Odd Lots - The Korean Levered ETFs Shaking Markets All Around the World

Episode Date: July 10, 2026

Retail participation in the stock market is booming. And of course the biggest story in markets is the AI trade, which has created an incredible amount of demand for chips and memory. These two broad themes have come together in the form of leveraged, single-stock ETFs. And while these products are popular in the US, the scale coming out of Korea is enormous. It's a good week to talk about this intersection, because some of the biggest stories of the week include Samsung's earnings and SK Hynix's new US listing. Barclays's Global Head of Equities Tactical Strategies Alexander Altmann has used the word “terrifying” to describe the amount of notional exposure coming from these levered ETFs. He explains to us why that is and we talk to him about why, in such a short period of time, the world of levered ETFs has gotten to be so large, with AUM increasing threefold in Asia alone. He also us gets into how he is thinking through risk management and how we as society — and retail investors in particular — got to be overexposed on equities and why that keeps him up at night. Read: SK Hynix’s $26.5 Billion Listing Reopens Asia Route to US MarketOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox, plus unlimited access to the site and app. Sign up: bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

This week on Leaders with me, Francine Lacqua. I speak to tennis legend Rafa Nadal about how he stayed competitive despite injury. I was able to enjoy the victory. The victory is probably more than if I will not have this issue. One iconic match. In my mind was, I am almost dead. And whether he misses playing. I don't miss tennis because it was nothing else to offer.

Listen and watch Leaders with me, Francine Lacqua, on Bloomberg Television or wherever you get your podcast. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Allotts podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. Joe, when I think about the big market events this week. This week.

This week. This week. July 9th. Macro doesn't feel like it matters that much anymore. So we had renewed hostilities between Iran and the U.S. Markets, at least as of Thursday morning, don't seem to get. care too much. You know, we've had some Fed minutes. They didn't really change things that much. The big stories this week, unusually for the U.S. market, have all stemmed from Korea.

Yeah, no, it's true. I mean, look, the chips trade, which then becomes the Korea trade and all of these things, is like the big thing in the entire world. And I agree. I do not think people are going to focus on much of this other stuff, as long as this thing is so crazy. And, you know, the Korean market, like, we've just come to get used to this major, you know, pretty big market in the grand scheme of thing, moving 5% a day. And we've suddenly all become sort of normalized to it. Yeah, this is the big thing. Yeah. So the two big Korea events this week, we had Samsung earnings already. And then today, which means we're recording this podcast either at the best or the worst time because we don't know how things are going to shake out. But we have a U.S.

US listing from S.K. Heinex. And the reason Korean stocks are so interesting right now is it's not just that the U.S. market is kind of like playing off with them as well. But it's because you have all these new products in the Korean market, all these things called single stock levered ETFs, which seem to be having an impact on the overall movement of the underlying shares. It's so funny to me, you look at, again, the performance of some of these chip companies. some of them up like 10x. 40% is not enough. We need like 86%.

You know what? I look at this chart. You know what? The one thing I'm missing is some leverage here. This is always also funny to me when people were like trading crypto on leverage. Just like what? You're not getting enough. You need to like 20x it.

But people love it. And so. Yeah, but here's the thing. Even if you personally don't love leverage, leverage has an impact on you. Totally. If you're in that market. You may not be interested in leverage. But leverage is interested in you.

Exactly. as one of those guys said. All right. So we should talk about all these products. You know, I can't resist a product, tail wagging, underlying share price dogs. So we really do have the perfect guest. We're going to be speaking with Alex Altman, aka Altie. He is, of course, the Global Head of Equity's Tactical Strategies over at Barclays.

So Altie, Alex, thanks so much for coming on. Thank you very much for having me. So I believe in one note I read from you, and the reason I wanted to get you on is you, you specifically use the word terrifying to describe the amount of notional exposure coming from levered ETFs. Can you give us a little bit of context about how big this market actually is now? I think that the – well, look, I'll give you the numbers straight away. And as you highlighted, markets are moving really quickly. So these numbers change a lot every day. And I think at the time when we wrote about that, it was the local highs of the AUM. And it was globally around about

$250, $270 billion. The number itself is actually not enormously terrifying at all. I would just say the asymptotic growth of the AUM over the past few months has been somewhat sensational. It's just meteoric. So just to put some numbers behind that. If we look at, say, the Korean market, which you guys has highlighted, at the beginning of the year, APAC, AUM, so Asia Pacific AUM was somewhere around about 12 or 13.

