The Derivative - Capturing the Global Sell-Off with Bastian Bolesta of Deep Field Capital

Episode Date: March 19, 2020

This timely episode gets into just what kind of investment strategy you would have needed to have to capture the huge down move in markets recently and huge spike up in volatility. We talk with Bastian Bolesta, founder and CEO of Swiss-based hedge fund Deep Field Capital, about: designing and implementing effective tail risk strategies, how most of the sell-off has happened in overnight hours, paddle boarding on the Hudson River, whether the “boy” is controlling the machine or the “machine” controlling the boy, Red Cross founder Henry Dunant, the theoretical upper bound of the VIX, squashing the sombrero, and of course…the Coronavirus/COVID-19 pandemic. Deep Field Capital AG is a purely systematic shop based in Zug, Switzerland trading highly reactive intraday and short-term systematic programs in global futures and equity markets with a positive skew, convex profile in a top-tier institutional setup. They also run a Volatility Arbitrage strategy composed of four different “pillars”: Calendar spreads in the VIX VIX/SP spreads Intraday capture in equity indices Intraday capture in VIX futures Note: If you want to skip straight to strategy/market talk, fast forward to 34:37. Links: Deep Field Materials Deep Field Capital: Quantitative Intraday and Short-term Trading Solutions Deep Field LinkedIn Contact Deep Field Books The Invention of Hugo Cabret Book The Behavioral Investor by Daniel Crosby       And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. It's becoming very, very dangerous as well, because if you react on that signal, you say, wow, that's a substantial short signal here. And then you enter that, and the market pulls back a little bit and closes just down seven percent um you may have seen a severe loss despite the fact that you actually wanted to add hatching capabilities and others to the portfolio and as a result these environments become very difficult to trade when you have substantial gaps and more frequent swings and swings of such huge magnitude into a day as well. Gruzzi, or hello, and welcome to The Derivative by RCM Alternatives. I'm your host Jeff Malek and I'm lucky to have with us the one and only Bastian Balesta

of Deepfield Capital today. Hi, I'm Jeff. Thank you very much for having us today. My pleasure. All right. How did I do on my Grootsy? Awesome. I completely understood it and everybody else would appreciate it here, definitely.

Good. So Deepfield Capital is a Swiss-based quant-focused asset manager with a quiver of different investment programs focused on providing positively skewed, long ball, convex down market performance on pretty short timeframes, sort of like the 30% down move we just had. So I'm excited to dive into more of the conversation with Bastian and learn about Deepfield. So welcome again, Bastian. How many languages can you say that in? A couple, but everybody else in Europe can do that as well. We tend to speak all these different languages of our very approximate neighbors, and you may know that in Switzerland, we have four official languages. So I don't speak the fourth, which is retro-Romanic. It's just 35,000 people speak it.

But I don't know, four or five. I used to live in China, so I can speak the Chinese as well. It's always a bit of a wonder for us lazy Americans who barely know how to speak English properly. So congrats on that, even if it's par for the course in Switzerland. And you have degrees from three different countries. Tell us about that. Do I?

Yes, I, yeah, yeah. Yeah, this also comes with being European. So you travel, you look for different ideas and opinions and try to get as much exposure as possible. I liked all three stages of my life, basically. Probably the last one, which was in the United Kingdom in Cambridge, I studied international relations. This was most fun, but has nothing to do with our work today, which is kind of a pleasure. So I was looking to understand how the world works and ask these questions.

What happens if this happens in China? What does it actually mean to the other side of the world? It doesn't play any role in our day-to-day business here, which is quite a relief. So you have pleasure in terms of thinking about these larger things out there, but at the same time, they don't determine your day-to-day work. It's much more comfortable for me in comparison to trading on the discretionary fundamental side.

Great. Which one was your favorite, if you're allowed to pick? Yeah, probably the last one I studied business administration and finance at Frankfurt School in Germany this was more like getting into

the industry used to work for Deutsche Bank there as well so it was to get an exposure but ultimately I so much more enjoyed international relations because you have a larger focus on history as well. So you think about these bigger pictures

and not necessarily what this specific number means for an investment right now. So in terms of pleasure, certainly the international relations part. In terms of having a sound foundation, probably the first studies were quite proper as well. All right. That's interesting. So let's get right to the good stuff. Where should I go skiing in the Alps? At the moment, skiing resorts are closed because of the coronavirus. The season has been officially declared ended, but we have a lot of very nice places here.

So once things become calmer, hopefully for everybody out there, you may not have the opportunity to go skiing, but you can go mountain biking, things like that. So we are close by here in Zug to the higher Alps and the team is certainly enjoying the outside world there from time to time. Not at the moment. We are more or less on curfew lockdown because of the important but still drastic measures to mitigate the coronavirus. But it's beautiful. It's sunny at moment so it's it's tempting to go outside yeah and so have you ever been skiing in america any of the resorts unfortunately not unfortunately not i know it's great um um when i was younger i was more traveling towards uh in in asia um um i never really um um traveled for pleasure in the US for longer periods of time of work,

but there I couldn't really combine it with skiing. I do a lot of stand-up paddling, and I have been paddling across the US. So whenever there's a conference at the West Coast, I went stand-up paddling in LA with dolphins and sharks. And I just recently went to New York and was paddling on the Hudson. So it's more a paddling thing for me than skiing in the US. That's a brave man paddling on the Hudson. If you fell in there, you'd come out orange.

That's true. But supposedly it's much cleaner than it used to be. Probably it's still lethal, but I'm not like 10 times lethal well I did that once paddleboarding in the San Francisco Bay and the seals are coming up and yeah it's quite amazing beautiful yeah it's beautiful it's it's really calms you down and you relax and you can go with friends or you can go by yourself. And you have peace of mind there for an hour or two, and then you go back to the desk. I like it.

So tell me a little bit about Zug. It's not quite known as a hedge fund hotspot, or is it? It's basically Switzerland has several hotspots for alternative managers. Certainly there's Zurich, everybody knows, and you have Geneva. Zouk has been developing into one to a certain degree and so has Feficon because of different tax regimes. If you drive down the road here,

you may have a different tax regime than here. So the individual places, they can do their own tax regimes and politics in order to attract companies. And Zouk has one of the individual places, they can do their own tax regimes and politics in order to attract companies. And ZOOC has one of the lower ones, which resulted in various asset managers starting their business here or moving their business here, even from London over the years. And what we have seen most recently over the past two years is that a larger crypto trading community, but generally also crypto programming and service providers have been established here in Zoo and it's called itself crypto Valley. So it's a crypto Valley of the world.

And this certainly has sound quite nice. A couple of years ago, it has become a bit more of a legacy at the moment because nobody really knows what's going to happen with the crypto world going forward. But ZOOC has been on the forefront to support these businesses and to establish a community here. And ZOOC is certainly known on the crypto side of things as ZOOC Crypto Valley, not necessarily on the hedge fund side. And were they actually mining it there or just services and programming? It seems to me it would be expensive to mine it there.

Yeah, probably. But it's more people really developing blockchain technology and also trading on the various cryptos from here. The mining part, I think, took place very initially, but of course we have higher utility costs here than other places. And as a result, I would doubt that mining takes place here anymore.

But it was, I think, in the early days, certainly a factor. And the regulatory bodies generally in Switzerland, not just in Zug, have been always very open-minded in terms of thinking about new ideas and jointly developing good rules, balanced rules, nuanced rules with the community and the different stakeholders. And that certainly has supported growth in the community here so that people even from the US, from the West Coast, were moving to ZOOC. We had a couple of names here in the office as well, because we have been trading crypto occasionally for test purposes on the discretionary and systematic side to get a better understanding of that, let's call it asset class or the additional instruments.

