's just like, nobody likes the

person that just says, I don't know.

844

:

Our entire society and culture

is built on knowing things.

845

:

And in school, you raise

your hand and get called on.

846

:

You're supposed to know things.

847

:

You can't tell the teacher, I don't know.

848

:

It's indoctrinated from a young age.

849

:

And we've had the

perspective, I don't know.

850

:

And that's a very hard thing to live

with because it's just, it's not cool.

851

:

Adam Butler: I just think also that

what's missing and, you know, Rod,

852

:

we've spent a fair amount of time on

this over the last few years, but a

853

:

lot of people, as you say, they gain

wealth through concentrated positions.

854

:

Maybe.

855

:

You know, they were one of the early

people at NVIDIA or Meta or Google or

856

:

Microsoft, or, you know, any number of a

thousand other companies that have, that

857

:

have done well, have generated wealth

for more than just the founder over the

858

:

years, they've got, they're sitting on

a concentrated position that came out of

859

:

that and, they want to continue to bet

on it, or they don't want to maybe face

860

:

the tax consequences of disposition,

or there's a number of reasons why.

861

:

Somebody might maintain that.

862

:

Maybe they're not allowed to sell it

for a term, but they're not aware of

863

:

the fact that they can, pledge some of

the value of that large concentrated

864

:

position to collateralize an allocation

to other positions that may offset.

865

:

Some of the volatility or risk of

catastrophic loss on that catastrophic,

866

:

Rodrigo Gordillo: like a

diversified future strategy on top.

867

:

Adam Butler: So you've got a couple

of big positions in Google or NVIDIA

868

:

or whatever, and you want to hold them

because you, you really believe that in

869

:

AI and the future of these companies,

et cetera, that's great, but it doesn't

870

:

need to be the only thing you own.

871

:

You can have that, maintain that bet, and

then just, You know, deposit those at,

872

:

interactive brokers or something and have

somebody run a managed futures mandate

873

:

on top of that, just use those stocks to

collateralize that strategy or any other

874

:

kind of strategy, like a tail hedging

strategy or what have you, for example,

875

:

maybe your, AI bets are going to pay off,

but the U S economy is going to go through

876

:

a major, recession or, liquidity crunch.

877

:

And your, bet on AI is right, but the

US, but, but the global economy implodes.

878

:

And so there's just things that you can

do to diversify while maintaining most

879

:

of the actualization of that concentrated

bet that you really want to make.

880

:

Jason Buck: Yeah, I want to touch on

two things that you said there, Adam,

881

:

but I'll also get to like, is going

back to Rodrigo's previous question

882

:

is , a lot of times we deal with a

lot of people coming out of like the

883

:

e commerce space and everything and

they go, I know things or whatever.

884

:

And like people have gal man amnesia and

they go, I, sold products on Amazon FBA.

885

:

I understand Amazon.

886

:

I go, really?

887

:

tell me who the CFO is.

888

:

Right.

889

:

They have no idea, Like, so they're

doubling down on their risk or their

890

:

exposure to Amazon by buying Amazon stock.

891

:

And I personally believe, and this

has been the hardest thing to maybe

892

:

get any sort of following with, or

get any sort of foothold is that

893

:

entrepreneurs, business owners should

actually not hold any offensive assets.

894

:

They should only hold defensive

assets because if you're

895

:

buying, you know, stocks, bonds,

private equity, private credit.

896

:

VC, real estate, you're just doubling

down on your long GDP exposure.

897

:

you're doubling down and hopefully

volatility doesn't hit the markets.

898

:

You're just doubling down

that, that credit and liquidity

899

:

is awash in the future.

900

:

And so you're really just really

double or triple or quadrupling your

901

:

exposure to that sort of environment.

902

:

And that's where you get hurt the most.

903

:

so we always think about what we

do as like an entrepreneurial.

904

:

hedge, but that's, really hard

for people to gain traction on.

905

:

But going back to then Adam's point that

I think the two interesting things for

906

:

us to talk about in that vein that I'm

curious about how you guys work around

907

:

is one, our mutual buddy, Corey Hofstein

was on my friend, Bill Brewster's

908

:

podcast the other day, and he was talking

about the capital efficiency, which

909

:

Adam was just kind of referring to.

910

:

But what I think that's missing a lot

of times people hear, you know, Through

911

:

return stacking, you're adding leverage.

912

:

But what they don't realize is

there's not that deterministic

913

:

payment schedule that you get in

leverage in anything else, right?

914

:

Like if I buy a house or commercial

property, every month that's called the

915

:

15th, that debt service payment's due.

916

:

Every month on the 15th, right?

917

:

And if I don't have the cash flow that

times perfectly with that 15th, I might

918

:

miss a payment and now I'm in default.

919

:

If you're trading futures and options

and you're getting that, financing

920

:

cost, which is like roughly about

the three month T bill rate, it's

921

:

baked into the term structure.

922

:

And you can go long or short

depending on that term structure.

923

:

And I don't think it's talked about

enough that that is a huge difference.

924

:

in using capital efficiency or leverage.

925

:

If you don't have a deterministic

payment schedule on like the 15th

926

:

of the month, that's where you can

truly get into trouble with leverage.

927

:

And I'm just wondering if you,

if you guys have thought about

928

:

different ways of talking about that.

929

:

And then we get into

the second one as well.

930

:

Rodrigo Gordillo: I have some thoughts

about different aspects of the leverage

931

:

side of things, but in terms of the

non deterministic, the fact that, you

932

:

know, the pricing can go up and down,

I don't know, Adam, if you have any.

933

:

Thoughts on it.

934

:

Adam Butler: No, I mean, my, my

big question is always, for most

935

:

people, they, they're experienced

with that as real estate.

936

:

And the challenge is that that bad on real

estate has for the most part paid off.

937

:

I mean, I think it would be

really useful for you to share.

938

:

I know you've done this on occasion

but share, your experience.

939

:

I just think like the hardest

conversations to have are with people

940

:

who have gotten very wealthy with real

estate portfolios, They literally are

941

:

like impossible to shake free of their

belief that real estate is the way, right?

942

:

And like leveraged real

estate especially is.

943

:

Is really the way, for the most part,

Rodrigo and I don't even bother.

944

:

Oh, you got wealthy in real estate.

945

:

Gotcha.

946

:

I don't really have anything

to say for you at all.

947

:

the entrepreneur has a similar

bias, For reasons that we've sort of

948

:

touched on, but the entrepreneur wants

to invest in other entrepreneurs.

949

:

Like if they've gotten wealthy,

I don't want to diversify.

950

:

I want to bet on other entrepreneurs.

951

:

I understand what it's

like to be an entrepreneur.

952

:

I believe that, I

understand entrepreneurship.

953

:

I can identify other people who are

likely to be successful entrepreneurs.

954

:

Why would I do this, diversify into

this thing when I've got this gift?

955

:

So those two types of individuals, I

feel like they're never going to get.

956

:

What we're trying to say and

nothing we can say to them will

957

:

overcome their lived experience.

958

:

Jason Buck: Yeah.

959

:

As, as Rodrigo used to always ask

me, like you're in the Bay area.

960

:

Why don't you go down and talk to

those VCs about like tail risk hedging,

961

:

long volatility and commodity trend.

962

:

Cause it's the perfect compliment for VC.

963

:

And I'm like, have you ever talked to VC?

964

:

They're not interested at all.

965

:

It's just YOLO it and then,

you know, keep YOLOing and keep

966

:

YOLOing until you can't anymore.

967

:

And then you, you raise

another fund, but that's fine.

968

:

Like to your point about Adam, about

commercial real estate, that's,

969

:

what I have a background in and

at best, commercial real estate is

970

:

unbelievable tax helpful in America.

971

:

You know, let's, let's You

know, X, the rest of the world.

972

:

Unbelievable tax alpha that I

don't think people truly understand

973

:

or fully take advantage of.

974

:

And that's more important than

anything else, is the tax alpha of

975

:

being a real estate professional.

976

:

And then in the best case scenario, you

build a:

977

:

So you're constantly rolling

properties and refinancing properties

978

:

to never have a tax consequence.

979

:

And then next thing you know, you've built

up this, 100 million cage around yourself.

980

:

Where, yeah, you could tap the liquidity

through refinancing and everything, but

981

:

now you still have those deterministic

payments like we were talking about.

982

:

And can you service those over time,

especially if something bad happens and

983

:

people don't realize how much of real

estate is just floating rate debt, right?

984

:

Like you can't really get more

than five to 10 year terms and

985

:

it's usually floating rate debt.

986

:

So it makes it incredibly

difficult, especially to service

987

:

the cap rates where they are.

988

:

And then Adam, you asked me to talk

about, so actually somebody just

989

:

asked me at this event in Austin was

interesting, they were, they asked me

990

:

if I was over levered in real estate.

991

:

And I was like, So I was a commercial

real estate developer in Charleston,

992

:

South Carolina, going into 2007, 2008,

the great financial crisis and end up

993

:

blowing up for lack of a better term.

994

:

but then the question

about, was I over levered?

995

:

I said yes and no, in a way, obviously

real estate requires leverage, right?

996

:

Like you, you don't, Put 30 percent

down in cash, the bank finances

997

:

the rest, but it's not necessarily

the leverage that kills you.

998

:

It's the time horizons and the

granularity of those investments.

999

:

So if I'm building out real estate

developments that take two, three, four,

:

00:45:58,012 --> 00:46:01,832

five years to come to fruition, I need

the environment to stay low volatility.

:

00:46:02,142 --> 00:46:05,182

If low volatility or rates pick up

over that time horizon and people

:

00:46:05,182 --> 00:46:08,612

can't close on, let's say, I'm flipping

condo units or whatever, then I get

:

00:46:08,612 --> 00:46:10,132

crushed and I can't make my payments.

:

00:46:10,402 --> 00:46:13,522

So it's not necessarily the leverage

that's the issue in real estate.

:

00:46:13,752 --> 00:46:17,492

It's those deterministic payment

schedules and giving the global macro

:

00:46:17,492 --> 00:46:18,942

environment and a liquidity crunch.

:

00:46:18,962 --> 00:46:19,942

Can you roll over that debt?

:

00:46:19,942 --> 00:46:21,082

Can you refinance that debt?

:

00:46:21,252 --> 00:46:22,822

Or can you make your payments on time?

:

00:46:23,062 --> 00:46:25,242

So that gets back to what I was

saying about what's beautiful

:

00:46:25,312 --> 00:46:26,932

about managed futures or options.

:

00:46:27,382 --> 00:46:29,972

Is you don't have to necessarily

worry about that payment schedule.

:

00:46:29,972 --> 00:46:32,792

It's baked into the term structure of

the instruments that you're trading.

:

00:46:33,682 --> 00:46:33,902

Rodrigo Gordillo: Yeah.

:

00:46:33,902 --> 00:46:34,732

You're, you're trading.

:

00:46:35,217 --> 00:46:38,967

Adam Butler: carry unless you're earning

expected positive carry and in other

:

00:46:38,967 --> 00:46:40,647

dimensions from the trade, right?

:

00:46:41,052 --> 00:46:41,312

Rodrigo Gordillo: Yeah.

:

00:46:41,352 --> 00:46:45,202

It's the, for those who don't

understand it, a futures contract,

:

00:46:45,402 --> 00:46:50,012

you're getting the price movement of

the excess returns above cash, right?

:

00:46:50,012 --> 00:46:53,962

So it's what you're trading is already

stripped out from the cost of borrow.

:

00:46:54,342 --> 00:47:00,485

So if I were to put up a treasury, the,

Price return of the 10 year treasury index

:

00:47:00,525 --> 00:47:02,975

fully paid up like an actual bond return.