billion. That's now around about 50. Sorry, just a wait. The EU and within these levered of lever products. Of lever products in Asia. They are now around about 50 to 55 billion dollars. So talking about a threefold increase or plus over relatively short period of time. And here in the US, if you take the beginning of April, excuse, yeah, beginning of April, which was, of course, the local lows for the market, we were talking around about 120 odd billion here in the US. And that's now increased, I think at its peak, it was just north of 200 billion. So these numbers can move extremely quickly. And what's really interesting is that if you look at the US market, it's not like you've

actually seen significant inflows and share creation in that space. Most of it, of that AUM growth has been because of price performance. Oh, interesting. Whereas in Korea, you've actually seen the opposite, not the opposite, but you've seen huge share creation on top of meteoric rises in the share prices. That's super interesting. But just to be clear, for the Korean products, as the underlying share price goes up, the AUM also tends to go up, right?

And then when the underlying goes down, it collapses. And so that's why you get these big spikes in AUM. Yes. So I think it's worth just like expanding on the mechanics of it just for a second. So I think that's really important to debunk and why they've become such a relevant product in the market. So if you just take, we just actually put some numbers behind this. Let's say you had one,

underlier, whatever it was, and it was an AUM of, call it, $30 billion, just to make the numbers simple. And let's say it was triple levered. So now they're going to basically go out and get a load of exposure for another $60 billion. That exposure is typically done through swap agreements, right? So they can actually sort of have this synthetic exposure through prime brokerages and so on and so forth. And so now you've got $90 billion exposure. Now, let's say the stock goes down 10%.

So $90 billion, 10% drop, so that's going to be a $9 billion drop. So you're down to an $81 billion of exposure now. But you've lost $9 billion of your AUM, which was only member $30 billion. So the 30 goes down to 21. And then if you multiply that back by three to maintain your triple-leavened exposure, you're going to be at 63. But you've got 81. So you need to reduce down your exposure mechanically by over $10 billion.

in order to sort of maintain what you've kind of put in your prospectors as your triple leverage against that underlier. And that's what's creating these mechanical adjustments on a daily basis, whether it's down, obviously, on down days, and then up on up days. So effectively, you're creating a new short gamma dimension in the market. That was relatively small only a couple of years ago. And I think really importantly is that there's a lot of dynamics that are moving non-discretionary flows in the market.

So obviously, in the ETFs you've got a lot of overriding ETFs that are doing the opposite. They're effectively selling volent to the market, which is creating a long gamma process. And that would typically have netted off against a lot of these levied ETFs. But because these levied ETFs have become so large in their rebalancing, that now net gamma profile is effectively becoming more negative. Yeah, a bigger role in the market. Yes, exactly. Can you actually just maybe take a step backwards? Can you just walk us through the basic?

I don't know if it's like the business or the simple mechanics of setting up a levered ETF. So I have a company, I want to, okay, I'm a upstart ETF provider. I want to do the odd lots three times. Yeah, the odd lots. The odd lots three times micron ETF, whatever it is. So it's like who's providing the leverage? Just talk to us about how this product.

You know, it was originally conceived of setting aside market impact and all that stuff for now. Sure. How the product works. The product, I mean, the product is very straightforward. It's really no different to any other fund provider in the ETF space. So effectively, if you're creating an ETF and you typically go and get some kind of anchor investor or some kind of co-sponsor who's effectively going to create the initial amount of AUM for you. And then obviously, because you need critical mass.

Yeah. There are, as I'm sure you guys have talked about, there's more ETFs in the world than there are single securities here in the US. So creating the ETF and the fund is not complicated. It all obviously has to go through SEC regulation. And I think that's an important point to highlight when it comes to all of these levied ETFs. It's whatever your opinion on them may be, the fact is that the SEC, the regulator has approved all of these. So in the same way, these funds will then get approved. And from there, of course, the question is, where do you get the leverage? So typically the leverage will come from a banking partner. So,

through a prime channel that they will effectively seek to get that exposure synthetically through the bank and that in turn obviously will effectively create the balance of their notion or exposure now from a bank's perspective that goes through the prime balance and the interesting thing about that is is that some of market participants have been talking about an increase in financing rates yeah that has been driven by yeah by these levity I think we need to debunk that for a hot second. Okay. Because I know I've kind of a little bit off topic, but it is still very much from...