And you may recall and our listeners that there was a time where volatility was a rare beast in our markets. And this time hasn't been too long ago, like six, seven, eight weeks. We were still very excited when the S&P moved more than a percent. So I can remember when we saw each other, I think in Miami in the last week of January. That's basically when we said, wow, here's a 1.5% move in the S&P. We haven't seen that since October 2019. And because of that, because we have been used to this very low environment, there was a tendency to look into other places where you have higher vol, and certainly the crypto

space had that opportunity set. So from that point of view, we reviewed it. We were monitoring it. We were looking for opportunities there. We are currently not trading it in any of our programs. That hasn't really been an important part, but we still look at it. And because of that, we had people stopping by, coming by and looking into how they could join us and work with us together on the systematic side for crypto trading. My favorite Bitcoin conspiracy theory is that it was a US CIA invention

to destabilize countries that subsidize their energies, like Russia, Venezuela. Probably has worked. Isn't that the important sense to any conspiracy theory, that it has to be rooted somehow in observable facts or observations at least. And yes, could be. I don't know, but it sounds decently reasonable. So how did Deepfield end up in Zug there and how did you end up at Deepfield? Oh, that's a long story.

So let's see if we really have the time to do that. Ultimately, we are five partners at Deepfield Capital. And two of them were traveling in China. And I was living in China back at the time. And the two of them, they were visiting a friend of mine or their friend as well. And that's how I got to know them. And at that point in time when I was working in China, I had just left the financial industry, so to say. This was in 2003 where I said, I want to do something else.

It's boring to work here in Deutsche Bank. I used to work in the market risk controlling where you were calculating bars and things like that. And this concept never really rooted with my approach or my ideas how one potentially should look at risk. I don't know. And as a result, I basically left that and started traveling in China and did all kinds of different businesses there. And I wasn't really thinking about going back into finance.

And then my two days partners basically showed up and they were trading on the prop side. And so I realized, well, there are a couple of cool guys, same age and really crazy the way they dress and what they think is important, what not. But they still are active in the finance industry. So you don't have to wear a suit and a tie all the time. Yeah, let me interrupt you for a second.

How are they dressed and crazily? Definitely, isn't there a saying that you shouldn't derive any assumptions about people from their outer appearance? Yeah, don't judge a book by its cover. By its cover, yeah. One of them, probably don't want to say his name, his cover certainly should not be judged at all.

He's a very, very, very smart guy and has been an important driver of our business together with all my partners today. It was exactly the opposite of what Deutsche Bank is, basically. together with all my partners today, but it was exactly the opposite of what Deutsche Bank is,

basically. Back at the time, it probably still is. Absolutely anti-suit. I think he has never worn a tie, and he would probably only use a tie if he has a road accident and needs something to cover his bleeding arm or something

like that. So in that case, totally anti-establishment in regards to finance, but very, very brilliant mind and inspiring and exciting. So basically, after I just left finance, I was lured back into finance. And this initially started on the discretionary side because this former team was predominantly focusing on discretionary trading and had a different subunit on the systematic side, which was still rather small. And together, we got quite excited about building that out, making it bigger. And this then started in 06, 07. I then came back to Switzerland, initially in Zurich.

And then we established an office in Zucca and we got our first institutional investors, first strength and family. And then a larger name from New York actually knocked at our door and said, hey, who are you? And we said, wow, that could mean that we actually become asset managers. We always thought we are prop traders, but we could give it a try. And that's why we moved the company then to Zouk. What were they doing in China? Were they trading there or they were just visiting? They were just visiting.

Yes, and trading. Because if you're a prop trader, you're never really just visiting, right? There was a philosophy. We always said, well, you may be on vacation, but it may be your most expensive vacation ever because you're not just paying your flight and your hotel or whatever. You're paying all the opportunity cost of missing out these opportunities in markets. And to a certain degree, this also reflects the comfort you may have in trading systematically. Discretionary meant that my discretionary partners from back at the time, they had to sit in front of the screen the entire time,

and they had to be always sharp. So if you have a bad day because your night wasn't as good, I don't know, your girlfriend left you or your dog was sick, this could actually influence your trading style. So while he was, or the team was basically quite good, you still have these fluctuations because you're not always 100%. But if you basically take your trading ideas and write them down when the market is closed, and then you start testing them,

and then you systemize them and you automize them, you may actually get an advantage in regards to certain shortcomings on the discretionary side. This doesn't work with all trading strategies, but with some of the stuff we did, it worked quite well. And as a result from these originally discretionary prop trading, we evolved into a systematic asset management or actually first systematic prop shop. And nowadays, deep field capital is basically purely systematic and highly automated with a large volume trading on the intraday and short-term side.

So it's quite a development from these years back in 06, 07. But it's still rooted in this prop idea. So it's still rooted in prop traders finding interesting patterns and markets and trying to systemize them. And I always wonder how many discretionary traders end up purely systematic, right? I bet it's a very high percentage because you're analyzing your mistakes.

If you could just automate that, you wouldn't make that mistake again. And eventually you end up in a purely systematic place. Yeah, or probably maybe somewhere in the middle. We are currently quite on the, we are in the purely systematic place? Yeah, or probably maybe somewhere in the middle. We are currently quite on the purely systematic side, but we have friends or peers in the space who are systematic, but they still second, I wouldn't say second guess,

but they sometimes come up with a very ad hoc, very smart idea, which may be more beneficial in that specific moment. And I would say our team accepts that. So we acknowledge that some people manage to have systematic basic signals, but they somehow still add value from time to time and not destroying it over longer times by having some kind of discretionary ad hoc trading approach. So probably trading around a signal.

You still get the signal that you want to go long or short, but then you become a bit more discretionary ad hoc how to execute in that specific environment or moment. We don't do that. So in our case, it's all fully automated, but we acknowledge that some people are quite capable of adding value by finding a middle ground there, I would say. And so how many people are on the total Deepfield team? of adding value by finding a middle ground there, I would say.

And so how many people are on the total Deepfield team? Basically, six people in the office, five partners. When this institution investor knocked on our door in 2013, they pushed us to further institutionalize the business. On the systematic side, we were just trading with interactive brokers back at the time via API, which is basically the easiest form to connect with a broker, I would say, but not really flexible. Once you get more investors and they would like to clear their account somewhere else, you should have different capabilities. And this was a quite sizable ticket of more than 20 million for us. It was a good start in venturing into the institutional side of the business.

And they basically said, well, you have to go to a larger top-tier execution broker. And that resulted in us reprogramming our communication protocol. So we were communicating since then via fixed protocol. So we could actually talk with all the different execution brokers. And then one can, of course, work on the clearing side also with other people across the board, tier one, tier two, as we always say. And we have made good experience basically becoming more flexible there or relying on people who can actually provide access to different executional clearing brokers as well because they have these bundling functions. But ultimately, you still have to start communicating why a fixed protocol is the first step. And on the middle and back office side, we looked out at a beauty contest, what kind

of software is available for us to basically now deal with a growing number of managed accounts and to do a proper trade reconciliation. You will not believe it, but there's still people out there who don't do that and they don't know if they get the trades they think they got. But while we're talking about, yeah, you definitely know it because we are working quite closely, of course, with your team on the clearing side as well with various accounts. And you know how busy they are. And our ops team here is to clear

breaks from time to time which is not ours fault not yours fault but basically just happening out there in the futures world it's fully electronic but you still get sometimes you get an instrument you have never traded we just trade one program just trades equities and we still get i don't know a gold future and if you don't do a trade reconciliation, it's sitting there. It may be good for you if it's P&L positive, but ultimately it's not yours, and it could also be a loss. So you have to do that. And if you start accepting a larger number of managed accounts,

you either have to build in-house or you have to rely on technology slash service providers. And we basically went to a company called HedgeFacts in late 2013. And they run our daily routines from Dublin in Ireland and Cincinnati in the US. And this has helped us a lot because we now have a scalable manpower in the middle and back office side, and they run our daily routines in different time zones. And we could substantially grow in terms of managed accounts,

but also complexity in terms of programs, different instruments. And it has been an enabler. We couldn't do our two days business like 15 years ago with such a small team, because you still, you heavily rely on technology in all different fronts on the research side, in terms of computing power, data as well, and also on the middle and back office side.