:

00:47:03,455 --> 00:47:08,025

And I would have put up a treasury

futures contract, a roll, kind of

:

00:47:08,025 --> 00:47:10,655

stitched together roll yield just

to compare what you'd find is a

:

00:47:10,655 --> 00:47:12,085

big gap between one and the other.

:

00:47:12,485 --> 00:47:15,285

I think oftentimes when I say,

listen, I'm buying a 10 year

:

00:47:15,285 --> 00:47:16,345

treasury futures contract.

:

00:47:16,665 --> 00:47:17,165

Okay, great.

:

00:47:17,165 --> 00:47:19,125

So we're going to get 10

year treasury returns.

:

00:47:19,700 --> 00:47:19,970

No, no, no.

:

00:47:20,000 --> 00:47:22,560

You're going to get 10 year treasury

returns minus the cost of borrow.

:

00:47:23,027 --> 00:47:25,327

And what you trade is the excess returns.

:

00:47:25,947 --> 00:47:29,357

And as a long short futures manager,

you know, you have the benefit of being

:

00:47:29,357 --> 00:47:31,997

able to trade that line long or short.

:

00:47:32,417 --> 00:47:36,694

If it's, there seems to be some sort

of expectation of continued cost

:

00:47:36,694 --> 00:47:40,484

of borrow and treasuries are going

down more aggressively, then you can

:

00:47:40,504 --> 00:47:42,414

play that by going short that thing.

:

00:47:42,634 --> 00:47:42,894

Right?

:

00:47:42,894 --> 00:47:47,987

So when we talk about overlays and we talk

about the benefits of future strategies,

:

00:47:48,377 --> 00:47:52,977

you know, the reason that when we talk

between us, between one CTA shop and

:

00:47:52,977 --> 00:47:55,024

another, we always talk excess returns.

:

00:47:55,024 --> 00:47:56,614

We don't talk about total returns.

:

00:47:57,044 --> 00:47:58,154

So what does that mean?

:

00:47:58,154 --> 00:48:03,254

If, you've had 4 percent annualized excess

returns, that's what you're stacking.

:

00:48:03,254 --> 00:48:05,477

That's, that's already taken

into account to borrow.

:

00:48:05,517 --> 00:48:07,357

So when people ask me, like, are

you sure you're gonna be able to

:

00:48:07,357 --> 00:48:10,080

outperform the cost of borrow long term?

:

00:48:10,080 --> 00:48:11,090

I'm like, well, every.

:

00:48:11,234 --> 00:48:16,434

CTA manager that you know that survived

has had to overcome that cost of borrow.

:

00:48:16,844 --> 00:48:18,254

It does a good job at doing that.

:

00:48:18,254 --> 00:48:20,884

So you're really just stacking

that little juice on top

:

00:48:21,064 --> 00:48:22,374

regardless of what the borrow is.

:

00:48:22,734 --> 00:48:27,274

And you've seen the benefits

of that in periods where rates

:

00:48:27,274 --> 00:48:28,324

were really, really high.

:

00:48:28,334 --> 00:48:31,834

You've seen CTAs provide positive

outcomes above the rate of cash

:

00:48:31,834 --> 00:48:35,464

and you've seen them do it when

rates of borrow were low, right?

:

00:48:35,464 --> 00:48:37,407

So, that's a nuanced.

:

00:48:37,662 --> 00:48:41,649

Part of the discussion that few people

really truly understand at this point.

:

00:48:41,879 --> 00:48:42,229

Jason Buck: And, even,

:

00:48:42,259 --> 00:48:43,112

Rodrigo Gordillo: uh, Go ahead.

:

00:48:43,389 --> 00:48:45,349

Jason Buck: I was going to say even

better, what you guys are hinting

:

00:48:45,349 --> 00:48:48,069

at is that borrow rate is like

close to a bank lending rate, right?

:

00:48:48,069 --> 00:48:51,249

It's like that roughly the three month

T bill trade track tracks over time.

:

00:48:51,249 --> 00:48:53,339

So more importantly, I think

Corey is kind of alluding in this

:

00:48:53,349 --> 00:48:54,999

podcast on the previous podcast.

:

00:48:55,029 --> 00:48:56,289

I don't think he can necessarily say it.

:

00:48:56,299 --> 00:48:57,499

I mean, might want to timestamp.

:

00:48:57,519 --> 00:49:00,509

I'll say this and you guys can tell

me if it's, regulatorily viable.

:

00:49:00,784 --> 00:49:03,614

But what I think is fascinating that

I always think about if you want to

:

00:49:03,614 --> 00:49:06,884

replicate, you know, and we'll, I

want to get more into tax consequences

:

00:49:06,884 --> 00:49:09,724

of like a real estate really is a

tax alpha, as I explained to you, so

:

00:49:09,724 --> 00:49:11,844

you have to fully understand the tax

alpha you're getting in real estate.

:

00:49:12,214 --> 00:49:14,314

But what's interesting with your

guys products, like if you're a

:

00:49:14,314 --> 00:49:17,394

return stacking stocks and bonds, and

let's say I want to build a 50, 50

:

00:49:17,394 --> 00:49:18,694

portfolio stocks and bonds, right.

:

00:49:18,924 --> 00:49:22,774

I can get much more capital efficiency out

of your guys products and I can allocate.

:

00:49:22,984 --> 00:49:25,784

Let's say I'm sitting, we'll make the

math simple, even though good luck finding

:

00:49:25,784 --> 00:49:28,274

houses for these prices, but let's just

say I have a million dollars, right?

:

00:49:28,284 --> 00:49:30,844

And I want a million dollar

portfolio of stocks and bonds.

:

00:49:30,874 --> 00:49:34,674

Well, I can put up 500, 000 into

products similar to what you guys run.

:

00:49:34,864 --> 00:49:36,774

And then I'm sitting on 500, 000 in cash.

:

00:49:37,094 --> 00:49:39,574

And for that leverage to get my

notional value of that million

:

00:49:39,574 --> 00:49:42,344

dollars of 50, 50 stocks and bonds,

like we said, I'm borrowing now

:

00:49:42,374 --> 00:49:43,464

at the three month T bill rate.

:

00:49:43,784 --> 00:49:46,594

Now people are used to going to their

brokerage, like Schwab and borrowing.

:

00:49:46,594 --> 00:49:48,214

And right now that's what, 10, 12%.

:

00:49:48,214 --> 00:49:48,944

It's pretty insane.

:

00:49:49,224 --> 00:49:52,364

The best one is interactive brokers

are passed through SOFR at size, but.

:

00:49:52,474 --> 00:49:53,604

You know, you're getting closer there.

:

00:49:53,614 --> 00:49:56,644

So I can borrow then at the T

bill rate, and then I can use

:

00:49:56,644 --> 00:49:58,414

that 500, 000 cash leftover.

:

00:49:58,434 --> 00:50:01,754

I can go buy my house cash if I

could find a house for 500, 000.

:

00:50:01,754 --> 00:50:02,834

Let's just make that assumption.

:

00:50:03,284 --> 00:50:06,964

And then more importantly, I can

then pay myself back like a loan.

:

00:50:07,004 --> 00:50:09,884

I can now be my own bank

and provide my own mortgage.

:

00:50:10,074 --> 00:50:11,514

Pay myself back plus interest.

:

00:50:11,644 --> 00:50:15,054

None of these are taxable consequences,

and it's a way to use that capital

:

00:50:15,054 --> 00:50:18,884

efficiency to be my own bank and not

be giving that VIG to the bank where

:

00:50:18,894 --> 00:50:22,314

over time I may be paying double or

triple the actual value of my house by

:

00:50:22,314 --> 00:50:23,874

financing that mortgage through a bank.

:

00:50:24,419 --> 00:50:27,079

Rodrigo Gordillo: Yeah, that use

case is, it's just about borrow.

:

00:50:27,079 --> 00:50:29,609

What, what, where, how can you find

the cheapest borrow on the planet?

:

00:50:30,132 --> 00:50:32,935

Okay, so if you want to find the

cheapest borrow on the planet, you go

:

00:50:32,935 --> 00:50:38,502

where the vast majority of the world,

the capital world goes to in order to

:

00:50:38,502 --> 00:50:43,172

achieve that without having to physically

go out to five, seven banks, say, hey,

:

00:50:43,422 --> 00:50:44,992

I need a hundred million dollar loan.

:

00:50:45,582 --> 00:50:48,692

Who I want you all to bid on it

and give me the cheapest price.

:

00:50:48,692 --> 00:50:48,912

Okay.

:

00:50:48,912 --> 00:50:51,932

Which is, I got to do paperwork

with that bank and then that's

:

00:50:51,932 --> 00:50:53,562

on how it's done at that level.

:

00:50:53,572 --> 00:50:56,992

At that level, what you do is you say,

I'm going to go to a futures con, I

:

00:50:56,992 --> 00:51:00,612

need to borrow, treasuries, five year

treasuries, 10 year treasuries, I'm going

:

00:51:00,612 --> 00:51:05,692

to go to the futures market because if

I, if there's a futures contract that is

:

00:51:05,692 --> 00:51:09,682

charging me more than the cheapest bank

will charge me, there's an arbitrage

:

00:51:09,712 --> 00:51:13,672

there, there is somebody that's going

to be willing to take out that loan and

:

00:51:13,672 --> 00:51:17,112

then, you know, Place the, the shorting

position on the futures contract.

:

00:51:17,112 --> 00:51:20,292

And then that futures contract

goes in line with market,

:

00:51:20,382 --> 00:51:21,412

the margin of the market.

:

00:51:21,432 --> 00:51:25,762

So when we think about derivatives

contracts, the reason they're so valuable

:

00:51:25,792 --> 00:51:28,462

is that you are getting the same rate.

:

00:51:29,545 --> 00:51:33,125

The same rate of borrow as

you, as an institution would.

:

00:51:33,125 --> 00:51:33,855

Let me say that again.

:

00:51:34,815 --> 00:51:40,345

You now with, with products out

there in the U S and Canada that have

:

00:51:40,345 --> 00:51:44,605

these derivatives inside these, these

stacking inside, you can now get the

:

00:51:44,605 --> 00:51:46,989

same borrow as an institution gets.

:

00:51:47,524 --> 00:51:50,094

I mean, that alone is mind blowing, right?

:

00:51:50,094 --> 00:51:54,180

And yes, there are portfolio

construction use cases for that.

:

00:51:54,180 --> 00:51:58,410

But like you said, Jason, there's also

a very interesting use case of, hey,

:

00:51:58,410 --> 00:51:59,620

I have a million dollar portfolio.

:

00:51:59,650 --> 00:52:03,837

I want to stay in the market and I

want a mortgage and I want a house.

:

00:52:03,907 --> 00:52:07,997

how do I get exposure to real estate

in a city that I like and also get

:

00:52:07,997 --> 00:52:10,297

exposure to markets and do it cheaply?

:

00:52:10,297 --> 00:52:14,207

Well, the cheapest way to do it is if you

can get a futures contract type of borrow,

:

00:52:14,867 --> 00:52:16,707

Jason Buck: And then it takes

a long at that notional value,

:

00:52:16,707 --> 00:52:19,197

which is the most important thing,

because you're not selling off

:

00:52:19,197 --> 00:52:20,427

your portfolio to buy those assets.

:

00:52:20,427 --> 00:52:21,907

You're still maintaining

that notional level.

:

00:52:21,907 --> 00:52:23,937

Let's say an example, I

use that a million dollars.

:

00:52:23,947 --> 00:52:24,577

Similarly.

:

00:52:24,887 --> 00:52:27,797

The way I think about it, what we do

as an entrepreneurial hedge, if I want

:

00:52:27,797 --> 00:52:30,697

to maintain my notional at, let's say

a million dollars, but I have a, I

:

00:52:30,697 --> 00:52:34,137

have a creative entrepreneurial idea,

but as we all know, business is very

:

00:52:34,137 --> 00:52:35,837

risky and it's most likely to fail.