No, I actually had a request recently. Someone wanted us to talk about equity, finance, and costs. I'm glad you brought that up. So it is perhaps a contributor. You have to acknowledge the fact that if you've got north of $200 billion of AUM that has materialized in relatively short order or grown exponentially recently, and you're obviously putting over two times leverage on that, you're creating an additional 400 billion plus of stuff that's being bought and put on balance sheets in swap format,

it's going to create a degree of tightness within bank balance sheets. That's not in isolation true. The fact of the matter is, is that bank balance sheets have become tighter because primary reason is markets have gone up. And as markets gone up, the price of stuff has gone up. And so that has been, without a doubt, the biggest reason for financing rates, rocketing is the fact that spot levels are higher. This has been a contributing factor, but we shouldn't overlook the fact that if you just look at the biggest driver of AUM growth within the hedge fund community, it's the multi-manager platform. We're talking about those guys are effectively a trillion dollars of AUM now. That's

essentially tripled since COVID. And obviously those guys are deploying a huge amount of risk on a long and a short side. So again, that's using balance sheet as well. So it's not really so much just the levered ETFs that are going out and asking the banks for balance sheet that's causing financing rates to squeeze higher. It's one of many factors. But balance sheet capacity is scarce. Balance sheet capacity is scarce and it will remain scarce so long as S&P trading at 75, 7,700. Well, just on a related note, okay, balance sheet is scarce from the dealers.

And it is true that like if a levered ETF comes to you and says, I have two times leverage and now I need like $40 billion worth of exposure, you're not going to want to extend like that much credit to a single counterparty if you're a dealer. And so one of the things I've heard in the market is that maybe some of the levered ETFs are going out and sourcing leverage, not just through swaps with dealers, but through the options market. Have you heard this? So that that was documented, I believe, in the press as well. And I believe that that was specific to one particular fund out in Asia rather than specifically anything that's happened here in the US. So I think that, you can open a bit of a can of worms when you start talking about the availability of this leverage

and to certain counterparties. And I don't think that's specific necessarily even just to just to the levied ETF market. I think you can really open that up in any counterparty risk when you think about does a bank really want to have. So what, you know, bank will be very careful in Barclays. So I would say are pretty conservative and extremely diligent about how they choose their counterparties, who they want to, who they want to partner with. And so as a general rule of thumb, you have to always keep that in mind. Just we're in the, we're in the business of risk management at the end of the day. And so, yes, this is sort of a, I wouldn't even say a new tool. It's not a new shiny part of the market. But it's, we would treat it exactly the same way as we would any other

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Subscribe to Bloomberg News Now today on Apple Podcasts, Spotify, or anywhere you listen. So you mentioned in the beginning that there's levered single stock ETFs in Korea. There's levered single stock ETFs in the U.S. The difference is that in Korea so much more of the AUM growth has come in through new money rather than the underlying asset values going up. So one thing I think about the Korean market, people talk about incredible retail interests that probably dwarfs the U.S. some sort of per capita basis. How does that matter? Does that have implications in terms of

the tail wagging the dog, the spillover effect, this fact that there is just a lot of interest in these products beyond just the products going out? I think that the retail channel in general is one of the most important dynamics for global equities in the world today, right? Could we make the case that Korea in particular is kind of ground zero for that retail cohort, probably. Okay. You know, so for example, 93% of levied ETFs in Korea are owned by the retail investor, whereas that number is lower in the US. It's approximately 75%.

Still high, still high, but not as high, right? And some may say, well, only 75% of why is it not high? And also, I think we should probably just be very clear, like, level ETFs have made retail an awful lot of money. Yeah, yeah. So, you know, there are plenty of guys driving around in McLaren's because of their returns that they've generated in level ETF. So, you know, I think we sort of need to balance it out and sort of...