Normally you would hire two or three people here on site to do that working in shifts. And you know, we're in Switzerland and everything is expensive, including our chocolate. So that would cost you a fortune. Yeah, I think that institutional investors have gotten more comfortable over the last five to 10 years with, okay, I get it. You're a small team. You're trying to be lean and you're outsourcing that back office. I think 10 years ago, they might have insisted on you having it all in-house. Totally agree. Today, they're much more comfortable with it's more of a best practice today to outsource. Exactly. In some cases, I would even go further and not say they're more comfortable.

In some cases, they actually positively acknowledge that you now focus on research and the alpha generation of the signals while not constantly being overwhelmed by dealing with these middle and back office functions. You still have to have the oversight. So our COO basically monitors all these processes and it's in the loop with what the different service providers do for us. But ultimately, very large institutions have ticked their boxes when doing due diligence on us because we have set it

up this way. So it has certainly changed in terms of what the industry sees as good and certainly also maybe as positive in that case. Yeah, quick story back when we ran our own CTA back in 2002, 2003, 2004, we had a big billboard in the office and we'd print out the breakdowns and pin them to the billboard. And then when an order got filled, you'd take it down, cut it out, fax it or scan it and send it to the clearing firm and break it down. And John Cummings in our office came one day and he's like, I'm not faxing another breakdown for the rest of my life. We need a technology solution. So we had a programmer actually in-house that came up with a system to break it all down and automatically send. But yeah, we paid that guy an insane amount of money to come up with that relatively simple breakdown process that can be done by any number of firms pretty automatically these days.

Yeah, that's a big step back at the time. The big step at the time. But think about some of our programs, they trade 12,000 roundtons per million. We used to have one with 35,000 roundtons per million. Probably you can't measure the number, the mass of paper you need in order to do that in the old fashioned way.

Oh, yeah. I've told a lot of people that days on the floor, it would never exist today because there was two inches of paper on the trading floor. You know, the environmentalist would have come in and said, no way, get out of here. Yeah. One of, one of, one, one more advantage why we have moved electronically there as well. Yeah, definitely. But i think you were on the on the floor um so it must have been an exciting time i never i never experienced that

myself so um i envy people who actually have been um knee deep in this paper and um felt the market because you can be you can be a little bit distance um now because on the floor, you hear the noise, the levels going up, you feel the action. And I always argued it's something we certainly miss when just looking at numbers. Think about what has happened the last two weeks. You see these massive downs, but it's also quite. Yeah, I think you would definitely. It's just ticking down. Right.

You would definitely have that feel of, is this true panic or are people just selling it? I think you would definitely get that sense live in a trading pit, looking across the pit at the other traders versus staring at the screen. You don't know if those big sell orders are completely automated, AI-based, just trying to push it down and then buy it back. Yeah, there's definitely a difference there. Switching gears a little bit, tell me about the robot art on all of your materials. I love that guy. Where did that come from? We just love robots and definitely the retro robots because they are a little bit a reflection of how we venture into that space with using machines and robots being machines as well and how you try to utilize them to your advantage.

But we have one picture of a very interesting famous painting basically where a boy plays with a robot, but you don't really know. He's so astonished and looks at the robot that you don't know if the robot controlling the boy or the boy is controlling the robot. So it's a little play with that. And we established that quite some time ago and it resonates quite well generally with majority of people, a lot of people like robots for whatever reason.

And at least they're not killing machines so far, and robots have always been a positive connotation to it. And our kids also get a better understanding of what we're doing. So when my son is asking me, Daddy, what are you doing? How are the robots doing? You can tell them, well, the robots are doing well, or they're struggling at the moment. They're currently losing money. And he says, well, you have to teach the robots how to better make money. So it's driven by that positive reception with robots all over the board with people we're dealing out there. Have you had, have your son read the invention of Hugo Cabret? Have you ever read that?

Not yet. yet, no. It's a kid that, I can't remember what happens, but I think he lost his parents and he grows up in a Paris train station or something. And he gets in between the walls and he finds basically an old-fashioned robot that he reassembles. And it's quite a cool story. Beautiful. Yeah, I think I have heard of it definitely um it do you see there's another very positive connotation to it probably because we as humans we try to humanize robots and um perceive them as being more than just i don't

know silicon and nowadays uh and copper but no there's more to it to a certain degree. And certainly if you think about artificial intelligence and where things are moving, we have the forefront that theoretically there's more to it than just metal trash. Some being somewhere behind the walls in a train station. And talk about that a little bit. So you're a purely automated shop.

You're relying on these quote-unquote robots inside the computer to place the trades and generate the trades. So what's that life like being that kind of a manager? Do you just sit back and have some wine and watch the trades happen? Or what's that lifestyle like? Nowadays, in the last couple of weeks, it has been a very, very stressful lifestyle. But that's because you can't distance yourself from markets, not in terms of what you do, because we don't really act on it.

It's all running fully automatically. But you still are very closely in front of the screens. You monitor the different programs. This is a very, very exciting but very important time as well in terms of trading. It's devastating in terms of human tragedy. And this is very, very painful to also have that basically in the back of your head in terms of the suffering out there. But if you just look at markets, it's also a very important time to learn. We haven't had crises for quite some time.

We had a tremendous long period of upwards equity markets. And we were basically starving for some larger movements with all our programs being long in terms of profile, though they benefit and try to help our investors basically to capture alpha during these times and hedging capabilities for their portfolios. And as a result, now is the time to learn. This is the ultimate testing ground for probably all systematic programs because it is not necessarily embedded in the data you use to build these programs.

And now it really shows if your risk management is properly set, if you have properly thought about sizing when volatility changes substantially. And as a result, we're really exhausted at the moment. So it's not the relaxed lifestyle of a systematic trader, just letting everything work out and you're somewhere on the beach, on the Alps, mountain biking or skiing. It is still a very active job, more or less 24-7, because we are trading globally with some of the programs.

So they need to be monitored and checked from the operational side of things, where we also have a high degree of automation, but still you still have to have people to look into things. And at the same time, you would like to learn in real time what's happening. Of course, ultimately at the end of the day, you have the data.

So you can look what happened last Monday and say, wow, that was quite a sell-off. And you have the data now and you can check if you would like to do things differently going forward, if you have a new idea, how you can strengthen a program, if you have a total new idea for a total new program. So the data is certainly there, but if you do that in real time to a certain degree, specifically in this environment, you can still learn more. It's the school of life at the moment in terms of trading.

And it goes also to the systematic side. Yeah. So you're basically the automation and the systematic approach allows you to do more research and be a student in real time, so to speak, of accessing that data, analyzing the data, instead of being neck deep in the data, trying to get trades done and whatnot. Yeah, exactly. I think you put it 100%.

That's what I wanted to say. It's basically, you can do the research and the thinking in terms of further developing and questioning yourself and things like that without the additional unbelievable pressure, certainly in these times, to actually execute trades and maybe even second guessing things. So that's not taking place. So it's certainly a totally different lifestyle to someone trading discretionary. But it's still very intense at the moment. And prior to that, because we strive in higher vol environments, and all of us know that this hasn't been around for quite some time, we had to do a lot of education for investors. One of our programs was launched in May 2017. It's basically targeting tail events in equity markets, global equity markets via global equity index switches.

And there weren't any. Markets were not really moving substantially. So we launched in 2017, but we didn't do anything. We didn't really get trades. We have to do a lot of education to tell people why it makes sense to have it on the portfolio with all these different advantages, but still no trading because people ultimately would like to see something happening. And then we were running into the February 2018 environment,

and then there was trading, and it worked out well. But then again, volatility died out, and then we had it in Q4, and in 2019 was even calmer. So it was a lot of education and explaining what we do. And this has now shifted in the last two, three months. It has become more specific in regards to what's currently happening in the market environment. What does it mean going forward? Generally speaking, people have highly appreciated the developments of the last two, three months and also the years before because we don't really have a bleed with our long wall positions. So all our strategies are absolute returns. So it's not that we have to justify why we are constantly losing and waiting for something big to happen.