:

00:52:35,987 --> 00:52:38,857

But if I carve off 10 percent of

that, what we call portable alpha

:

00:52:38,857 --> 00:52:41,667

or capital efficiency, and I put

a hundred thousand dollars in this

:

00:52:41,667 --> 00:52:45,517

business, but I'm maintaining my

portfolio value of that million dollars.

:

00:52:45,722 --> 00:52:48,572

Let's say I blow through all that

100, 000 on that, on that business.

:

00:52:48,572 --> 00:52:49,522

I thought would succeed.

:

00:52:49,722 --> 00:52:51,892

Well, it's not going to hopefully

take me too long to make up for that

:

00:52:51,892 --> 00:52:54,552

because I'm trudging along at that

notional value of that 1 million.

:

00:52:55,132 --> 00:52:57,732

And that's why I think about what we

do much more as like an entrepreneurial

:

00:52:57,732 --> 00:53:01,542

hedge, because I know how difficult

entrepreneurism is, or like buying

:

00:53:01,542 --> 00:53:04,826

properties, et cetera, like all

these things are inherently difficult

:

00:53:04,826 --> 00:53:07,466

and you inherently can't see the

black swans in the future, or you

:

00:53:07,466 --> 00:53:08,576

can't see where your risk lies.

:

00:53:08,886 --> 00:53:10,986

So how do I, how do I reduce that risk?

:

00:53:10,986 --> 00:53:12,526

How do I hedge away a lot of that risk?

:

00:53:12,826 --> 00:53:15,486

And I think there's much more interesting

things with the products we all create

:

00:53:15,736 --> 00:53:17,676

to hedge a lot of entrepreneurial risk.

:

00:53:18,016 --> 00:53:20,696

And then maybe, especially if you're

raising capital from friends, family,

:

00:53:20,696 --> 00:53:23,466

outside sources, having a bunch of

better fiduciary responsibility,

:

00:53:23,466 --> 00:53:26,396

you may need to raise more

capital to maybe hedge that risk.

:

00:53:26,396 --> 00:53:28,906

Like we used to, it's very similar

to, um, they're starting to come back,

:

00:53:28,906 --> 00:53:30,546

thankfully, like zero coupon bonds, right?

:

00:53:30,941 --> 00:53:34,171

Principle protected strategies where at

least you got returned that principle

:

00:53:34,411 --> 00:53:37,601

and you could use the the delta between

what you needed to post for that 10

:

00:53:37,601 --> 00:53:41,141

year, you know, zero coupon bond now

and use that for more risky investments.

:

00:53:41,361 --> 00:53:43,851

So it's about those things like I

think it's a little bit better maybe

:

00:53:43,851 --> 00:53:46,471

than than principle protection because

You know, you can hopefully make a

:

00:53:46,471 --> 00:53:49,411

return over time, given that 10 year

time horizon that you may outpace

:

00:53:49,421 --> 00:53:52,811

that zero coupon bond and maybe not

miss out on the inflationary prints.

:

00:53:53,171 --> 00:53:56,551

But I think it's a very interesting

way of looking at either housing or

:

00:53:56,561 --> 00:54:00,181

entrepreneurship to use the ideas

from return stacking or capital

:

00:54:00,181 --> 00:54:01,251

efficiency that we're talking about.

:

00:54:01,251 --> 00:54:03,701

But the other thing that we've

been hinting at is taxes.

:

00:54:04,131 --> 00:54:06,341

And I'm curious the way you guys

think about it for, let's say for.

:

00:54:06,661 --> 00:54:09,551

US based investor that's a taxable

investor and they're not put in like

:

00:54:09,551 --> 00:54:13,481

a self directed IRA or any 401k,

anything like that is how do you

:

00:54:13,481 --> 00:54:16,081

think about with like a return stack

product, especially when you're

:

00:54:16,091 --> 00:54:17,361

adding those managed futures in there?

:

00:54:17,361 --> 00:54:22,876

Because I think generally everybody loves

the mantra of low fee, no taxes, right?

:

00:54:22,876 --> 00:54:26,296

And ETFs, but we all know as soon

as you put commodities in there, you

:

00:54:26,296 --> 00:54:29,166

know, you have the:

they have a preferential tax treatment,

:

00:54:29,166 --> 00:54:30,546

but they're going to be taxed, right?

:

00:54:30,856 --> 00:54:31,496

And so.

:

00:54:31,921 --> 00:54:35,081

That's another hurdle for you guys

explaining the complexity of what you do.

:

00:54:35,411 --> 00:54:38,909

So how do you think about, do you

think you have to produce, excess

:

00:54:38,909 --> 00:54:42,439

returns over a 60 40 benchmark with

the managed futures to be able to

:

00:54:42,689 --> 00:54:44,829

compensate them for the tax consequences?

:

00:54:44,829 --> 00:54:47,879

Or how do you think about the

Delta, the tax consequences when

:

00:54:47,879 --> 00:54:48,909

you're talking to investors?

:

00:54:49,505 --> 00:54:52,398

Rodrigo Gordillo: So I think this is

an, should be a relatively simple one.

:

00:54:52,398 --> 00:54:56,699

But of course, when we think about

traditional portfolios, you're thinking

:

00:54:56,699 --> 00:55:00,478

about I have a hundred dollars, that

a hundred dollars made 110, a portion

:

00:55:00,478 --> 00:55:02,118

of that is owed to the tax man.

:

00:55:02,698 --> 00:55:05,483

And so that they're going to

take away that return, right?

:

00:55:05,483 --> 00:55:07,883

So let's say I'm investing

in the S&P 500, I make 10%.

:

00:55:07,913 --> 00:55:09,755

You've got to pay and you

want, and you sell it.

:

00:55:09,765 --> 00:55:12,285

So you have what a year should

be long term capital gains.

:

00:55:12,295 --> 00:55:14,335

So you, you have to pay the tax

on the long term capital gain.

:

00:55:14,844 --> 00:55:19,704

The concept of futures on top of an s and

p 500, or the futures on top of anything.

:

00:55:19,704 --> 00:55:22,947

If you're stacking whatever it is,

and you're using futures to do it,

:

00:55:23,067 --> 00:55:29,173

is the S&P 500, let's say, makes you

10%, but you've used margin on that

:

00:55:29,233 --> 00:55:35,783

S&P in order to have another type of

return In the future space, managed

:

00:55:35,783 --> 00:55:39,893

futures are tax as 60 40, meaning 60%

of it goes to long-term capital gains,

:

00:55:39,893 --> 00:55:41,693

40% goes to short-term capital gains.

:

00:55:42,273 --> 00:55:43,573

To be honest, I want to take that back.

:

00:55:43,573 --> 00:55:45,583

Forget about how it's taxed, right?

:

00:55:45,683 --> 00:55:46,483

Forget about how it's taxed.

:

00:55:47,273 --> 00:55:49,300

Let's say it's taxed at 80%.

:

00:55:49,300 --> 00:55:52,990

The fact that you stacked it on

top of the S& P 500 is that you are

:

00:55:52,990 --> 00:55:56,330

going to get something above that

10 percent if that strategy had

:

00:55:56,330 --> 00:55:58,330

a positive rate of return, right?

:

00:55:58,330 --> 00:56:01,110

So you get your 10 percent from S& P.

:

00:56:01,110 --> 00:56:02,030

You're going to get taxed on that.

:

00:56:02,040 --> 00:56:03,240

You may or may not get taxed on that.

:

00:56:03,240 --> 00:56:05,200

If you don't sell, if you do sell,

you're going to get taxed on it.

:

00:56:05,600 --> 00:56:08,091

And then whatever that

future strategy made you.

:

00:56:08,366 --> 00:56:09,836

It's going to be above and beyond that.

:

00:56:09,856 --> 00:56:13,046

And if they take away 80 percent of that,

it's still a positive outcome for you.

:

00:56:13,344 --> 00:56:18,670

So as long as you find a stack that

stacking positively, taxes are less

:

00:56:18,670 --> 00:56:21,680

of an it, you're still better off

doing it than just investing in the S

:

00:56:21,680 --> 00:56:23,360

and P by one is what I'm getting at.

:

00:56:23,440 --> 00:56:27,680

Right now, if people do care about

maximizing the returns on that and

:

00:56:27,690 --> 00:56:30,980

understanding what that means, if you're

doing a full separately managed account,

:

00:56:31,078 --> 00:56:34,158

like Adam was alluding to something like,

you know, somebody owns an Nvidia and then

:

00:56:34,158 --> 00:56:37,308

you stack the strategies on top, you're

Well, the video is not going to be sold.

:

00:56:37,448 --> 00:56:39,928

You will be paying taxes on

whatever future strategies you

:

00:56:39,938 --> 00:56:43,318

have, and that'll be 60 percent

long term, 40 percent short term.

:

00:56:43,848 --> 00:56:47,878

And then if you're doing it within a,

public structure, so all the managed

:

00:56:47,878 --> 00:56:52,068

futures funds, any returns that come out

of, financial assets like currencies,

:

00:56:52,068 --> 00:56:56,860

equities, and bonds will be 60, 40, but

then the big, curve ball is how much.

:

00:56:57,225 --> 00:57:00,541

Of your returns this year came

from commodities, which is

:

00:57:00,541 --> 00:57:02,051

traded on a Cayman blocker.

:

00:57:02,102 --> 00:57:04,122

that's going to be regular

or ordinary income.

:

00:57:04,192 --> 00:57:08,162

And so it's a little bit complicated

to say to somebody, here's what

:

00:57:08,162 --> 00:57:12,192

you can expect every year from a 40

act fund, because it'll all depend

:

00:57:12,192 --> 00:57:13,372

on where the returns came from.

:

00:57:13,392 --> 00:57:16,128

And if we have a year like, the last

couple of years where most of your

:

00:57:16,128 --> 00:57:18,940

assets are in T bills and you're

getting 5 percent on that, then

:

00:57:18,940 --> 00:57:21,972

you're also paying tax on the T bills.

:

00:57:21,982 --> 00:57:22,322

So.

:

00:57:22,445 --> 00:57:25,615

You know, I think it becomes cleaner

if you're a separately managed

:

00:57:25,615 --> 00:57:26,855

account, it's much more clean.

:

00:57:27,315 --> 00:57:30,515

If you're a 40 act fund, you have to

just kind of keep track and keep on

:

00:57:30,515 --> 00:57:33,105

communicating with investors about how

it's going to look like every year.

:

00:57:33,790 --> 00:57:36,390

Jason Buck: Well, the good thing for you,

though, is it goes on to:

:

00:57:36,390 --> 00:57:38,380

We're K1s and people hate K1s.

:

00:57:38,400 --> 00:57:41,640

So I'd much prefer the,

uh, the:

:

00:57:41,640 --> 00:57:44,210

So I want to bring Adam back

in before he falls asleep.

:

00:57:44,318 --> 00:57:46,098

but also like, by the

way, is this my interview

:

00:57:46,173 --> 00:57:47,793

Adam Butler: Buck is buck hosting this and

:

00:57:47,908 --> 00:57:48,188

Jason Buck: Yeah.

:

00:57:48,233 --> 00:57:48,493

Adam Butler: all the guests

:

00:57:48,988 --> 00:57:51,604

Jason Buck: No, because I, I had

a, I had a question that I should

:

00:57:51,604 --> 00:57:54,419

have asked you privately, but like,

it makes me think about, so CTA

:

00:57:54,419 --> 00:57:55,579

trend following strategies, right?

:

00:57:55,899 --> 00:57:58,779

If you're running a replicator

strategy, they're top down or bottom up.