No judgment here. We're just trying to learn how it works, but I don't judge anyone for making money. And on balance, a lot of money. I actually got asked this morning, you know, have you actually calculated how much money's been made? And I said no, but on balance a lot. Yeah, quite a bit. So going back to the point on READSEN,

Take the US, for example, the US, it's a phenomenon of our lifetimes. 34% of US household wealth is now in equities, right? It's the highest on record, it's higher than dot com. I think what's even more amazing about that stat is if you take the next largest component of household wealth in the US is real estate, and that is around about 26%. So the eight percentage point difference between those two sort of assets, so to speak, is also the widest on record. We as a society have never been this,

this over indexed or overexposed to to equities. And so I think that what you've seen within, say, the levied ETF space is really just another small part of that broader ecosystem that has contributed to this enormous wealth creation. And one of the things that we think about a lot as a team, people ask us, what keeps you awake at night? It's not leveled ETFs that keep me awake at night. What keeps me awake at night is that you have a structural impairment to equities

That effectively no economist on the planet has a cell in their econometric model that says 20% impairment to the S&P that basically destroys, let's just call it, around about $16 trillion of wealth. So let's just say that's half of US GDP, right? And that is an instant impairment to US consumption. It's your recession straight out the gate. I don't want to get all sort of bearish or anything, but I think it's just important to highlight within the broader context that retail investors, have a huge amount of exposure and therefore, in turn, the US government has a huge amount of incentive to try and not do anything too disorderly that could completely derail. I mean, my big stat is that people used to say the economy is not the stock market,

or the stock market is not the economy. This has been said many times on the podcast. Yeah, I just think the stock market is the economy now. Not in the traditional sense of like, oh, the stock market is going up, therefore the economy's doing great. Yeah, a 20% impairment to the stock market is kind of, I think, it will trigger a meaningful downturn in U.S. consumption. The thing that worries me now is it's not just the stock market is the economy.

It's like AI is the stock market and therefore AI is the economy as well. Like we know it's been driving not just macro growth, but if it's also driving stocks and we're getting a wealth effect and it's also driving consumption, then I don't know. It's like an AI impact squared. Right. And look, again, just to talk about facts, the bulk of levered ETF, AUM has grown within that cohort as well.

The largest AUMs are all within either NASDAQRATR products or semis conductors or single names, most of which are, I mean, the largest single name levered ETF in the US is Micron. So that kind of tells you. The largest single name levered ETF in the world is Hynix. So these dynamics do play an important role. And especially when you start thinking about tail wagging the dog and price dictates narrative. Right. So people see prices going up. That gives them a confirmation bias about, oh, that means maybe we can spend more money on Cappex,

or that means that the AI story is alive and well. And that's not necessarily not true, but how much of that is getting distorted by these sort of these non-discretionary flows that are pushing prices up or indeed down. Or just general momentum, right? Like momentum attracting more flows. Correct. I mean, let's face it. Momentum is the...

Everything. It's the most successful factor strategy in history, right? You know, S&P goes up 78% of the... time. Therefore, by definition, investors generally want to be long momentum. They want to be long stuff that goes up and they want to be short, the stuff that goes down if they do indeed short. The MUU, the triple levered, I think it's triple levered, whatever it is. That was trading at 23 a year ago, and it recently had a peak of over 1,200. So that'll get you a lot of McLarence, on that. Yeah, look, I mean, again, this is the thing. As a team, our main management...

Oh, sorry, it's 2X. It's a 2X. It's a 2X, that's okay. But actually, can I ask you a question about this. So you mentioned that all of these products, like they go through the regulatory process. And, you know, we have the SEC. I don't know what Korea's equivalent is, but I assume they have some sort of similar body. What is like the SEC's bar? Is it just like, does it? Yeah, like what is, like what is, like what, no, seriously, or like, you know, 10x. Like, what is the point? Is it just like, okay, this checks a certain set of boxes? Because clearly it's not about like, I doubt it should be. You know, it's like, oh, is this product good? or bad, right? That's not really the question. Does this product meet a criteria or doesn't?

What is the criteria? And why don't we have 10x ETF? So there's actually an anecdote. There was a time, if I'm not mistaken relatively recently during the government shutdown, where there was an attempt to try and list and shelf some, I don't think it was 10x, but there was, I believe, some 5x levered ETFs. And effectively, the regulator, I believe at that point, just kind of made it abundantly clear that there are limitations to leverage. Just from a, to your beginning point, you know, you may not be interested in leverage. Leverage is probably interested in you. And again, I'm not privy to those conversations in any way, shape or form. But I do know and understand that there are limitations to what a regulator would deem acceptable. Okay. From a leverage perspective,

quite reasonably as well. Sure. Just going back to the momentum trade more broadly. So, Barclays, you have this index product. I can't remember the exact name, but it's like the market timing product. Betty, yeah, Betty. Barclays equity timing indicator. Yeah, and that has been, like, in, I don't know if you use the specific term overbought, but like it's basically been in sort of bubblish, speculative territory for some time now, like a record amount of time, right?