So this is certainly a certain comfort we had. But still, what we do currently has substantially changed from what we have been doing six months ago or something like that. Well, not necessarily what you do, but how you're – the markets are changing, not what you do. Oh, got it. Yeah, exactly. Good that you put that into perspective. Yes, definitely. Markets change as a result.

The trading programs are more active. As a result, communication with investors has changed. It's not talking about what might happen. It's talking about what has happened. So let's take a quick break, and then we'll come back and dive a little more into the strategy. Sure. Welcome back, listeners. I'm sitting here with Bastian Balesta from Deepfield Capital, and we're going to dive deep into deepfield strategies a bit now.

See what I did there? So, Bastian, time for the elevator pitch. Give me the 30-second overview of what Deepfield is and what you're trying to do in the markets. Sure. That's a short elevator. Deepfield is a short and systematic asset manager. So, all we do is basically rather intraday or short-term, short holding periods. All programs that we trade, most of them, what we do is basically rather intraday or short-term, short holding periods. All programs that we trade, most of them, what we do is futures trading, a little bit on the equity side as well. All is fully systematic, highly automated. And the programs share certain characteristics as being long ball in terms of profile. So they tend to do well in times of high volatility levels.

They show positively skewed returns. So the advantage of a positive larger surprise in contrast to the negative skewed. And they are negatively correlate when equity markets are down, showing a positive return on average in these periods. So they tend to do well when markets are in tumult. Not necessarily what we currently see. It doesn't have to be as drastic. But generally speaking, we are not as active when the markets grind upward slowly. They don't have that bleed as said.

So we absolutely turn and do also make money in these environments, generally speaking, but higher wall levels lead to more action in these programs, and that's when we become active, and that's what we are specialized in. Pretty good. I got one myself here. So you're a purely systematic shop trading highly reactive intraday and short-term systematic programs in global futures and equity markets with a positive skew convex profile and a top-tier institutional setup. That's an elevator to the third floor. I took the one to the 10th floor. So yes, that sums it up quite well. It's exactly the way it is. I cheated. I had that typed up. So you guys have four strategies that you're managing or what you call pillars inside your trading philosophy.

So let's talk a little bit about what's going on in each pillar. I've got intraday crisis alpha, intraday convexity capture, systematic volatility arbitrage, and liquid equity alpha. So you want to start with – I'll let you start wherever you want, but let's go through the four pillars. Yeah, probably biggest differentiation, Liquid Equity Alpha is an equity program, cash equity. So it trades US single stocks. It's our oldest program, actually, like running for more than years, and is also intraday only. So we have three intraday programs, and this is our cash equity intraday trading program.

It is a little bit our ugly stepchild, because we haven't really taken care of it for quite some time, focusing on the futures trading side because of various reasons. Equities are differently treated in terms of taxes, so people tend to favor futures. People were happy with their normal S&P long exposure, so it had a little bit a difficult time to actually spread its message being long only, intraday only, meaning the thing is out at the end of the market and it does most of its money when the markets go down and does it in a long only fashion. So I think that's about to change, but it has been neglected a little bit, but has been running stable over the last 10 years and has been

trading on all-time highs since mid-last year and just basically had a very beautiful proof of concept. So that one's kind of set that one aside. It's the least like the others? Yes. Basically, LEA is idiosyncratic in terms of risk, and we were looking into approaches to benefit from systemic moves when the entire market is moving. First of all, identifying that and benefiting from it. And that's where research started for our intraday crisis alpha program. It is also intraday only. It trades global equity

index futures and focuses on tail events in these equity markets. So it's not interested in the daily small up and downs. It is looking for substantial large moves and in the intraday sessions only, meaning when, generally speaking, when cash markets are open. So it doesn't look at the overnight. It doesn't care any overnight risk. As such, it doesn't have any margin requirements because the margin to equity, as everybody knows, is calculated based on your positions you hold overnight. And in the majority of cases, the intraday margin requirements are substantially smaller. In our case, they're very small and sometimes you don't need any at all, depending

on the setup. And ICA has been developed to strengthen the portfolio where Liquid Equity Alpha is trading, but has evolved into something what investors use, and we also do on our prop side, as a portfolio overlay, because it is basically sitting there and waiting for larger movements to happen. And if they don't happen, it doesn't trade. You don't have opportunity costs

because you don't have to de-invest somewhere else and allocate it to this int been very important specifically in regards to what has happened over the last two, three months. Also in terms of what has happened in February, March, because our initial S&P only program wouldn't have fared as well as ICA has been doing with these very great results in the last couple of weeks and months, because the majority of action in these equity markets, where all of us get scared and excited and don't really know what's currently happening out there in the world, has actually taken place overnight.

So it is counter to other observations in other periods of time. We currently see most of the action actually in the overnight. And if you only trade, for example, the S&P or even Nasdaq or Dow and Russell in the US in the intraday session, you will not capture anything there. It's very difficult to capture it because the majority of action takes place by a market gapping down substantially and then the circuit breakers kicking in just seconds after the market opened and you can't really trade there on the intraday side. That was kind of last Friday, right? We opened down whatever it was

10%, rounded up a little and closed down around 10%. There's nothing really to do. It's not only that nothing is to do, it's becoming very, very dangerous as well. Because if you react on that signal, you say, wow, that's a substantial short signal here. And then you enter that and the market pulls back a little bit and closes just down 7%. You may have seen a severe loss, despite the fact that you actually wanted to add hedging capabilities and other to the portfolio. And as a result, these environments become very difficult to trade when you have substantial gaps and more frequent swings and swings of huge magnitude intraday as

well. And the philosophy of ICA is I'm not trying to catch a three-month down move. I'm trying to capture that very quick first leg down of a move. Yes, or you slice down the three-month down move. I'm trying to capture that very quick first leg down of a move. Yes, or you slice down the three-month down move into, I don't know, three months is like 90 days, but no, 80 days or something like that. And you slice it down into a lot of opportunities on the short and the long side. I don't know if you were referring to a long or short move, but ultimately...

Short move. Short move, okay, yes. What happened currently there. I don't remember long moves. Do those still exist? It's not too long ago. There was actually long as well, yeah. And it will eventually come as well.

But I'm totally with you there. If you zoom in, you still have opportunities on the long side as well. And we see that. If you look at the swings in the S&P over the last couple of days, for example, yesterday we were up 5.4%. The day before, we were down 10.9%. The day before, we were up 8.5%. So we mean the S&P. So you see, even when we have a downwards trajectory at the moment,

you still have these larger up moves potentially if they don't take place overnight. So what we do is basically we slice down whatever's happening there into intraday sessions. Initially, just in the US, so we always look what's happening intraday, then we close next morning. We look again what's happening intraday sessions. Initially, just in the US, so we always look what's happening intraday, then we close next morning. We look again what's happening intraday. If there are larger moves intraday, that's our specialty. That's where we would like to engage. And at the same time,

this program has matured into a global approach because these global impacts on markets may travel around the globe. So if something is happening in the late hours in the U.S., there's a presidential speech, some kind of intervention action by the Fed, it may not play out in the intraday session in the U.S. because it's potentially after the markets are closed, on the cash side at least. And you then have the opportunity to trade that intraday in Japan, for example, where ICA is trading in Osaka, the Nikkei and the topics. Or in Hong Kong on the HSI, the Hong Kong, the Hangzhang Index or the China Enterprise Index as well, the HHI. And so ICA, having matured into a global program, has substantially strengthened its capability to trade the year-to-date has been captured in Asia and in Europe in reaction to things which have been triggered in the U.S. as well. So the concept

there is when the U.S. market opens down 10%, the Asian markets took it from zero to 10 in their normal trading hours. Yeah, something like that. But still zooming out, we also see massive gaps in Asia and Europe. Asia might open down three and went to down 10. Correct. But then you can capture a little bit there. And then you capture a little bit in Europe. And at certain times, you can trade in three different geographies. So you have compounding impacts.