:

00:57:58,799 --> 00:58:01,269

And let's say you're using your

benchmark SocGen trend index.

:

00:58:01,319 --> 00:58:04,839

As we all know, SocGen trend has

just the 10 biggest trend followers

:

00:58:04,849 --> 00:58:08,089

in the world in it, in equal

weight, And as we all know that.

:

00:58:08,267 --> 00:58:12,921

In the last few decades, those big

managers, focus more on the financials

:

00:58:12,921 --> 00:58:16,577

than on the commodity space to be

able to raise more AUM, And as we

:

00:58:16,577 --> 00:58:19,437

know,:

following and that sort of thing.

:

00:58:19,437 --> 00:58:20,917

I mean, still, I think it did great.

:

00:58:20,937 --> 00:58:24,367

Like, especially if you can return stack

it, you know, at that like 2 percent CAGR,

:

00:58:24,427 --> 00:58:26,467

hink that was SocGen trend in:

:

00:58:26,782 --> 00:58:27,522

Great, whatever.

:

00:58:27,542 --> 00:58:28,642

And we'll get back into that in a second.

:

00:58:28,642 --> 00:58:31,476

But like the idea though, I

wonder though, by running a

:

00:58:31,476 --> 00:58:34,056

replicator, it's not necessarily

top down or bottom up replicator.

:

00:58:34,246 --> 00:58:37,959

My question is more like, if you

limit the scope or the choice of the

:

00:58:38,029 --> 00:58:41,179

instruments, because you're trying

to stuff it into this ETF wrapper,

:

00:58:41,489 --> 00:58:42,769

like how much does that concern you?

:

00:58:42,769 --> 00:58:46,744

But it does great for Replicating

that stock gen trend because those big

:

00:58:46,744 --> 00:58:48,174

managers focused on the financials.

:

00:58:48,184 --> 00:58:50,044

So you can kind of reduce the financials.

:

00:58:50,354 --> 00:58:50,784

very similar.

:

00:58:50,784 --> 00:58:52,444

I mean, Andrew Beer is not

here to defend himself.

:

00:58:52,444 --> 00:58:53,894

So I won't talk about that necessarily.

:

00:58:53,934 --> 00:58:55,314

And I have zero problem

with any of this stuff.

:

00:58:55,324 --> 00:58:59,494

I hope people load into commodity,

you know, ETF managed futures.

:

00:58:59,934 --> 00:59:03,094

But like you miss out and we'll get

to the, like the last few months, you

:

00:59:03,094 --> 00:59:06,864

can get some crazy trends and like

these obscure soft contracts, right.

:

00:59:06,864 --> 00:59:10,234

That you're missing out on by reducing

the universe that you allocate to try

:

00:59:10,234 --> 00:59:11,894

to replicate a sock gen trend index.

:

00:59:12,194 --> 00:59:13,854

I'm not sure if that makes

sense, but do you see what kind

:

00:59:13,854 --> 00:59:14,724

of where I'm going with there?

:

00:59:15,524 --> 00:59:19,097

Adam Butler: Well, there's couple of

different points I think you're making,

:

00:59:19,097 --> 00:59:23,537

But one of the big ones is that the

replication indices typically have

:

00:59:23,557 --> 00:59:26,677

a narrower universe of, of markets.

:

00:59:27,327 --> 00:59:29,397

And for scale reasons.

:

00:59:29,672 --> 00:59:32,662

They tend to skew more financial.

:

00:59:33,332 --> 00:59:39,289

Now, the way that the replication takes

place, there's no necessary bias, right?

:

00:59:39,399 --> 00:59:43,659

And if the index itself is not skewing

to financials, there's no reason to

:

00:59:43,659 --> 00:59:47,376

think that the replication strategy

is going to be biased to financials.

:

00:59:47,842 --> 00:59:53,392

You make a point about larger

managers needing to focus more on

:

00:59:53,392 --> 00:59:58,762

financials because, of liquidity

and CFTC limits in commodities.

:

00:59:58,762 --> 01:00:01,592

And that's an absolutely valid point.

:

01:00:01,896 --> 01:00:05,841

And I think that's the big point,

which is that If you're in the top

:

01:00:05,901 --> 01:00:13,167

10 CTAs by market cap or by AUM, then

the amount of excess juice you're

:

01:00:13,167 --> 01:00:19,651

able to extract from more peripheral

CFTC limited or low liquidity markets.

:

01:00:20,157 --> 01:00:22,587

is relatively small anyway.

:

01:00:23,047 --> 01:00:28,927

So while a small CTA manager may be

able to put up gargantuan returns

:

01:00:28,927 --> 01:00:33,787

because a very illiquid market has a

real, spiky, like remember orange juice

:

01:00:34,147 --> 01:00:35,757

a few months back had a, had a huge

:

01:00:35,867 --> 01:00:36,287

Rodrigo Gordillo: Cocoa

:

01:00:36,517 --> 01:00:37,497

Adam Butler: Cocoa is now,

:

01:00:38,047 --> 01:00:39,567

cocoa is certainly more liquid.

:

01:00:41,092 --> 01:00:44,896

Yeah, but, OJ is great

because it's very thin, right?

:

01:00:45,216 --> 01:00:49,506

You just you can't be a large

CTA and trade OJ in any size.

:

01:00:50,166 --> 01:00:54,809

So if you're a small CTA, you can

trade OJ in the same size you trade ES.

:

01:00:55,609 --> 01:00:59,159

Well, if OJ is going to run as an illiquid

market, it's going to show up as really

:

01:00:59,159 --> 01:01:04,162

strong percent returns in those months

that you're capturing those OJ returns,

:

01:01:04,542 --> 01:01:09,142

but it didn't really translate to much

in terms of actual dollar, dollars that

:

01:01:09,142 --> 01:01:14,492

are accrued to the, to the fund or to

the strategy, You've got your big CTA,

:

01:01:14,776 --> 01:01:20,409

you might trade 400 markets, but 80

percent of your returns in terms of the

:

01:01:20,419 --> 01:01:26,319

dollar returns are going to come from,

The same kind of 40 markets, and most

:

01:01:26,319 --> 01:01:28,079

of those are going to be financials.

:

01:01:28,419 --> 01:01:32,196

So you need to take steps, either

heuristic steps as you're forming the

:

01:01:32,206 --> 01:01:37,656

portfolio to say, I, even though majority

of my, my markets that are liquid, that

:

01:01:37,656 --> 01:01:40,276

have high capacity, are financials.

:

01:01:40,916 --> 01:01:45,929

I'm going to limit my allocation to those

financials to ensure that I'm getting

:

01:01:45,929 --> 01:01:50,119

the same amount of risk or my target

amount of risk from commodities, right?

:

01:01:50,379 --> 01:01:54,269

That is an active decision that may limit

the amount of scale that the strategy

:

01:01:54,269 --> 01:01:56,129

will have, So it's just trade offs.

:

01:01:56,819 --> 01:02:01,939

All the way down and, you can't

scale a multi billion dollar trend

:

01:02:01,939 --> 01:02:06,779

replication strategy and also

trade 80 markets in full size.

:

01:02:06,809 --> 01:02:08,679

Like it's just, it's impossible to do.

:

01:02:09,109 --> 01:02:13,272

And the fact is, because, you know,

most advisors are more concerned

:

01:02:13,272 --> 01:02:17,942

with that I under or outperform

this benchmark of big managers

:

01:02:17,952 --> 01:02:22,312

than they are with have I maximized

the potential of trend strategies.

:

01:02:22,312 --> 01:02:22,327

Is.

:

01:02:23,287 --> 01:02:26,107

Then this kind of replication

works really well.

:

01:02:26,527 --> 01:02:31,107

If you actually want to maximize the

performance of your CTA allocation,

:

01:02:31,117 --> 01:02:35,211

there are other ways to do that, We

run other strategies that more formally

:

01:02:35,211 --> 01:02:38,667

have that objective, but that's not

the objective that people are going

:

01:02:38,667 --> 01:02:43,967

for when they buy a relatively low

fee stacking product that is primarily

:

01:02:43,987 --> 01:02:46,357

designed to replicate a benchmark.

:

01:02:47,222 --> 01:02:47,492

Jason Buck: Yeah.

:

01:02:47,502 --> 01:02:50,082

I think, I think another example

is this one, uh, lumber took off

:

01:02:50,082 --> 01:02:51,452

during the Pandy Wandy, right?

:

01:02:51,482 --> 01:02:53,872

The reason it took off was

because the float was so low.

:

01:02:54,072 --> 01:02:55,692

It spiked because nobody's trading it.

:

01:02:55,692 --> 01:02:57,122

Cause the cut, like you

couldn't really get in there.

:

01:02:57,122 --> 01:02:59,482

There's a little bit of money can

move those real markets tremendously.

:

01:02:59,482 --> 01:03:01,422

And that's why it was

lock limit up every day.

:

01:03:01,422 --> 01:03:04,459

But like you're saying, I think there's,

it's interesting on like, the soft side,

:

01:03:04,459 --> 01:03:07,759

the year to date, like those cottons and

Cocos are ripping, you know, you could

:

01:03:07,759 --> 01:03:10,792

also have been, you know, short your

grains, but like, you know, what size

:

01:03:10,802 --> 01:03:15,002

can you get off and how much percentage

of your returns are coming that, Like

:

01:03:15,002 --> 01:03:17,062

you said, I think it's perfect to say

there's trade offs all the way down.

:

01:03:17,062 --> 01:03:19,972

I think that's really

inherently what our business is.

:

01:03:20,002 --> 01:03:22,252

It's every day just dealing with

trade offs and trying to figure out

:

01:03:22,252 --> 01:03:24,772

which trade offs you can accept and

which ones you can't, especially

:

01:03:24,772 --> 01:03:27,332

when you're trying to productize

something for, for retail clients.

:

01:03:27,792 --> 01:03:29,842

I think what I was getting at that,

I think you were alluding to that, I

:

01:03:29,842 --> 01:03:34,182

think is interesting that you'd maybe

have a broader answer to is going back

:

01:03:34,182 --> 01:03:37,552

to where we started of like, people is

always, what have you done for me lately?

:

01:03:37,632 --> 01:03:41,092

During the two thousands, you

know, 60, 40 was like underwater.

:

01:03:41,132 --> 01:03:41,452

Right.

:

01:03:41,472 --> 01:03:44,669

So you had the rise of managed

futures, alternatives, everything

:

01:03:44,669 --> 01:03:45,419

during the two thousand.

:

01:03:45,419 --> 01:03:46,879

So everybody, right.

:

01:03:46,879 --> 01:03:50,199

But it's, it takes, it's like these

slow moving cargo ships, but it takes

:

01:03:50,199 --> 01:03:51,579

like 10 years for people to get there.

:

01:03:51,589 --> 01:03:53,049

They, see a tent in the back 10 years.

:

01:03:53,069 --> 01:03:54,479

Oh my God, the alternatives are amazing.

:

01:03:54,779 --> 01:03:56,369

Then they rush into all these strategies.

:

01:03:56,369 --> 01:03:59,669

And then the:

do poorly after the money's flowed in.

:

01:03:59,889 --> 01:04:02,169

And during the:

40 comes roaring back.

:

01:04:02,419 --> 01:04:03,759

So now we're here in the:

:

01:04:03,819 --> 01:04:05,369

Everybody's talking about 60 40.

:

01:04:05,509 --> 01:04:06,589

Nobody wants alternatives.

:

01:04:06,629 --> 01:04:07,389

Is that part of it?

:

01:04:07,419 --> 01:04:10,339

And then what I'm getting at is I,

I haven't really double checked.