Yep, that's right, yeah. Okay. What should investors do with this information? Sure. Because I feel like all the surveys right now show everyone's super, bullish. Everyone thinks stocks are overvalued. And it's like, so what? If the trade is momentum, then you just keep going. Yeah. So Betty, yeah, we love Betty. So this index was created shortly after I joined Barclays. But it was the first iteration was created back in 2018. So there's a reasonable

amount of out of sample data around this framework. It's got 19 inputs, none of those inputs. We have a mantra on my team. I tell everyone this in my team every week, which is if you can't quantify, you don't have the right to talk about it, and using the word feels and seams are banned. If you use the word feels and seams, you're fired. I think we'd be in trouble, Joe. Yeah, but it's a good rule. But the idea is it's a very simple rule, which is we just want to try and really deep root the team in quantifiable data, right?

And just to take a step back, when Scott and Ronnie, who run the equity business, when they sort of effectively were hired into Barclays to kind of really revamp as an ascendant equity business, one of their main priorities was like, we need content at the center of the mindshare or just sort of like really partner and hold hands with our clients. And so that's when they brought me in. And because we wanted to focus on quantifiable content as opposed to it. So that's the backstory as to why Betty was created because we wanted to have a market timing model that removed feels and seams.

And and so it's got 19 inputs. It's got everything ranging from real yields to spot-fold correlation to looking at discretionary flows, like what a mutual fund beaters, what a hedge fund beaters, what are CTAs doing, what a VOL control doing, what a level ETF doing. So everything from the discretionary and non-discretionary vertical, from the vol vertical, from positioning, we just, the only thing we didn't include was sentiment indicators. We weren't interested in fields and seams. So there's no AIA-I Bull Bear Index or anything like that. And so your question was, it's been in this record sort of warning territory now. Yes, it has been in record warning

territory. And effectively, that's been driven by primarily momentum crowding. Now, as you know, at the time of recording, we had a big momentum pullback over the past couple of weeks. So that's actually sort of been a relatively healthy in reselling that. Real yields, problematic. If you're competing for capital at the same time as the between the equity market, obviously record year for issuance, possibly this year. Government going to be record year of issuance. IG record year of issuance. Yeah, this is the other big market story is like a blockbuster summer for IG bond issuance. Absolutely. So if you think about what real yields effectively represent that dynamic of that competition of capital versus equities, if you just generally look at where real yields are today

in, say, a post-GFC environment or a post-COVID environment and benchmark it against where equity multiples are, equity multiples shouldn't be this high, right? So we can get into a bigger debate about, oh, dot com, real yields were very high and an equity multiples sky. Skyrocketed it. I'm like, yeah, but the government wasn't asking you cap in hand for tons of money. Also, that didn't end great. Yes, but hell of a ride it wasn't in the buildup to that. So, but so Betty effectively is taking all of these inputs. And what is it telling you right now? It's just telling you that the forward return profile of the S&P from an asymmetry perspective on a tactical two month time horizon. It's just not great right now. We're looking at if you were to

pick a random day in time and say, all right, I'm going to buy the S&P and I'll hold it for two months, two trading days. The average return would be around about 190 bibs, not bad, right? And your hit rate of making money is about 73%. So Betty, when it is in this kind of territory, so six, seven, it was high as sort of 10 or 11. It was telling you that you only had around about a 35% chance, or even lower of making money in the S&P over that same time horizon. Your average return was basically negative. So it's not so much necessarily that it's telling you, oh my gosh, the market's going to crater, it's really just an illustration of a bunch of quantitative inputs that are telling you, actually, the asymmetry is not great. And that's exactly what we've seen. The model first

flashed as a warning signal late May. S&P's kind of gone, done nothing since then. And so maybe in anticipation of some big correction in the equity market isn't forthcoming. And that's okay. I still take a lot of validation in the model that is kind of telling you that to just sort of pump the brakes a bit, let some of this froth in the equity market come out and actually get a reset, which then actually sets us up better. I mean, ultimately, earnings are still good, right? We're still driving AI in the economy, and we can get into a debate about whether that's sustainable or not. And then we've also got to, you know, work off the assumption. We're still running a massive fiscal deficit. And whilst that environment is happening, it's quite hard to create any kind