You trade around, you basically trade around the clock. In other cases, you only capture something in Europe or in Asia, and you don't capture in the US. So it's a different setting, being more balanced, basically, and more reactive to sudden changes in the environment without the overnight risk. Because if you are in positions overnight, you are more exposed to sudden changes. Of course, you have the opportunity if you're rightly positioned to capture these substantial moves which are gapping up or gapping down. But we wouldn't do that with a directional position. We have positions overnight in our relative value strategies in the Volar program.

But they are more balanced. It's a relative trade we put on there, and as a result, they benefit from larger movements overnight, but it's not single directional as ICA is trading. Maybe a question for you, Jeff. Sure. Have a guess. What is the year-to-date return in the S&P 500, taking the SPDR, if you compare night moves and day moves. As of yesterday, I give you the combined. The combined was down

21.46%. As of yesterday, the SPDR was down 21.46%. So how much is night and how much is day? I'll guess negative 11 day and negative 17 overnight? Close, but not really. The night is down 23.41. So it's more down than the combined. And the day is actually up.

It's up 2.54. Wow. So if you're basically trying to capture something on the short side intraday, it's nothing there. It's not there. It's actually the day session is here to date as of yesterday. It's positive. And the night has lost even more than where we are combined. And this is not normal. Or let's say it's difficult to say what is really normal. This isn't always the case. We currently

have a paradigm shift here. We currently have a paradigm shift here. Yeah. We currently have a paradigm shift that this is actually happening overnight. And as a result, it can be very important and essential to trade globally in that regard. But the danger is these Asian and European markets aren't totally correlated, right? So you may have moves that don't happen there. I guess in a time of crisis, they're going to become more highly correlated. But I guess why the Asian and European markets instead of just trading the Globex overnight? Good question. The first one is, in fact, generally speaking, over longer stretches of time, if you look at the close to close, so you look at the entire session,

global equity markets have become highly correlated. So it's, I think, if you look at the rolling correlation between the US and Asia, for example, it's 0.6 or something like that since the late 1990s until recently. This is close to close. If you differentiate open to close versus close to close, you see that the intraday sessions in Asia and in the U.S., again, on a rolling basis, are actually not correlated. It's more, it's flattish. It's around zero. And as a result, you can substantially benefit from trading these sessions intraday globally because you access uncorrelated market moves and return streams. But again, as you said, in times of crisis, correlations increase.

So you basically now have the opportunity, something you may not get in the years, you can capture the same drivers actually playing out in Asia and in Europe, which you otherwise couldn't capture because of the gaps. Trading overnight is an option because S&P futures are open. And while generally speaking, liquidity is not as large there, certainly in times of crisis, you have increased liquidity, but the liquidity is still higher in the interday sessions in the other geographies. And currently in these crises, there's a high correlation between the action taking place

in Asia and in Europe. This may change again going forward, returning to what I said just a second ago. But at the moment, there's an opportunity to capture whatever is shaking up the U.S. in a more liquid form in Asia or in Europe. So putting your old international relations hat back on, do you think those have become more correlated since, oh wait, since the financial crisis, the central banks are acting in unison? Globalization, what do you think are the drivers behind them becoming more correlated?

The key driver of globalization, I would say. It's global trade and companies, global companies, or actually initially U.S. companies becoming global companies who may still have a headquarter in the U.S. or maybe a small assembly line, but they produce something else in China. So these companies become basically bridges across the globe and may have – Across China and Starbucks and Apple stores and across the world, yeah. Exactly. And as a result, it is completely understandable why you have seen this increased correlation

on a close-to-close basis. But still, intraday, there may still be domestic issues. If you have, we can't really remember that at the moment because we are all shaken up by this immense global crisis and tragedy. But there were times, basically, where something was happening in Hong Kong. You may recall that Hong Kong was exactly running through a very difficult political process, still not solved, but forgotten at the moment. And then you have different opportunities in Hong Kong, which are not connected to whatever's happening in Europe or the US. You had a higher connection between the US and China

because of the US Sino-Trade War and the actions were more aligned depending on who said what at what time of the day and then this market reacted more or the other. But ultimately speaking, a lot of very day, and then this market reacted more the other. But ultimately speaking, a lot of very easy, actually not easy, but logical factors driving these increased correlations. For us, it was very exciting to learn during the research process that the intraday sessions don't show these correlations, generally speaking.

Currently, in these very special times, they are increased and we benefit from that as well. But ultimately, you also benefit from the non-correlation of these. Got it. And so... Generally speaking, they're still not correlated. So the move has not been massive that now you can say the intraday session in Hong Kong is highly correlated to the S. We are still talking very, very low levels, specifically when put in relation or in comparison to the close-to-close. In their normal session. Switching gears a little from the theory of the program,

in practice, it's still not structurally going to capture the move. It has to be right. It's not like I own a put, and if the markets go down, I'm going to make that put's price is going to increase. Your models have to correctly identify and capture the down moves. Yes, that goes for the ICA, so the intraday program on global equity index futures, as well as the application of ICA to VIX futures called ICC. That's the intraday convexity capture program. We'll move on to pillar two, which is the ICC intraday convexity capture. Yeah, I didn't want to stop you there, but ultimately we don't even call that pillars because the reference of pillars is coming from the Vol-Arp. So if we just take one step back, at the beginning, we had the Liquid Equity Alpha program.

That's our cash equity intraday program. And now we were spending a larger part of time about the ICA program, which is probably something like our flagship or at least quickly growing program because people use it for different roles. It is used as an overlay for portfolios. It is used as a single investment. People combine it with the S&P, for example. We are currently working on a product where a pension fund has requested an ESG-rated equity slash bond portfolio as a core, and we put ICA on top of it. Do you see that the intraday program here is used for different roles?

Yeah, and our clients really appreciate it because there's nothing really out there that attempts to capture that first leg down, which it's trying to do. Yeah, we have benefited from that. I hope it stays for that for a while so that no other players are moving into that space. We try to innovate, of course. You see that that type of innovation is reflected in us applying ICA's architecture to the VIX futures. So this is a program called intraday convexity capture where we also trade intraday only momentum, but we trade the U. the US VIX futures, the first and second expiry.

And it's built on the same modeling, how we look at opportunity sets, how we analyze if that momentum trade is going to last for a certain period of time and has enough steam and action to it that we would like to take a position or the programs would like to take a position. And now going back to the pillars. So the ICA, the equity momentum and the ICC, the U.S. VIX futures momentum, they are central parts and the latest additions to our systematic wallop program. And that's where we refer to pillars. So ICA is pillar three and ICC is pillar four of our wallop program, which has in pillar one and pillar two, two relative value strategies.

These are the strategies holding overnight as well, I referred to earlier. And they do quite well specifically in the current environment. So they have long wall positions in terms of the pillar one, it's a calendar spread. So we are long the positions in terms of the pillar one, it's a calendar spread. So we are long the front months against the back months short already for quite some time. And in the second pillar, this is VIX versus S&P trading long, long or short, short, also a relative value approach. We also long the VIX versus long the S&P. And these strategies have seen a very, very good run or streak, being up 14 days in a row now, benefiting from these extreme high levels of volatility. But at the same time, you can strengthen them by more reactive strategy.

And the relative value strategies utilize the reactivity of the intraday program. So they utilize ICA and ICC, which are traded together as Pillar 3 and Pillar 4. So the program has evolved over time. And you may recall that ICC, the Volatility Intraday Program, has just been recently launched in July last year. So obviously, our volat program has evolved over time as well. That's our learning process, where we believe that there is value in relative value. But at the same time, there are opportunity sets where you need more activity and where you would like to strengthen this approach to volatility by adding something which may trade overnight.

For example, ICA trades overnight, so to say, in Asia, in Europe, in regards to your relative value positions in Pillar 1 and Pillar 2. And you have more boom for the buck, so to say, more steam potentially when you trade the VIX intraday. But again, if we go back to our observation that the majority of action actually took place overnight, with the S&P being down 23% in the night session versus combined 21% as of yesterday, of course, this is also reflected on the VIX future complex side. So the majority of action where the VIX really moved substantially was also coming from the overnight.