:

01:04:10,339 --> 01:04:12,129

And I'm curious off the top

of your head without, you

:

01:04:12,129 --> 01:04:12,939

know, putting you on the spot.

:

01:04:12,939 --> 01:04:16,469

It's like during the:

into now, like I said, those stock gen

:

01:04:16,469 --> 01:04:18,369

trend managers were primarily financials.

:

01:04:18,791 --> 01:04:22,571

When you really need those CTA

most, do you really need those

:

01:04:22,611 --> 01:04:24,611

less liquid obscure markets?

:

01:04:24,641 --> 01:04:27,641

Like in the:

they produced their returns, right?

:

01:04:27,641 --> 01:04:29,881

Like, so maybe we're looking at

the hindsight bias of the last

:

01:04:29,881 --> 01:04:31,481

20 years saying you're fine.

:

01:04:31,481 --> 01:04:34,681

We're replicating with the financials,

but maybe when you need CTAs most for

:

01:04:34,681 --> 01:04:38,121

like a, if there is a commodity super

cycle, then you need those smaller

:

01:04:38,121 --> 01:04:39,591

contracts that are less liquid.

:

01:04:40,109 --> 01:04:44,136

Adam Butler: The only way to really

get material access to commodities

:

01:04:44,136 --> 01:04:47,346

is by investing in a large

number of small managers, right?

:

01:04:47,346 --> 01:04:49,156

Because any single manager has.

:

01:04:49,417 --> 01:04:54,877

a finite, amount that they can allocate

to any, any particular contract under

:

01:04:54,877 --> 01:05:01,084

CFTC limits, So if you want a really

broad exposure to more esoteric markets,

:

01:05:01,724 --> 01:05:07,034

you just cannot get that by buying

AQR or buying Winton or AHL, right?

:

01:05:07,474 --> 01:05:09,194

They've got phenomenal research teams.

:

01:05:09,194 --> 01:05:10,264

They run great strategies.

:

01:05:11,163 --> 01:05:15,174

But they just cannot possibly

allocate materially to the

:

01:05:15,244 --> 01:05:17,794

tail of esoteric contracts.

:

01:05:17,794 --> 01:05:22,947

You know, the AHL alpha strategy

has one of the best track records in

:

01:05:22,957 --> 01:05:27,124

the business, but it's a, secondary

and tertiary market strategy.

:

01:05:27,134 --> 01:05:31,139

It doesn't even trade any of the

more common liquid futures markets.

:

01:05:31,139 --> 01:05:35,589

And by design, It therefore cannot

scale to hundreds and hundreds

:

01:05:35,589 --> 01:05:38,419

of millions of dollars, right?

:

01:05:38,999 --> 01:05:40,719

The trade offs are along a

few different dimensions.

:

01:05:40,719 --> 01:05:45,629

One of them is access, Like, you can run

a much more complex, diverse, Managed

:

01:05:45,629 --> 01:05:47,679

future strategy within a mutual fund.

:

01:05:48,529 --> 01:05:53,739

And you can very easily return stack

in a mutual fund, the same way as you

:

01:05:53,739 --> 01:06:00,896

can in an ETF, but getting shelf space

as the mutual fund from, all of the

:

01:06:00,896 --> 01:06:06,729

major, wire houses or RIA platforms

or whatever is a lot more complicated.

:

01:06:07,479 --> 01:06:12,089

And, you know, the zeitgeist

right now is nobody, there's no

:

01:06:12,089 --> 01:06:13,339

dignity in buying mutual funds.

:

01:06:13,339 --> 01:06:14,619

Everyone wants to buy ETFs.

:

01:06:15,261 --> 01:06:19,321

So, you know, you launch something

ETF, there's things you can

:

01:06:19,371 --> 01:06:20,671

easily do in a mutual fund.

:

01:06:20,671 --> 01:06:22,531

You can't quite as easily do an ETF.

:

01:06:23,261 --> 01:06:24,261

There's trade offs.

:

01:06:24,411 --> 01:06:27,681

A lot more investors from around the

world can buy an ETF than can buy a U.

:

01:06:27,681 --> 01:06:27,811

S.

:

01:06:27,811 --> 01:06:28,501

mutual fund.

:

01:06:29,191 --> 01:06:32,601

But you're slightly more limited

in what you can do in an ETF than

:

01:06:32,601 --> 01:06:33,711

what you can do in a mutual fund.

:

01:06:34,161 --> 01:06:37,521

So, you know, access is

a really big dimension.

:

01:06:37,941 --> 01:06:41,421

So, you know, just figure out what

you're, who you're trying to serve.

:

01:06:41,876 --> 01:06:46,096

What the objectives are, what the

objectives of the end buyer of the

:

01:06:46,096 --> 01:06:48,836

product are, and then try to optimize.

:

01:06:48,836 --> 01:06:52,942

And different clients are going to find,

optimal exposures through different means.

:

01:06:53,552 --> 01:06:58,341

Clients with really big positions in

Google and Meta and, you know, whatever

:

01:06:58,341 --> 01:07:04,512

are going to want to have those on

a posit at Goldman Sachs or Morgan

:

01:07:04,512 --> 01:07:09,532

Stanley or Interactive Brokers and run

a future strategy on top of that, right?

:

01:07:09,562 --> 01:07:11,042

That is vastly more efficient.

:

01:07:11,122 --> 01:07:15,572

You can get as much access to

esoteric markets as you want within

:

01:07:15,572 --> 01:07:18,912

the limitations of whatever are

offered on that, broker's platform.

:

01:07:19,482 --> 01:07:23,586

But if you're not in that position and

you're a retail investor or you serve

:

01:07:23,596 --> 01:07:27,826

retail investors, you've got a more

limited product list and you know,

:

01:07:27,826 --> 01:07:29,076

you, you make do with what you can.

:

01:07:29,661 --> 01:07:32,491

Jason Buck: Maybe it's just me, like in

my via negativa in general is like, I

:

01:07:32,501 --> 01:07:35,641

think it's important for us to illuminate

or elucidate those, those trade offs.

:

01:07:36,016 --> 01:07:38,476

Like, cause I think that's like, you

know, a lot of times I'm sure before

:

01:07:38,476 --> 01:07:40,496

you guys launch your products, we were

getting those questions all the time.

:

01:07:40,506 --> 01:07:43,586

It's like, why can't you bring that

institutional quality portfolio and stuff

:

01:07:43,586 --> 01:07:45,346

it into an ETF tax free and low fee?

:

01:07:45,346 --> 01:07:47,546

And I'm just like, here's all

the reasons why we can't, I

:

01:07:47,546 --> 01:07:49,016

wish I could, but I can't do it.

:

01:07:49,056 --> 01:07:51,636

And you know, write your

congressman or whatever it is.

:

01:07:51,656 --> 01:07:54,946

Like there's, there's all these rules

in our industry that make all these

:

01:07:54,946 --> 01:07:57,896

trade offs that we have to think

about constantly, extremely difficult.

:

01:07:58,166 --> 01:08:00,841

And it was also made me think

about Rodrigo, you're, Saying

:

01:08:00,841 --> 01:08:03,901

questions about, you know, selling

rationally and explaining, you know,

:

01:08:03,931 --> 01:08:05,531

using historical representations.

:

01:08:05,921 --> 01:08:08,281

I think it was Jason Zweig said something

like, I can draw you a picture of the

:

01:08:08,281 --> 01:08:11,211

snake, but if I throw a snake in your

lap, you're going to react differently.

:

01:08:11,351 --> 01:08:13,191

Like we've always heard

it a million times.

:

01:08:13,191 --> 01:08:16,501

Like people are like, Oh, if the

market's down 30 to 50%, I'm a buyer.

:

01:08:16,591 --> 01:08:18,470

And I'm like, really, have

you lived through that before?

:

01:08:18,711 --> 01:08:21,264

Do you know how, like how you feel

like the world's ending, everything's

:

01:08:21,264 --> 01:08:22,684

going to shit and like all that stuff.

:

01:08:23,067 --> 01:08:25,466

I think it was, Philbrick, I

think retweeted it, but my partner

:

01:08:25,466 --> 01:08:27,457

Taylor wrote an essay about

like stocks for the long run.

:

01:08:27,836 --> 01:08:30,136

And it was interesting, even just

trying to be, look at basic things.

:

01:08:30,136 --> 01:08:33,791

If you look at global stocks

from the:

:

01:08:33,791 --> 01:08:35,470

over 30 year time horizons.

:

01:08:35,850 --> 01:08:38,941

And if you look at the 25th

percentile, it went from a 7 percent

:

01:08:38,951 --> 01:08:40,401

Kager down to a 2 percent Kager.

:

01:08:40,826 --> 01:08:44,316

So then over a 30 year time rise, I

mean, you have a one in four chance

:

01:08:44,395 --> 01:08:47,406

over a 30 year time rise and make

a 2 percent CAGR on global stocks.

:

01:08:47,826 --> 01:08:50,276

And that was, that was the

difference between starting with

:

01:08:50,276 --> 01:08:53,866

500, 000 and retiring with like

910, 000 versus starting with

:

01:08:53,866 --> 01:08:55,576

500, 000 and retiring with 3.

:

01:08:55,626 --> 01:08:56,286

8 million.

:

01:08:56,576 --> 01:08:58,196

If you could get that 7 percent CAGR.

:

01:08:58,216 --> 01:09:01,006

And this is the idea we're talking

about with non ergodicity, right?

:

01:09:01,006 --> 01:09:01,536

Those issues.

:

01:09:01,595 --> 01:09:04,666

And even worse over that 30 year

time rise, you had a one in eight

:

01:09:04,666 --> 01:09:06,466

chance of finishing underwater.

:

01:09:06,616 --> 01:09:07,656

Over a 30 year time horizon.

:

01:09:07,746 --> 01:09:08,546

One in eight.

:

01:09:08,826 --> 01:09:12,486

And if you go to 20 year time horizons,

it was one in six of finishing underwater.

:

01:09:12,916 --> 01:09:15,645

But like I said, we can show all

those things, but I don't know how you

:

01:09:15,645 --> 01:09:17,145

get people to believe those things.

:

01:09:17,145 --> 01:09:20,546

Like it's a very emotional versus

rational perspective, but we try to

:

01:09:20,645 --> 01:09:21,711

Rodrigo Gordillo: time

versus behavioral time.

:

01:09:21,711 --> 01:09:25,446

That's, uh, Asness's recent,

statement, and I think that's

:

01:09:25,576 --> 01:09:26,442

100 percent true, right?

:

01:09:26,442 --> 01:09:30,292

How do you get people to deal

with, get as close as possible to

:

01:09:30,292 --> 01:09:31,682

statistical time with their behavior?

:

01:09:32,622 --> 01:09:36,211

Honestly, I think a good advisor that

understands what we're talking about,

:

01:09:36,586 --> 01:09:39,935

that's kind of, if, if I'm going to

pay anybody for anything, it's got

:

01:09:39,935 --> 01:09:41,176

to be for emotional handholding.

:

01:09:41,676 --> 01:09:45,026

The problem is, as it stands today, you

know, I'm just, by the way, if there

:

01:09:45,026 --> 01:09:49,066

are, advisors out there who are doing

all terrain or stuff like that, and they

:

01:09:49,066 --> 01:09:52,765

really know it and they know their stuff,

reach out to me because there's a ton of

:

01:09:52,765 --> 01:09:54,756

retail that comes to me and asks for help.

:

01:09:54,756 --> 01:09:57,206

And I only have a handful of

people that they can talk to.

:

01:09:57,701 --> 01:10:01,251

Like very very small elite group

of advisors that are willing to do

:

01:10:01,251 --> 01:10:02,621

that for smaller clients, right?