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etc. Just on the sort of like bigger question, the combination of market valuations, however you want to measure them, all the classical ratios that people like, versus the increase in real yields. Like how historically expensive is this market right now? All right. So if we take the post-GFC environment, the challenge is always going to be

that S&P margins were much lower for a long period after the GFC than where they are today. And we have to acknowledge that higher margins should map into higher multiples. But we'll do the full comparison. So post-GFC, because there's not that many periods where real yields are this high. Real yields today on a 10-year basis are running about

the 95th percentile. And they're around about, I think, 2.30, give or take. So with that being said, if you take what the average S&P multiple when real yields were this high or higher, it's a scary low number. The S&P multiple would be around about 14 to 15 times. And we're currently trading on around about 20.2, 20.3. If you take the post-COVID environment, which I think is probably a better representation of what S&P operating margins look like today. We're still low. It's around about 18 and a half times. So you're still talking about basically a 10% multiple contraction versus where the... Let's just a very simple question. Why are margins a more important factor here than

expected growth or expected earnings growth? I mean, like I in my mind, I would pay higher multiples because I think that the earnings are going to have a faster growth rate than they used to have. That seems intuitive to me. Why is margins the lever here that we're looking at? It's a good question. Well, it's not exclusive just margins. You can sort of measure it as ROE as well. There's different ways you can do it.

But effectively, businesses are becoming more profitable. If it's a more profitable business, it's going to be working off the assumption to a degree. It may not necessarily be accurate, but that effectively that has a big moat. It's more. It's a more. All right. high quality business and therefore you'll put that on a higher premium, so to speak. Can I ask a slightly personal question?

Which is, I used to joke that I wanted to be reincarnated as an equity derivative strategist, because then I could just find a number to like justify anything that's happening in markets. But does it feel like people taking more seriously now versus, say, 20 years ago when people were still talking about like fundamentals and stocks? Now you have this environment where flows are super important. You have all these mechanical things happening. You have the multistrots, as you pointed out, Vol-targeting, CTAs. All of this stuff is getting bigger.

Does it feel like equity derivatives are more important now? Oh, I thought you were going to say, where it's my British accent that makes me sound more. Well, that too. People take me more seriously because I'm, because I'm, I will say we get a higher listenership on episodes when our guest has a British accent. It's crazy because like everyone knows how much Americans love a British accent. But what's annoying is the Brits know it to it too. exploit that. You know, like, you know what you're doing. It's a reason why I stayed here

for 10 years. Married in America, you know, living the American dream. Sorry, you know, you know what you're doing. I'll get, I'll get back to the actual question at hand. So is there increased validation from having a more quantifiable world that we operate in? Yes, but, but on a person, if you're asking a personal question, I don't think that's a personal question. If I was to give a personal answer, my career wasn't always like that. I started my career as a fundamental to single stock analyst. And I actually started my career actually as a generalist sales

at JP Morgan in 2004. But I then became a generalist analyst, so to speak, on the by side. And I did that within the adventure of the world for several years. And then when I went to back to the sell side, I had to pivot. I had to change my investment approach

because of the fact that the industry was becoming increasingly specialized. Yeah. And as a generalist, I was struggling to make an impact on clients that were becoming much more sophisticated in the weeds on their particular sectors and areas of granularity that I just couldn't compete with. And so at the time, I was working at City and City has a very good, had a very good quant business. And I was like, what's all this quantum factor stuff? What is all that? And I genuinely didn't know. This is 2012, to be clear, 2013.

And so I took it on a personal crusade to understand the post-mortem of my portfolio management experience prior, understanding why was my P&L doing certain things, which I didn't understand at the time. And as it turned out, I was just a value investor. But the concept of being a value investor other than sort of the Ben Graham or Warren Buffett model was a bit as in value from a factor perspective. Now it's ubiquitous, just sort of 14 years ago. But back then, it was really novel that you were. going to customers, discretionary customers, generalists or just long short guys who weren't quant guys, and explaining to them this quant phenomenon in layman parlance, basically. And that was

the start of a pivot into a much more sort of quanti, derivativey knowledge experiment. And it just ballooned from there. Yeah. This is kind of what I'm getting at, right? Like it has become more important in the market. I remember, speaking of 2012, do you remember Joe, the headlines where like people would talk about CTA flows or something like that. Oh, yeah, of course. And it would be like a mysterious force in markets. Now everyone knows what CTAs are. Yeah, and it's interesting to think too, like, if I just think in my mind about one of these platform shops, multi-strategy, whatever, the understanding of the company is that that pod invests in.