And as a result, our intraday VIX trading program didn't really do much in the last couple of days because the VIX was moving a little bit here and a little bit there. We had a long position on one day and then we'd have one today, for example, but it's still on really high levels. And yes, it can go higher, but of course, there's not so much steam to it when the market has gapped down 5%, 7%, 10% as observed the last 10 trading days. And as a result... Is the ICC's signals based on the stock index or the VIX itself? The VIX futures itself. So it's not using the ICA signals to trade the VIX. It's using the same modeling but applying it to the VIX futures.

Correct. 100% correct. And as a result, because ICA US wasn't really as active, we just had a few trades in the last 10 days, but the majority of action coming from Asia and Europe. And you can basically build the bridge to ICC also being not as active. And that's where the strength of the Wallop program comes into play, having this holistic approach with relative value strategies, with directional strategies. That's why Wallup has been thriving in this environment because it is not only betting on relative value moves and it's not only betting on an intraday move in the US,

but it's a global approach in terms of the third pillar. And yes, ICC currently doesn't add too much value. It's basically slightly up, but there have been times in the last six months since we added it to the portfolio where it had some really nice uncoordinated returns. And if you look at the portfolio structure, the relative value strategies and the intraday strategies, they show very compelling correlation numbers where if the relative value is down, for example, on a given day, the intraday programs show a negative correlation with an average positive return capture and vice versa. And that's why we could build it that way, because they have these very, very compelling,

but also stable throughout different environments correlation characteristics and so the the overall concept is to cover as many path dependencies as possible so if you just calendar spreads there's a lot of scenarios where you might not capture a move if you so then you add the vix and s p spread pillar two so let's dive into the ball arb a little bit so you have the the one component of that their relative value strategies meaning uh you're not necessarily taking a directional approach so the first part of that is vix calendar spreads how does that work? It basically looks at the first four expiries of the VIX future and does a risk-reward analysis on the specific futures and goes along the one with the highest risk reward and short the one with the lowest risk reward, generally speaking. Meaning that just from a price driven perspective,

a lot of players in the field, they basically look at price action. And if you look at the role yield, you may capture most of the time contango, but now with a very pronounced backwardation off of the role yield, you may assume a certain position in the first expiry. But if you basically do a risk-reward analysis, it could be that given the risk associated

with the position is substantially higher, and you would maybe just go for a smaller roll yield in another expiry, but with a substantially lower risk. And then you can basically, by sizing, you can get a much better risk-reward ratio. So when you look at the term structure and then you look at the positioning of the calendar spread, quite often you may be surprised because we can't remember that again because we're in this unbelievable steep backwardation at the moment. most of the time the VIX futures is actually in contango, like 85% of the time. So the classic trade there is long the front month and short the back month?

The classic trade would be, probably for most people, being short the front month and long something else because you're harvesting the roll here when the contango basically is rolled down towards the spot. And that's exactly what you would expect. And interestingly, because of the risk-reward analysis of the calendar spread, of our calendar spread, quite often we actually long the front months. We long the front months a bit more than 50% of the time, despite the term structure being in contango.

And this is a reflection of this risk-reward analysis where positioning may be in the front months or the second. You can also trade the second against the fourth or second against the third, and where it is initially counterintuitive because the hidden parameters like risk associated with a certain position are not revealed, obviously, in the term structure. So you see, well, isn't there the highest roll yield? Yes, but we are not just after the roll yield, after the risk premier as a whole, and try to put that in relation how much risk is associated with a certain position sizing. And as a result, we come up with a long wall position more frequently

than the term structure would suggest. And the current environment, of course, we are long the front month against a short one of the back months. And have been that for quite some time, like two and a half weeks at least. And this, we have benefited from that despite the fact that we saw parallel shifts, basically in the term structure, but the VIX, when it was at 40 something, we said, wow, that's high, like one and a half weeks ago.

And now we had at totally different levels. But we could still squeeze a little bit out here and there, despite the fact that the curve shifted up in parallel. And of course, if you, for example, long the front month and short the third, we may not capture as much then because both of them move and we make money on the first in the front month and we lose money on the third. But we still manage because of this dynamic position sizing to actually squeeze out a little bit here and there

and had a streak of 14 updates in the relative value strategies, which is very exciting, but also very challenging at the moment. And position size has become smaller and smaller as well. So it is, you see that all programs basically are doing the position sizing inverse to volatility. And if you put it in a nutshell, a lot of factors coming into play, determining ultimately the position size, but just from an outside perspective, it looks like a short term volatility, if it's higher position size, but just from an outside perspective, it looks like a short-term volatility. If it's higher, position size are smaller, and this goes for all programs.

And this is, of course, then becoming more difficult to make some money because you don't carry large positions in this current environment. And then what's the difference between, what is the VIX S&P spread capturing, the pillar two that the calendar spreads can't or aren't doing? Yeah, basically, the VIX and the S&P, they have this inverse relationship. And the VIX has the risk premier and the S&P doesn't. And as a result, you can build a relative value trade by going long the VIX versus long the S&P and lock in certain opportunity sets when the risk cream is basically too high or too low in regards to your own calculations, put in a nutshell, basically. Right. And the concept there is the VIX will spike 70%

when the S&P falls 20%. So you can be long, long and only lose 20 and make 70. Yes, and you're basically, you're long, long because of the inverse relationship between the two. And the idea is that you don't have an outright position there, but it's a relative value trade again. Got it. So I know it's probably like picking your favorite child, but which strategy is your favorite to work on day in and day out? With my international relations hat, probably the ICA program is the most exciting one because I can follow actions taking place in Asia, Europe, and the

US. So it comes a little bit of what's happening in driving markets. In terms of investing, it's probably the Vol-Ar program with the four pillars because there you have the relative value strategies where we have done quite some substantial work over the last six months now on the second pillar. And we now move on and review the first pillar. And it also has the latest intraday knowledge of the team in regards to the ICHO program trading globally and the ICC and the fourth pillar trading the VIX futures. And that's kind of your best ideas program, you would say? Like some people have a, yeah.

Yeah. It's the best ideas program, and it has grown clearly over the last couple of months. We have doubled assets since the beginning of the year, and I expect that to continue given the overall very compelling results in this current environment. But at the same time, the ICA and a certain degree of the ICC is also used differently in a portfolio context, as I said earlier. So we have various investors who are invested in our Wall-Arp for their Wall-Arp bucket and like the combination of the relative value and these more reactive intraday strategies within one program. But still, they look at their overall portfolio and say, I would like to add ICA as an overlay or a combination of ICA and ICC. We call that intraday momentum plan. It's basically a one-to-one ICA and ICC.

And because of the characteristics of not requiring any additional capital and not missed opportunity costs, it is very easy for an investor to put that on top of the portfolio, maybe with a small size initially, get a feel of the program and see how it reacts in different environments, and then you can build it up. And you don't have the hurdle of de-investing somewhere else and then allocating capital to us. You can very efficiently basically just have ICA sitting on top. And whenever it's trading, it's only trading intraday at the end it's out, you don't really have these capital requirements except for buffer you should of course count in in terms of drawdowns because

of course every program is going drawdowns occasionally. So we see this dual function of Volarb as a standalone and the intraday programs as overlays. And they are, of course, all absolute return in general. So people are looking for absolute return. Currently, three of the four with double digits year to date has been a driver for the growth in assets over the past couple of months. I love it. Welcome back to The Derivative. I'm Jeff Malek here with Bastian Balesta of Deepfield.

And I think we'd be criminally liable in podcast court if we had a volatility expert of your caliber on and didn't talk about the current market and massive sell-off that started about a month ago. So here's what I have as of today over the last month. U.S. real estate down 34, commodities down 33, world stocks down 31, U.S. stocks down 28, hedge funds down 12, and bonds down 3% all of that. So let's talk about what you've been seeing in terms of volatility. We talked already a little bit about the Asian and U.S. market connections and how that's happened overnight. But I'll hand it over to you and tell the listeners what it's been like on the front lines during these past couple of weeks. Thank you, Jeff. You see, I have to get my breath first to start in this section here. It's breathtaking.