:

01:10:02,621 --> 01:10:05,021

But and then after that you have

to handhold and that's what you're

:

01:10:05,021 --> 01:10:08,531

paid for as an investor to make sure

that they stick to it That's how

:

01:10:08,531 --> 01:10:12,831

you get closer to uh statistical

time with your behavior, I think

:

01:10:12,996 --> 01:10:13,326

Jason Buck: Yeah,

:

01:10:13,486 --> 01:10:17,249

Adam Butler: I do think you need to

grant investors a little bit of the

:

01:10:17,259 --> 01:10:20,936

benefit of the doubt, and I will say

that I have, it's taken me a long

:

01:10:20,936 --> 01:10:23,332

time to, internalize this, right?

:

01:10:23,342 --> 01:10:27,199

But it is legitimate to

be attempting to find.

:

01:10:27,361 --> 01:10:32,504

A Pareto frontier between minimizing the

risk that all your, your peers, your peer

:

01:10:32,504 --> 01:10:36,354

group are going to outrun you, and that,

by doing something different, you may end

:

01:10:36,364 --> 01:10:42,397

up in the, I failed and I'm alone instead

of the, I failed, but I'm, With all my

:

01:10:42,397 --> 01:10:46,654

friends who failed with me, quadrant,

you know, like it is a difficult thing.

:

01:10:46,664 --> 01:10:49,704

You can know what's right

from a wealth maximization or

:

01:10:49,704 --> 01:10:51,554

utility maximization standpoint.

:

01:10:52,144 --> 01:10:57,674

And then still also recognize that

we live in a social world with

:

01:10:57,867 --> 01:11:01,057

a community of friends around us

that we'd like to spend time with.

:

01:11:01,057 --> 01:11:04,091

And, you know, everybody's

sort of concerned with.

:

01:11:04,591 --> 01:11:08,541

Maybe not day to day preserving

their exact social status, but,

:

01:11:08,751 --> 01:11:12,141

being one of the gang, being one of

the, one of the group and, taste,

:

01:11:12,361 --> 01:11:12,831

Rodrigo Gordillo: I mean,

:

01:11:13,001 --> 01:11:17,247

Adam Butler: stepping too far out of that

is, is very uncomfortable and probably

:

01:11:17,247 --> 01:11:19,167

not rational for, for most people.

:

01:11:19,417 --> 01:11:22,007

Rodrigo Gordillo: I was at a dinner

party on saturday and everybody

:

01:11:22,007 --> 01:11:23,147

was in a good mood, right?

:

01:11:23,147 --> 01:11:27,872

We had a guy in real estate We had a

guy who was a stock trader long only,

:

01:11:28,192 --> 01:11:31,407

you know, we had an investor that

had like a portfolio that was 80 20.

:

01:11:31,911 --> 01:11:34,061

we had a business owner that

whose business was booming.

:

01:11:34,071 --> 01:11:38,161

Like, like you said, all of the

things tied to stuff, positive GDP.

:

01:11:38,281 --> 01:11:40,001

That's I'm going to steal

that one as well, Jason.

:

01:11:40,791 --> 01:11:43,371

And everybody was just

in such a good mood.

:

01:11:43,681 --> 01:11:46,261

Everybody was talking about how well

they were doing their Bitcoin portfolio.

:

01:11:46,261 --> 01:11:46,461

Yeah.

:

01:11:46,471 --> 01:11:47,821

I forgot about the Bitcoin guy, right?

:

01:11:48,381 --> 01:11:50,011

Like Bitcoin portfolio

going through the wind.

:

01:11:50,011 --> 01:11:50,681

I'm like, you know what?

:

01:11:51,026 --> 01:11:54,436

I've been, I'm, you know, my portfolio

is up like four or five percent.

:

01:11:54,976 --> 01:11:56,596

My all terrain portfolio is up.

:

01:11:56,966 --> 01:11:58,146

Mildly okay.

:

01:11:58,776 --> 01:12:01,596

I'm not complaining, but I'm

not as happy as the rest of you.

:

01:12:01,686 --> 01:12:04,396

Everybody's ecstatic and

there's something wonderful,

:

01:12:04,396 --> 01:12:05,236

but I'm like, good for you guys.

:

01:12:05,246 --> 01:12:06,576

Like actually, it's great.

:

01:12:06,606 --> 01:12:07,716

Everybody's in a good mood.

:

01:12:07,936 --> 01:12:09,146

Everybody's doing great.

:

01:12:09,176 --> 01:12:13,246

I love these moments because you know,

the wives are happy, the husband's

:

01:12:13,246 --> 01:12:15,856

happy, everybody, the kids are

happy, they're taking extra trips.

:

01:12:16,226 --> 01:12:18,896

There's something to that

social, like being part of that.

:

01:12:19,336 --> 01:12:22,276

And if you exclude yourself from that,

it might be a little, a little shitty.

:

01:12:22,802 --> 01:12:26,412

but I kind of want to tell me your

thoughts, Jason, but I do want to get

:

01:12:26,512 --> 01:12:28,072

into volatility a little bit before we

:

01:12:28,212 --> 01:12:28,522

Jason Buck: Yeah,

:

01:12:28,782 --> 01:12:30,132

Rodrigo Gordillo: podcast,

so tell me your thoughts.

:

01:12:30,132 --> 01:12:31,472

And then I want to have

a question for you.

:

01:12:32,012 --> 01:12:34,292

Jason Buck: Yeah, I think what

you're saying is like, we're

:

01:12:34,292 --> 01:12:35,472

not permaveres at all, right?

:

01:12:35,472 --> 01:12:39,627

Like, like you said, this, these,

these High liquidity, long GDP, stock

:

01:12:39,627 --> 01:12:40,947

market up environments are great.

:

01:12:40,957 --> 01:12:42,087

Like we all have friends and family.

:

01:12:42,087 --> 01:12:42,637

It's awesome.

:

01:12:42,657 --> 01:12:42,947

Right?

:

01:12:42,947 --> 01:12:45,077

Like, and we want to participate in

those and that's the beauty of capital

:

01:12:45,077 --> 01:12:48,097

efficiency or return stacking is like,

you can give them those stocks and bonds.

:

01:12:48,337 --> 01:12:50,277

And then you could stack in

those defensive strategies that

:

01:12:50,287 --> 01:12:52,307

hopefully jump out behind the

curtain and they need them most.

:

01:12:52,514 --> 01:12:54,364

So you're giving them exactly,

hopefully what they're looking for.

:

01:12:54,364 --> 01:12:56,604

And what Adam was saying is

about finding the clients.

:

01:12:56,693 --> 01:12:57,594

Like I couldn't agree more.

:

01:12:57,604 --> 01:13:00,354

Like I believe in the clients,

like you're sending out your bat

:

01:13:00,354 --> 01:13:01,534

signal or Adam, when you say like.

:

01:13:01,874 --> 01:13:05,254

Pareto, utility maximizing, you know, and

when you're doing these dance on here,

:

01:13:05,254 --> 01:13:08,134

it's because like, it's maybe one out

of a thousand people that agree with us.

:

01:13:08,193 --> 01:13:09,044

And so that's all you're trying.

:

01:13:09,054 --> 01:13:09,564

That's what I'm saying.

:

01:13:09,564 --> 01:13:11,454

I'm trying to find is like the

one out of a thousand focus on

:

01:13:11,454 --> 01:13:13,943

them, eliminate the other 999.

:

01:13:13,964 --> 01:13:15,364

They're just, they don't

like the cut of our jib.

:

01:13:15,784 --> 01:13:18,214

And so it's just trying to find

those people that agree with you.

:

01:13:18,214 --> 01:13:21,094

And I think that, I don't know if

we've talked behind the scenes before,

:

01:13:21,094 --> 01:13:23,264

but I think what is interesting

when you're dealing with financial

:

01:13:23,264 --> 01:13:26,394

advisors is you might have a financial

advisor that buys in, but now they

:

01:13:26,394 --> 01:13:27,994

need 50 of their clients to buy in.

:

01:13:28,054 --> 01:13:30,184

And I think that's much more

difficult than people realize.

:

01:13:30,414 --> 01:13:33,554

And I like to kind of control that

narrative with my clients, because I

:

01:13:33,554 --> 01:13:35,074

know exactly who the end client is.

:

01:13:35,374 --> 01:13:39,614

And because if the advisor fully buys

in, the clients don't necessarily,

:

01:13:39,664 --> 01:13:42,954

they see those negative line items,

they start complaining, you know, then

:

01:13:42,954 --> 01:13:45,004

they're going to, they're going to

make the calls to the advisor and the

:

01:13:45,004 --> 01:13:48,274

advisor is eventually going to cut you

just even though they don't want to, but

:

01:13:48,274 --> 01:13:49,443

then you're getting that whole cloth.

:

01:13:49,443 --> 01:13:52,024

You're just getting cut off because they

believed in you, but the clients didn't.

:

01:13:52,044 --> 01:13:53,834

So you have that secondary effect.

:

01:13:54,054 --> 01:13:56,374

so I just think that's interesting, but

what do you want to talk about at vol?

:

01:13:56,809 --> 01:13:57,009

Rodrigo Gordillo: Yeah.

:

01:13:57,009 --> 01:14:00,529

So, so I just want to, I think vol

has been very confusing for a lot of

:

01:14:00,529 --> 01:14:01,649

people over the last couple of years.

:

01:14:02,639 --> 01:14:04,459

And so you now have

:

01:14:04,794 --> 01:14:06,314

Adam Butler: As opposed to before

when it wasn't confusing at all.

:

01:14:06,454 --> 01:14:07,174

Jason Buck: Exactly.

:

01:14:07,774 --> 01:14:09,544

Rodrigo Gordillo: Well, I think

there were certain expectations of

:

01:14:09,544 --> 01:14:12,934

volatility that in a lot of people's

minds didn't come to fruition.

:

01:14:12,974 --> 01:14:16,231

And you're currently one of the funds

that you have for those that have

:

01:14:16,231 --> 01:14:17,961

big positions is that defensive fund.

:

01:14:18,247 --> 01:14:22,527

and I know part of that is commodity

CTA, but part of that is volatility.

:

01:14:23,414 --> 01:14:28,574

How do you describe that volatility

element, especially in the face of,

:

01:14:28,974 --> 01:14:31,964

maybe we can talk a little bit about

how those long volatility managers

:

01:14:31,964 --> 01:14:36,654

performed in:

and then how you, how do you, um,

:

01:14:36,794 --> 01:14:38,721

articulate what to expect from them?

:

01:14:39,461 --> 01:14:39,731

Jason Buck: Yeah.

:

01:14:39,731 --> 01:14:41,471

So I'll start at a high level.

:

01:14:41,511 --> 01:14:43,751

And one of the things I was yelling

from the rooftops and even talking

:

01:14:43,751 --> 01:14:46,651

to you guys prior to:

:

01:14:47,086 --> 01:14:49,376

When I look at the defensive side

of the portfolio, commodity trend

:

01:14:49,386 --> 01:14:50,906

advisors do incredibly well, right?

:

01:14:50,936 --> 01:14:53,126

They have a high beta to high

inflationary environments.

:

01:14:53,126 --> 01:14:56,016

They have a high beta to recession,

at least protracted, prolonged

:

01:14:56,016 --> 01:14:58,096

recessions they've allegedly done well.

:

01:14:58,106 --> 01:15:00,006

And that's how they originally

got that term crisis alpha that

:

01:15:00,006 --> 01:15:01,096

they've kind of walked back from.

:

01:15:01,556 --> 01:15:03,796

The only time they have

problems is when you have acute.

:

01:15:03,931 --> 01:15:05,161

Liquidity cascades, right?

:

01:15:05,161 --> 01:15:06,011

Like March,:

:

01:15:06,041 --> 01:15:09,091

And I was really scared of

that prior to March,:

:

01:15:09,091 --> 01:15:09,822

And that's exactly what happened, right?