Like they must on the buy side must be orders of magnitude greater than it was in the sort of hay. day of like the sell side analysts who would like, oh, we're going to issue a buy rating on GE Vernova or whatever like that. So those investors know that company insanely well. Oh, totally. And look, to put some anecdote around that, Barclays as a bank, as an equity business, as a research house, again, ascendant equity business. We've been working really hard over the past three years to sort of hold our client's hands

and make them aware that we are a really prime and tier one equity franchise. A lot of that is about corporate access, right? So actually having more research coverage and having more access to more companies, which in turn we can roadshow and actually give our customers access to those companies because it is that important to them. To your point, exactly, Joe. They have so much granularity in detail in their forensic modeling now that if you're a generalist, it's very, very hard to compete on such a granular level.

So, yes, I pivoted away completely and focused on different mansions. was if you think about the verticals of equity investment, the way I see it is that you've got fundamentals, which is obviously what we talked about. You've got economics. You've got cross-assets slash macro. You've got quant, which I would include factors. You've got derivatives. You've got positioning, right? And then you've probably got some other stuff as well. But my view is the way that I run the tactical strategies team is that we don't need to be a 10 out of 10 in all of these. I'd love to be, but it's just, I just don't think it's possible. In a world of AI, we can obviously augment some of our game in certain verticals.

But the aim of our game is if we can be like a seven or an eight in all of these, and some of them will be less and some of them will be more, some of them will be in nines or tens and others will be like fives or sixes, it basically means that what we can do is we can go into any customer, any client, any investor and say, hey, there's something about the market that I'm sure I can help you on, that you're not as aware of. And that's where I think that the evolution of that kind of education, investor education, has come to now rather than just focusing on just one vertical. Yeah, I don't mean to get all media navel-gazy here.

But I think we are seeing a similar story in media where like the niche subject matter experts are becoming much more important, much more popular versus the sort of generalized news platforms. I think that. You don't have to comment on that, by the way. No, but it does polly back into the world. finance and the world of AI because in the world of AI everyone can have an army of quants in their pockets now of questionable accuracy but the point is you can crunch orders of magnitude more data so where's the real value I'm a big believer that the value I see it kind of think about it

as knowledge and wisdom right everyone can now have access infinite knowledge but it doesn't necessarily mean that they've got wisdom I mean the old saying is is that knowledge is knowing that tomatoes a fruit but wisdom is knowing that you know this came up on another episode and by the way Tracy I just want to say I meant to send you this I saw someone with one of these viral froyo places that are like

they put little cherry tomatoes actually that could be good yeah that's what I'm saying tomato is a fruit in the in it not to get wildly off topic but my tomatoes so far this year are freaking amazing yeah and come later this month and August you're going to have like no this one might take actually boxes

I love the saying knowledge, wisdom, tomatoes, et cetera, but I actually think some tomatoes actually to make the cut to make it into a fruit sale. This is my only point. But I understand. I understand the point. Yeah. And so I think it's the same when it comes to sort of data and the world of final. You can be incredibly granular and specialized, but sometimes you're going to miss the forest for the trees. Can I just ask not to turn this into just another AI conversation, but you must actually have some insight on the question. And on some of these things, let's say, like, you want to construct an index or some new thing. Like, how good are the models right now at, like, really reliably being able to do quantitative work? I know it's like you can get a lot of the way there and even someone like me can, like, hack together or something.

But like, to the standards that you have, like, how much do they still like, no, this is nowhere near something that I would like then be ready to. turn into a chart and send to a client. Yeah, I think that's a great question because we're doing that all the time. So, you know, we'll have a customer come in and let's say they've got a particular security, a single name item. They want to hedge that item and they want to hedge it with a basket, right? That's one of our most common kind of business problems that we face off with. And so we need to build a universe of securities that effectively replicates that particular

instrument without using that instrument, of course. and as a consequence of that, we're effectively running a, what is essentially a giant pairwise correlation model, and then we've got to optimize the inputs depending on what individual correlations against that underlying instrument are. It's relatively straightforward if you've got a really cool optimizer. If you ask AI to do it,