We haven't seen that for quite some time. A lot of people probably have never experienced it. And we had a glimpse of this action compressed in a very short period of time in February 2018. But this had different reasons. It was a structural issue within the VIX complex as well. And now we basically face a global crisis in the real world out there, a tragedy with humans, people suffering all over the place in different countries. And we don't know where we will go from here because we don't know the peak yet. First time in my career I've ever been hearing 1987 comparisons.

Exactly. Yeah, Black Monday. And to a certain degree, we already put 1987 aside. I had a discussion with the team just yesterday where we said, well, nobody will compare that to 1987 anymore. They will always talk about March 2020, what happened in March 2020. That's basically the new benchmark. How have you done in March 2020? Why has it happened?

It's a really humbling experience, certainly. As we said earlier during the podcast, we do well. We deliver in line with our framework. So we are blessed that it seems that we have set the models over the last couple of years to also deal with these extreme circumstances.

But it's still a very humbling experience. And we honestly don't know what's going to happen going forward. Nobody knows. And I don't really see any direct parallels because we haven't really had this situation that country by country, some sooner, some later, and later probably being even more devastating, are shutting down.

So we had a call earlier with an investor where someone made a reference to this is like war times. Yes, it feels like it. But during a war, war takes place somewhere. It doesn't take place in all the countries, meaning that some countries still just work normally. Yes, their boys and girls are over there and fighting, which is a very bad and human tragedy by itself, but they don't shut down their companies to the country. And they maybe

even have a striving economy because of that. But here we have a situation where decisions have to be taken and the economy slows down. Companies have to shut doors, services close doors, and people lose jobs. And it's happening in a very breathtaking and scary fast pace. And as a result, we don't know because there's no reference. And now we see, of course, all the larger actors trying to come up with ideas how to soften that, how to mitigate it. But at the same time, they have to juggle a lot of balls there. The reaction to the countermeasures to the health crisis itself has to be probably better managed going forward where we are at this today in all kinds of different countries. And at the same time, we have to struggle with the impact on the economy.

And we are already using a lot of gunpowder there. If you think about the intervention of the Fed over the weekend, today is what is Wednesday. So on Sunday, basically, we have the Fed stepping in again. And I think I saw one of the Twitter feeds of our friends and peers in the world space. I think Chris Cole tweeted, Fed put rest in peace. I think it was him. And basically, yes, that's it.

So here's the Fed put, put in action. Yeah, they cleared the cannon and it didn't work. Nothing happened. No, it didn't. And to the contrary, the thing dived on Monday. And think about this. This was the rule. You have that Fed put since Greenspan's days

that whenever there's a crisis, they open up their box and bring all this money out and everything's going to be fine. But here in this case, we are dealing with something which we don't know because we don't really know how severe the impact on all the different levels of our lives will be because of that health crisis. And so giving out money may not work. And even more standard things...

Yeah, lowering interest rates won't make people go back out to Starbucks. Exactly. Because they can't. And at the same time, another part of the government, while we're handing out money on one side, is saying stay at home. So what do we do? All online shopping? Yes, we can do that. You see that the online shops are exploding, and they're actually hiring at the moment and building up facilities.

But what does it actually mean for all the other businesses? And if you send money to people, I hope not by check because it could be contaminated. So if you wire them the $1,000 or $2,000, as we have done in the past in the U.S., and actually Hong Kong did that just a couple of months ago, you normally in other crises, you wanted to go people out, go shopping. Go buy a TV. You know, buy a TV, drink coffee, go on vacation. But now we tell people, no, stay at home, social distancing.

So what do you want to do with a thousand bucks? You just spend it on Amazon? Buy stocks, yeah. What have you seen in terms of the actual market structure? So like bid-ask spreads blown way out? Has the VIX gone crazy in terms of the actual market structure? So like a bid-ask spread's blown way out. Has the VIX gone crazy in terms of liquidity and whatnot? What have you been seeing in terms of the market structure itself? Yeah, it's not too much, not too much.

We look into that, but not as closely. And it is not what we saw. There were periods over the last couple of days where there was a larger disconnect between what was happening in the VIX and what's happening in the S&P. So you could see massive moves in the S&P and you would still assume based on the relations of the two that you should see a larger move in the VIX, but this didn't take place. But we have seen periods of disconnect between the VIX index and also the VIX futures versus what's happening in the S&P in various periods. Also during February 2018, think about the Walmart Gatom where basically we saw the explosion

on the VIX side of things, whereas the S&P was down, how much, 3.5%, 4%? Yeah. And basically you see this can happen. Yeah, exactly, above 100. So you have these periods, or you could observe similar things in the past. What may be very special this time is that normally when you have an event which actually pushes up volatility and shakes up markets,

this event may have some kind of fallout for a couple of days, but then everybody knows everything and then we find a new level. But here, we are currently in something which is rapidly moving, and we don't know how severe it's going to be. We now see these charts with, we have to flatten the curve. People have to stay home, acknowledging that we have limited capacities in the health sector in the US, but it goes for every country. And now we tell people via television shows, please stay at home to flatten the curve, to flatten the curve, acknowledging that we will go beyond this dotted line and have more cases most likely than.

And meanwhile, half of America doesn't understand what a curve is. But I think they tried to really simplify it so it's basically two curves with shape with colors and the dotted line and the message is stay at home so that we get this blue thing which is below the dotted line which will not be the case and in the uk called it a squash the sombrero yes yeah he he was also the guy who just said two or three days ago, everybody should get it and then everything's going to be fine because the people who will not survive that. And this can be young people with preconditions. So we should take care of everyone. And actually, everybody should as the US has reacted to that in comparison to, let's take Singapore, for example, or let's take

Hong Kong as well, Taiwan. And we looked at that and it looks like that the experience they made with SARS back in 2003, and here nobody understands. they made with SARS back in 2003. Pardon me. Pardon me. And here, nobody understands. And now, basically, now it's coming through, but we needed these devastating pictures from Italy. We didn't believe what we saw on television, what's happening in Wuhan.

Arguably, in a democracy, you don't have these tool sets to react to something like what happened in Wuhan as the Chinese government did. But to a certain degree, with all the difficult things they do and the humanitarian aspects of things happening in China, certainly not being in the green area, generally speaking, they did the rest of the world a favor because they slowed down and gave everybody else time. But a lot of people wasted that time. And here in the U.S., we still have packed crowds at Disney World and on beaches at spring break, and yeah, it's not getting through to the people.

And because of that, because of what you're saying, we see that that means potentially even a further acceleration in contamination of larger parts of the population without testing capabilities as placed to really know how to mitigate it. It's not about containment anymore. It's about mitigation and mitigation placed down into impact on the economy. And as a result, what we will probably see here without having the glass ball in front of me is that these elevated levels of volatility are here to stay longer. So normally, not normally, but in various other occasions in the past,

you also have a spike in volatility, and then it comes down again. But now we have been staying on very high levels for quite some time. And I would argue nobody of us really know what kind of factors still need to be priced in in this price-siding mechanism in markets to justify a drop. So on the VIX curve itself, though, it's saying that, no, it is going to come down. What are the back months trading at? So the front month at 70-ish, what are the back months at? Yeah, currently front is at 68. And then we go 56 and 49, 43. So you see

something there, but this is changing very drastically from day to day. So it could be that whatever press conference we're going to hear in two or three hours that we jump up again. And we saw quite substantial parallel shifts over the last couple of days. So some of those back month fixed levels have to be records, I would assume. Yes, definitely. Right. As you're saying, in the past, it was the front month spike, a terrorist attack, some environmental crisis, Fukushima, things like that, even Fukushima may play out a bit longer, but still, first, it's this massive negative impact on markets, absorption of these news being reflected in the front steepening substantially. But here, the high levels further down the road in the back months is a reflection of

the market pricing in the likelihood that we haven't seen at all. And we all know that we haven't seen at all. Just looking at what has happened in Italy, we know there's a lot of action in the next two or three weeks heading towards us. And while we currently in this podcast look at it from the financial side, we should not forget the human tragedy behind it. And of course, market needs a price finding mechanism where we price in and revalue at the situation.