:

01:15:09,822 --> 01:15:10,797

They're on the long side of the trend.

:

01:15:10,797 --> 01:15:11,981

They're on the same trend

of stocks and bonds.

:

01:15:12,371 --> 01:15:15,651

Everything correlations go to one,

even your CTAs go down together

:

01:15:15,651 --> 01:15:16,691

in acute scenario like that.

:

01:15:16,701 --> 01:15:18,401

That's why I believe in

tail risk protection.

:

01:15:18,651 --> 01:15:20,691

So the combination of those

two are very powerful.

:

01:15:20,691 --> 01:15:22,941

Like if you have a sharp liquidity

event, whenever he's caught on

:

01:15:22,941 --> 01:15:26,261

the wrong side, you need some long

volatility or tail risk protection.

:

01:15:26,501 --> 01:15:30,216

If you have a more protracted

recession, like a:

:

01:15:30,296 --> 01:15:31,986

Your CTAs are likely to do better.

:

01:15:32,089 --> 01:15:34,629

and that's why I think the

combo is very powerful for the

:

01:15:34,629 --> 01:15:35,969

defensive side of the portfolio.

:

01:15:36,659 --> 01:15:38,279

And:

:

01:15:38,279 --> 01:15:41,789

Like you said, as anybody really

understood vol, like why did I pick

:

01:15:41,789 --> 01:15:44,719

one of the hardest industries to try to

explain to people is always difficult.

:

01:15:45,019 --> 01:15:47,049

but the thing is with, volatility,

there's so many different path

:

01:15:47,049 --> 01:15:49,599

dependencies, there's so many different

ways of trading vol, even though

:

01:15:49,599 --> 01:15:51,269

we are philosophically aligned.

:

01:15:51,279 --> 01:15:54,049

The thing that we do that I think

that's a bit different is we try to

:

01:15:54,049 --> 01:15:55,729

build institutional style portfolios.

:

01:15:55,729 --> 01:15:56,579

And what I mean by that.

:

01:15:56,624 --> 01:16:00,384

Is maybe a lot of retail clients don't

understand is that, you know, your large

:

01:16:00,384 --> 01:16:05,434

pensions, endowments, or multi strat fund

funds, they look for individual hedge

:

01:16:05,434 --> 01:16:07,774

funds that do very, very niche strategies.

:

01:16:08,094 --> 01:16:10,254

And it may not be like an

absolute return strategy.

:

01:16:10,264 --> 01:16:10,774

It may not be anything.

:

01:16:10,784 --> 01:16:12,804

It may be a very specific strategy.

:

01:16:13,024 --> 01:16:15,644

And what they do is they aggregate

those together into ensembles, and

:

01:16:15,644 --> 01:16:18,874

that's how they build their portfolio,

which is very different from the way a

:

01:16:18,874 --> 01:16:20,394

retail client may assemble a portfolio.

:

01:16:20,394 --> 01:16:21,494

So that's what we try to do.

:

01:16:21,494 --> 01:16:23,774

So when we think about like the

volatility space, like I said, there's

:

01:16:23,774 --> 01:16:25,294

a lot of different path dependencies.

:

01:16:25,654 --> 01:16:29,454

And so we have 14 managers in that vol

space, and we kind of look at them across

:

01:16:29,734 --> 01:16:34,097

relative value, volatility, long, vague

or long volatility, opportunistic trades.

:

01:16:34,477 --> 01:16:37,727

Taylorist trades, and even short

futures, like intraday trend

:

01:16:37,727 --> 01:16:38,747

following on short futures.

:

01:16:38,757 --> 01:16:41,147

Like those are the kind

of spaces we look across.

:

01:16:41,177 --> 01:16:44,587

And even inside of those buckets, we

use once again, that fractal ensemble as

:

01:16:44,587 --> 01:16:47,367

well, where we have different managers

attacking it from different viewpoints.

:

01:16:47,987 --> 01:16:50,597

Now, the reason we do that, like

I said, is the path dependency.

:

01:16:50,597 --> 01:16:54,007

So in:

asking Rodrigo, the interesting,

:

01:16:54,007 --> 01:16:56,587

just like CTAs have a large

dispersion of returns, depending

:

01:16:56,587 --> 01:16:59,547

on what they're doing, volatility

has a large dispersion of returns.

:

01:16:59,557 --> 01:17:04,437

So in:

and our bottom manager was about 60%.

:

01:17:04,932 --> 01:17:08,562

We have a one manager up about

35 and another manager down 25.

:

01:17:08,572 --> 01:17:09,852

So that gives you an idea of the

:

01:17:10,157 --> 01:17:12,937

Rodrigo Gordillo: Now were these long

vol managers or just vol managers?

:

01:17:12,957 --> 01:17:13,227

Cause,

:

01:17:13,291 --> 01:17:16,032

Jason Buck: these, these, this

specific one is long vol managers.

:

01:17:16,032 --> 01:17:17,302

And I'll explain a little bit why.

:

01:17:17,932 --> 01:17:21,572

So as long as you have a kind of mid

range vol environment or a decent, you

:

01:17:21,572 --> 01:17:22,732

know, pops are here, they're involved.

:

01:17:22,772 --> 01:17:26,066

Relative value volatility is kind of

those pairs trading, going long and short,

:

01:17:26,076 --> 01:17:28,476

they can kind of make money in any vol

environment and separate one more in

:

01:17:28,476 --> 01:17:31,216

like a:

:

01:17:31,296 --> 01:17:33,346

Very hard for anybody to

make money in the vol space.

:

01:17:33,626 --> 01:17:34,526

So, that's relative value.

:

01:17:35,236 --> 01:17:39,216

on the other sides of The vol, like I'll

call them opportunistic long vol trades.

:

01:17:39,416 --> 01:17:41,916

You might have managers that

are looking to basically trend

:

01:17:41,916 --> 01:17:43,216

follow volatility, right?

:

01:17:43,286 --> 01:17:46,826

As implied volatility or vega expands,

they're waiting for it to start expanding.

:

01:17:46,826 --> 01:17:48,576

When it reaches a breakout,

they're jumping in and riding

:

01:17:48,576 --> 01:17:49,906

that up before it mean reverts.

:

01:17:50,419 --> 01:17:53,318

So, managers that were doing

that style in:

:

01:17:53,318 --> 01:17:54,479

lot of false breakouts, right?

:

01:17:54,489 --> 01:17:58,289

So they were, they were just like a, a

CTA, a lot of small losses that start

:

01:17:58,342 --> 01:18:02,102

those death by a thousand paper cuts start

to really add up into real serious losses.

:

01:18:02,112 --> 01:18:03,982

t's where that problem was in:

:

01:18:03,982 --> 01:18:04,282

Yeah.

:

01:18:05,041 --> 01:18:09,172

In:

to high vol kind of environment was

:

01:18:09,172 --> 01:18:11,072

that echo of volatility from:

:

01:18:11,402 --> 01:18:15,492

So managers that were trading more

long gamma is a way of looking

:

01:18:15,492 --> 01:18:16,796

at long realized volatility.

:

01:18:17,425 --> 01:18:20,166

So that's the difference between kind of

gamma and vegas implied versus realized.

:

01:18:20,536 --> 01:18:22,606

And, I'll give a really

simplistic example.

:

01:18:22,956 --> 01:18:26,779

If I'm long and at the money call,

I'm long gamma and long vega.

:

01:18:27,304 --> 01:18:29,964

And the gamma is the acceleration

of my Delta or my exposure.

:

01:18:30,254 --> 01:18:34,084

And my Vega is the long implied

volatility, but then I calendar that.

:

01:18:34,084 --> 01:18:34,334

Right.

:

01:18:34,364 --> 01:18:37,957

And six months out, I go short and at

the money call, Which would be a short

:

01:18:37,967 --> 01:18:42,147

gamma, short Vega trade, but because

gamma is highest at the money and you're

:

01:18:42,166 --> 01:18:45,937

offsetting it's theta, your time decay, if

you position that, right, you're going to

:

01:18:45,947 --> 01:18:48,027

have a long gamma trade, short Vega trade.

:

01:18:48,747 --> 01:18:52,137

So in a market like:

having these like little movements

:

01:18:52,137 --> 01:18:55,407

in, in volatility and you constantly

restriking and you have that long gamma

:

01:18:55,407 --> 01:18:58,827

or gamma scalping position, and you're

capturing real out those realized vol

:

01:18:58,827 --> 01:19:02,027

where realized vol a lot of times was

popping higher than implied vol in 22,

:

01:19:02,297 --> 01:19:03,777

those managers did incredibly well.

:

01:19:04,089 --> 01:19:06,099

The other managers that

did really well in 22

:

01:19:06,114 --> 01:19:07,704

Rodrigo Gordillo: and just, can

I stop, can I stop you there?

:

01:19:07,734 --> 01:19:12,304

Will those managers have done just as well

in a continuation of volatility spike?

:

01:19:13,139 --> 01:19:16,046

Jason Buck: I'm gonna, uh, I'm gonna

get to that . So, so you really

:

01:19:16,046 --> 01:19:19,166

need like that, that continuation is

debatable how well they have done.

:

01:19:19,166 --> 01:19:21,686

'cause if it starts to affect an

implied volatility right now you're

:

01:19:21,686 --> 01:19:24,356

short Vega, you're short the implied

volatility, you got a problem.

:

01:19:24,706 --> 01:19:26,386

And I'll get to kind of

latter in a little bit.

:

01:19:26,386 --> 01:19:28,246

The other one that did really well in 22.

:

01:19:28,601 --> 01:19:31,284

Particularly this trading style

is, cross asset volatility.

:

01:19:31,914 --> 01:19:35,311

So if you were buying, deep,

you know, money or like, let's

:

01:19:35,311 --> 01:19:36,561

call it seven to 10 year leaps.

:

01:19:36,561 --> 01:19:40,711

If you had an ISDA on cross asset

volatility and also on rates fall, FX

:

01:19:40,711 --> 01:19:44,781

fall starts spiking, but S& P falls

down, then you can make money on

:

01:19:44,781 --> 01:19:46,421

the, on the cross asset volatility.

:

01:19:46,471 --> 01:19:48,601

Now, the problem is if you have a

portfolio like ours, and most of

:

01:19:48,601 --> 01:19:51,621

our clients are tied to S& P 500

vol, you can only kind of sprinkle

:

01:19:51,621 --> 01:19:52,631

that in around the frontier.

:

01:19:52,631 --> 01:19:52,951

Like you don't

:

01:19:52,951 --> 01:19:53,031

want

:

01:19:53,086 --> 01:19:55,206

Rodrigo Gordillo: want to understand

what you mean by cross asset volatility.

:

01:19:55,216 --> 01:19:58,812

Is it the volatility of, like how many,

how many assets are we talking about?

:

01:20:00,312 --> 01:20:02,142

Jason Buck: Think of managed futures,

like that whole entire space.

:

01:20:02,142 --> 01:20:04,782

Like if you can, if you have an

Insta, you can buy a 7, 10 year leap

:

01:20:04,782 --> 01:20:07,716

on almost everything and have like a

swap that, is a mark to market daily.

:

01:20:08,216 --> 01:20:09,406

And so the idea is.

:

01:20:09,634 --> 01:20:13,924

if you're on, you're in rates fall, you're

in FX fall, you're in commodity ball, you

:

01:20:13,924 --> 01:20:17,084

would have done well in 22, but then, so

then to the flip side of your question,

:

01:20:17,084 --> 01:20:20,754

the continuation or discontinuation,

those managers that did the best in

:

01:20:20,754 --> 01:20:23,004

22, probably did the worst in 23.