what it's okay at is selecting what instruments you should. So let's say you're like, I need, all right, this is a household consumer product. Actually, you know what, let's do it in AI. Let's make it more new. economy. So we've got, all right, we've got a particular AI vertical, let's say it's a neocloud. All right, we need to hedge that neocloud with something else. All right. So AI is quite good at selecting, let's go and get all the other neoclouds that are listed. And then let's find a whole bunch of other companies that most of which you'll be aware of, maybe some you're not aware

of, that actually have a reasonably high correlation to that instrument that you're trying to hedge. That's kind of where it ends. It's not very good at telling you, all right, what about the liquidity considerations. But it can roughly sort of determine the first, the ingredients, right? Like, you're making Emmanuel Derman in his book talked about like the job of the trade, just make a, it's we were going back to the fruit salad question, but you have a bunch of wholesale fruit and then you slice it up in a certain way. It can identify the ingredients and then it's your job to figure out the optimal, like, you can't do the proper slicing and allocation. Exactly. So it's, yeah, it's pretty good at, it's pretty good at identifying what my universe is meant to

look like? Because I get the, sometimes I see these notes, and I have never tried this, but like, I don't know, somehow I got on like J.P. Morgan's like trading desk thing. And they're like, oh, buy that we think it's time to go long this basket of, you know, energy related companies and short this basket of like, whatever it is. And I've been curious. I've never tried it. It's like, could I get a model to like back out what these ingredients are? If I gave the model line and the theme. Yeah. So again, I would, I mean, get this real credit to the, to Barclays, just in terms of we've been pretty leading edge in experimenting and adopting as much AI as we can. And so we have co-pilot. We've got Claude licenses. We are, we're working

with other partners to sort of build in-house stuff, either using external models or our own internal models. But the point being is, is that we've had plenty of time to operate in the sandbox now. And I'd say where AI is, without a doubt, most powerful is when you're giving it very, identifiable data parameters. So whether it's structured or unstructured data and say, hey, I need to try and figure out whatever my parameters are, that's the data. Where it's still less good is if you're basically giving it unstructured parameters

to say, just can you think about an ethereal topic and sort of come back to me with an answer? And it will come back with a pretty comprehensive answer, but most of the time it needs to be fact-checked and or annotated or just tested it to scrutinize. Joe, you've successfully turned this into another AI conversation. Well, how can you talk about quantitative? You know, how can you talk about this?

Yeah, we were doing pretty good for 40 minutes. So, all right, Alex, thank you so much for coming on all thoughts. Really appreciate it. Truly the perfect guess. Thank you so much for having it. So, Joe, that was a fantastic conversation. A couple things stand out. So first of all, it does seem like with the growth.

of all these products, the explosion, especially in Asia, that we have products who are sort of like more important marginal buyers and sellers in the market at a minimum. The other thing I was thinking about is like, okay, a regulator isn't necessarily going to approve a five times levered product or a hundred times levered product. But is there a point at which like the aggregate number of all these products actually becomes more of a concern? Totally. I mean, there's two things. One, you have to take seriously, like, where we are in terms of balance sheet capacity and how much balance sheet is being allocated to this leverage and what happens to bank balance sheets in the event, like, some major downturn. And then I thought, like, the, just the idea of, like, I had not realized how big that gap has grown between household equity exposure and household real estate exposure. I still feel like that's probably. like a pretty, at least to me, like a pretty eye-opening stand because they're just, I know there's a lot of equity exposure and it's become important and no one needs to like argue with me. It's like the stock market is the economy. But in my mind, I'm like, oh, it's still like real estate is the core of like people's holdings. And not only is it not the core, at least in the aggregate, I'm sure the median household is still way more exposed to their house than the stock market. But in overall, it's pretty staggering. Yeah. And then you start wondering. geared to the stock market. Geared to the stock market. How much of the stock market is now geared towards leverage and then how much of it is also geared towards AI?

It's, yeah, it's a lot. No, it's a lot. And he really spelled it out well. Yeah, we have to have him back on. Definitely. Shall we leave it there for now? Yeah, let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloy. You can follow me at Tracy Alloway.

And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, Kale Brooks at Kail Brooks and Kevin Lazzano at Kevin Lloyd-Lisano. And for more Oddlots content, go to Bloomberg.com slash oddlots for a daily newsletter and all of our episodes. And you could chat about all of these topics 24-7 in our Discord. Discord.g.g. slash oddlots. And if you enjoy Oddlots, if you like it when we talk about single-stock levered ETFs, then please leave us a positive review on your favorite podcast platform.

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