:

01:20:23,523 --> 01:20:26,414

So this is why you have that ensemble

of returns and that dispersion.

:

01:20:26,414 --> 01:20:29,193

And then the ones that were maybe doing

the trend following on vol, they didn't

:

01:20:29,193 --> 01:20:30,794

even have any opportunities in 23.

:

01:20:30,834 --> 01:20:35,754

Cause I don't know if you guys remember

23 is very similar to, 17 or 19.

:

01:20:35,754 --> 01:20:36,884

We had two days.

:

01:20:37,209 --> 01:20:40,489

in the entire year where the

market moved plus or minus 2%.

:

01:20:41,179 --> 01:20:42,749

We had two days of backwardation.

:

01:20:42,809 --> 01:20:46,068

Like it was only, I think it was in maybe

like two days where vol went above 20.

:

01:20:46,099 --> 01:20:51,479

Like it was the lowest vol environment

in 23, similar to seven, uh, 17 and 19.

:

01:20:51,489 --> 01:20:55,249

So that makes it difficult for any

vol strategy to aggregate those up.

:

01:20:55,249 --> 01:20:56,109

That makes it difficult.

:

01:20:56,419 --> 01:20:57,559

but like you're saying, if you're.

:

01:20:57,727 --> 01:21:00,737

If you're doing that cross asset vol,

and then let's say You have a liquidity

:

01:21:00,737 --> 01:21:05,007

event, like March of:

crashes except for S& P vol spikes because

:

01:21:05,027 --> 01:21:06,527

it's the most liquid market in the world.

:

01:21:06,777 --> 01:21:08,087

You may be getting a trade off, right?

:

01:21:08,087 --> 01:21:11,117

You're taking basis risk, as we know,

like by, by not pinpointing your

:

01:21:11,117 --> 01:21:12,747

risk, you're taking that basis risk.

:

01:21:12,987 --> 01:21:16,187

So you have to be, once again, trade offs

all the way down as Adam referred to.

:

01:21:16,187 --> 01:21:19,367

So those are the kinds of things

that we look at is like, Trying

:

01:21:19,367 --> 01:21:22,047

to have a sprinkling and a

diversification across all strategies.

:

01:21:22,187 --> 01:21:24,677

But like that kind of dispersion

across the ball space is similar

:

01:21:24,677 --> 01:21:27,867

to the commodity trend space is, is

why I firmly believe on, on broad

:

01:21:28,162 --> 01:21:30,252

Rodrigo Gordillo: Especially small

managers in the CTI space that can

:

01:21:30,252 --> 01:21:32,302

trade those smaller markets in size.

:

01:21:32,312 --> 01:21:36,702

So when, uh, but, but ultimately when

you look at the ensemble of volatility,

:

01:21:36,712 --> 01:21:40,732

all of those managers are trying to make

money in periods of abrupt illiquidity.

:

01:21:41,257 --> 01:21:42,507

And abrupt losses, right?

:

01:21:42,507 --> 01:21:43,537

They're all trying.

:

01:21:43,647 --> 01:21:46,207

It's not going to mean that they're

all going to, I'm, I'm actually

:

01:21:46,207 --> 01:21:48,207

asking, are they all trying to do that?

:

01:21:48,227 --> 01:21:50,647

Like, are they all expected

to make money in:

:

01:21:51,457 --> 01:21:51,637

Jason Buck: Yeah.

:

01:21:51,637 --> 01:21:51,767

So

:

01:21:51,777 --> 01:21:52,247

Rodrigo Gordillo: their minds

:

01:21:52,267 --> 01:21:52,307

Jason Buck: part.

:

01:21:52,781 --> 01:21:54,941

It depends on who you pick,

like a relative value.

:

01:21:54,981 --> 01:21:58,151

Like, so we try to find relative value

managers, which I would argue that Paris

:

01:21:58,171 --> 01:21:59,521

trade is implicit short volatility.

:

01:21:59,531 --> 01:22:01,891

Whenever you have a sort of Paris trade

on, and by the Paris trade, I mean,

:

01:22:01,891 --> 01:22:06,101

like between S& P and VIX or a calendar

spread or whatever, they're trying to

:

01:22:06,101 --> 01:22:08,941

pitch us, pick off like a little bit of

that Paris return, but we try to find

:

01:22:08,941 --> 01:22:10,471

managers that still maybe buy the wings.

:

01:22:10,721 --> 01:22:13,571

So in a March:

off, they make money, right.

:

01:22:13,841 --> 01:22:16,601

But yes, then the rest of our

portfolio, the opportunistic long ball

:

01:22:16,601 --> 01:22:17,791

trades, tail risk trades, et cetera.

:

01:22:17,991 --> 01:22:20,781

They are really trying to make

money in a March,:

:

01:22:21,041 --> 01:22:24,431

But like, if, that doesn't materialize

and people are fighting the last

:

01:22:24,431 --> 01:22:25,601

battle, it can be difficult.

:

01:22:25,631 --> 01:22:27,931

So you're also trying to find managers

that aren't really attenuating

:

01:22:27,981 --> 01:22:30,981

all of their strategies to March,

:

:

01:22:30,981 --> 01:22:31,721

is not going to look like the

:

01:22:31,961 --> 01:22:32,451

Rodrigo Gordillo: right, right,

:

01:22:32,561 --> 01:22:33,571

Jason Buck: So those are the

things you're looking for.

:

01:22:33,831 --> 01:22:34,641

Rodrigo Gordillo: So that's

kind of what I went to.

:

01:22:34,641 --> 01:22:37,751

Cause I, you, you think about your

mate, you're placing bets for a specific

:

01:22:37,751 --> 01:22:41,647

scenario and I just wanted to like,

they're all trying to win that, game.

:

01:22:41,987 --> 01:22:44,327

And sometimes they're just, their

strategy is not going to work out.

:

01:22:44,397 --> 01:22:48,777

One or two might not, but as long as

more numbers of them are doing well,

:

01:22:48,787 --> 01:22:49,916

and you're going to get that payoff.

:

01:22:49,916 --> 01:22:50,239

Right.

:

01:22:50,239 --> 01:22:55,336

And the worst thing that you can

do is choose a single , and just

:

01:22:55,336 --> 01:22:58,609

hope that they're not the one

with the sixth bullet on the.

:

01:22:58,619 --> 01:22:59,059

Jason Buck: Yeah.

:

01:22:59,239 --> 01:22:59,489

Yeah.

:

01:23:00,089 --> 01:23:00,299

Yeah.

:

01:23:00,299 --> 01:23:00,519

Nice.

:

01:23:00,559 --> 01:23:01,179

Nice callback.

:

01:23:01,199 --> 01:23:03,599

But yeah, you were, or you hope it

was the one that was up 35 instead

:

01:23:03,599 --> 01:23:04,619

of the one that was down 25.

:

01:23:04,629 --> 01:23:06,749

So you can look at a

hero or zero that way.

:

01:23:07,009 --> 01:23:09,989

The other thing that like not to get,

you know, just first order Greeks is

:

01:23:09,989 --> 01:23:13,229

like, yeah, we look for, you know,

different managers, managers that are

:

01:23:13,229 --> 01:23:15,079

long Vega managers are long gamma.

:

01:23:15,109 --> 01:23:15,219

You know, Yeah.

:

01:23:15,489 --> 01:23:16,579

Managers are short Delta.

:

01:23:16,648 --> 01:23:18,398

And we think about the

combination of those managers.

:

01:23:18,398 --> 01:23:21,029

Then we think about paths of moneyness,

overlaying, overlapping those paths of

:

01:23:21,068 --> 01:23:23,749

money is from at the money, down the

money, the deep out of the money, all

:

01:23:23,749 --> 01:23:25,139

those sorts of things, are interesting.

:

01:23:25,139 --> 01:23:30,009

And then so far in the last six months

ish, relative value volatility, uh,

:

01:23:30,039 --> 01:23:33,159

managers are starting to pick back

up a little bit and then tail risk

:

01:23:33,179 --> 01:23:34,949

is as cheap as like it's ever been.

:

01:23:35,519 --> 01:23:38,549

It's one of those things again, where

you're seeing:

:

01:23:38,549 --> 01:23:39,509

buying that tail risk protection.

:

01:23:39,509 --> 01:23:43,586

Now, the hard part is this, like we were

talking about,:

:

01:23:43,586 --> 01:23:47,106

versus:

still burned from the last three

:

01:23:47,106 --> 01:23:48,496

years of buying tail risk protection.

:

01:23:48,496 --> 01:23:51,736

So now they're getting out of that market,

which makes it incredibly cheap now.

:

01:23:52,036 --> 01:23:54,675

So this is the thing about just

surviving and keeping those line

:

01:23:54,675 --> 01:23:58,056

items in the portfolio for when you

need them most is really hard to do.

:

01:23:58,209 --> 01:23:59,429

over longer term periods.

:

01:24:00,193 --> 01:24:00,913

Rodrigo Gordillo: Amen, brother.

:

01:24:01,416 --> 01:24:04,716

Well, what a ride as per usual, Jason.

:

01:24:05,199 --> 01:24:06,419

we went all over the place.

:

01:24:06,419 --> 01:24:07,429

Thank you for the interview.

:

01:24:07,999 --> 01:24:09,359

Thank you for interviewing Adam.

:

01:24:09,359 --> 01:24:10,599

Thank you for interviewing me.

:

01:24:10,719 --> 01:24:12,379

One day we'll interview you.

:

01:24:13,093 --> 01:24:14,433

Adam Butler: Appreciate

your gracious hosting.

:

01:24:15,193 --> 01:24:17,633

Jason Buck: Now what you forgot

to ask me is, I should just like,

:

01:24:17,633 --> 01:24:20,593

just use you guys as a wall, just

keep asking myself questions.

:

01:24:21,032 --> 01:24:24,303

Rodrigo Gordillo: Well, look, what, where

can people find you and, tell us a little

:

01:24:24,303 --> 01:24:26,213

bit about Mutiny just before we go?

:

01:24:26,713 --> 01:24:28,763

Where they can find all the

information about Mutiny Funds.

:

01:24:29,693 --> 01:24:31,423

Jason Buck: Yeah, you can

find us at mutinyfund.

:

01:24:31,443 --> 01:24:32,613

com, that's singular.

:

01:24:32,683 --> 01:24:34,863

and Twitter, I'm at Jason C.

:

01:24:34,893 --> 01:24:38,773

Buck on Twitter, and my partner's

at Taylor Pearson Me on Twitter.

:

01:24:39,073 --> 01:24:41,223

We also have at Mutiny

Fund on Twitter as well.

:

01:24:41,353 --> 01:24:44,452

so everything Mutiny Fund, Cockroach Fund,

that's where you can usually find us.

:

01:24:44,863 --> 01:24:46,823

Rodrigo Gordillo: And I got to say,

like you guys are very close to

:

01:24:46,823 --> 01:24:51,543

winning the, uh, the best website

design and logo out of all the

:

01:24:51,543 --> 01:24:52,753

asset management firms out there.

:

01:24:52,753 --> 01:24:55,333

So if you guys haven't checked

it out, if you just want to check

:

01:24:55,333 --> 01:24:58,423

out good design and forget about

the strategies, go to MutinyFunds.

:

01:24:58,463 --> 01:24:59,883

com, you will be blown away.

:

01:25:00,623 --> 01:25:01,073

Well done.

:

01:25:01,833 --> 01:25:02,193

All right.

:

01:25:02,243 --> 01:25:02,983

Thanks, Jason.

:

01:25:03,233 --> 01:25:03,943

Really appreciate your time.

:

01:25:04,713 --> 01:25:05,363

Jason Buck: Appreciate you having me.

:

01:25:05,393 --> 01:25:05,773

Adam Butler: See ya.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.