And some companies will come out of this crisis better. And we can allocate capital to them via the stock market and things like that. So I hope that the government is not going in the direction of shutting down markets. There was a glimpse of that earlier this morning. Actually mentioned it, and I don't know who he talked to because everybody else said, no, he didn't talk to us, but this would be a first timer. Well, 9-11, they did it but that was shortly more because of the location also hey correct new york is the head of the trading and its head just got cut off so what

what does it look like for naive vix traders if they're saying hey volatility is so high i want to short it like with that curve and backwardation they're going to be hemorrhaging cash just on the roll yield, right? Yes, exactly. That's very expensive. And then, of course, you're at risk of things jumping a little bit higher as well. So we saw various players in the vault space who are more active on the short vault side, so exactly the opposite of the spectrum. They got hammered in the last one and a half, two weeks, and not because of being wrong in the initial situation, but because of a bet, however, they actually made it that

we had already seen the worst and they expected it to drop. And that was, of course, very expensive. Is there a theoretical bound on how high the VIX can go? I know technically there is no bound, right? It's just a calculation, but it seems to me at some point, right, if you had a thousand VIX reading or something, that that would be the odds of the S&P going to zero in three days would be something. So it seems like there's some upper bound to how high it could actually go. Yes, potentially. But if you just want to take the extreme on the other side, theoretically, the S&P could go as high as he wants.

We have a limit to the bottom, but we don't to the other side. So from that function, you could say that it's unlimited. But you've rightly pointed out that you can't lose more than everything. We don't really look at that from that level. We are currently already at very extreme level, but it certainly can go higher. From a historical perspective, certainly in the 120 region.

And so you guys are, just to reiterate, you're not seeing liquidity issues or execution issues. So you have your own algos RCM has great ones as well so there are various players out there who basically have these services and we decided for ourselves internally that we would while we have been trading for 25 years

Arna has been developing our chief investment officer systematic strategies for like 26 years. And then the rest of the team, like 19 and 18, 15 years, a lot of experience, certainly. But we still say there are experts out there who just focus on better execution. Why not talk to them? They have all the technology and all the knowledge and resources to continuously analyze these different instruments in all these different exchanges on a global scale.

And we focus on the signal generation and then we work together with them to see that we have the smallest market impact as possible and as a result can increase our capacity in these generally speaking capacity constraint strategies. Because we are active on the intraday and short term side, so everything we do is rather short-term. Of course, these are generally speaking, highly capital,

constrained strategies in terms of capacity, but you can, you can mitigate that with execution specialists. You can, you can basically team up with. Got it. And then your, just to round out everything, your research and testing, you guys are continuously researching new methods of not just execution,

but new strategies for attacking the market. Yeah, yeah. And this is basically a very fruitful period as something we're currently facing. If you're now basically in front of the screens, learning, observing, not just analyzing the data later on, but basically living that through,

not with the necessity, as you said earlier, to press a button and buy and sell. This is done by the algos, but still feeling it by monitoring very closely what's currently happening. You can learn a lot, get a lot of inspirations. Our list of ideas has substantially lengthened in the last two, three weeks.

Every single time you see something, you say, wow, okay, that's interesting. I want to look into that closer. So our research workload has probably just doubled, if not tripled because of observations in the last three months. And that's not because we saw negative things. It's not negative learnings. It's basically inspirations in that sense. And there were no VIX futures around in 1987 or even during 9-11, right? They came out in 2004. So this is truly new ground in terms of data for the VIX futures on how they react to a swift moving crisis. Right, 07-08 was kind of very slow in comparison.

Definitely. And the granularity of the data hasn't been around like in this time. So if you work on TIC data, very granular order book data, so the amount of data we buy and analyze was just not possible 10 years ago. First of all, we couldn't afford it because the data was very, very expensive. You didn't have the granularity in all the instruments. The VIX wasn't as liquid back at the time. So you couldn't trade it the way we're currently trading it. And so your research and testing is going all the way down to the order book level?

In some of the strategies, yes. So it's very granular. Yeah. Wow. Yeah. So that would have been millions of dollars back in the day? Maybe not millions, but hundreds of thousands. Yeah, we had one quote like nine years ago for parts of what we do in ICA.

I think it was seven and a half million US dollars from one of the large data shops. And we said, ah, thank you. Maybe later. And someone was paying it, Millennium or someone like that. Yeah. And yeah, there are a couple of names

who certainly would pay for that. But at the same time, the strategies are very capacity constrained and they may be too small for a renaissance, maybe a millennium if you're in-house by them. Facebook would probably still be interested in something which can trade $100 million or $150 million. But we hope that we're going to wrap up in a second, but we'd like to do a little favorite section, get back to your personal side to wrap all the pods.

So I'm going to do some quick-fire questions for you here. Sure. Your favorite Swiss national, not named Roger Federer. Oh, that's mean. That would be a very good and easy pick. Nice human being and awesome athlete. He's a legend.

Yes, he is. I'm not allowed to use him. The way he actually communicates with everybody else and how he treats people, it's a very inspiring person. I don't know him personally, but I don't know anyone who doesn't like him.

Put it this way. If I have to pick someone else, maybe out of my international relations box, Henri Dunant. I think he basically was the inspiration. He wrote a book about a battle, a very bloody battle, in the mid-late 19th century in Italy. And because of that, the Red Cross was basically founded later on. I think he got the first Nobel Peace Prize as well, 1901 or 1902.

A pretty cool guy. So Swiss guy, traveled back at the time, observed that, wrote a famous book about it, about these immense human tragedy and suggested we need something where people can get carried off the battlefield and the ones been taken care of on a neutral level. Did he take the Red Cross from the Swiss White Cross? He reversed the flag? I actually don't know. It could be. I think there's a museum of the International Committee of the Red Cross in Geneva.

And it's the Henri Dunant Museum if I'm not mistaken and there you can probably learn more about it on your next due diligence trip to managers in Switzerland Jeff. Perfect yes ski trip favorite American food when you get over here maybe I don't do justice there but

isn't America is not as famous for its food, I would say. But basically, of the melting pot of people from all over the world, you have all these different cuisines. So I love all kinds of different Asian cuisines in America, maybe taco as well. Interesting. I'll take it. We think we're good at food over here. We have enough shows on reality TV to prove it. Of course we do.

Exactly. We're very ethnocentric. So do you watch Star Wars over there? We ask everyone who their favorite Star Wars character is. Rey. Definitely Rey. Rey, yes. I love it.

We've been having too many male characters, so I love the female lead. She's strong, smart, I love it. Yeah, and a bit insecure about herself. She has much more capabilities than being aware and then grows into that role and still doesn't really show off. So it's cool. Pretty cool. Humble. Good answer. The Roger Federer of Star Wars so to say right the female Federer of Star Wars

favorite podcast the podcast you do with the mutiny guys the mutiny podcast I like that one I hope that they grow it and build it further but I like this entire pirate thing. So it's like our robots, there's pirates and even my kids

love it. So very interesting conversations. I hope they build it going forward. That's a good one. Will do. And I think in Miami we were talking, you like the flirting with models? Yes, flirting with models, certainly. I think you told me a story of your wife caught you

looking at something that said flirting with models. Yes, it was a living room evening, just came back from work, supposed to, of course, do some family time, but still have this podcast on. She was like, what are you doing there flirting with models? Who do you want to impress by that? I said, honey, it's not models, it's's financial models and then everybody laughed and everything was fine so

yes i found my my podcast listening time has gone way down in this uh coronavirus work from home but yeah i don't have a commute i don't have the time which is depressing same for me that's true that's true and then i'll finish it up with your favorite investing book. Haven't read as much in the last couple of months because of more on the podcast side and tweets and things like that. But the behavioral investor, I think Danny or Daniel Crosby, it basically reflects a little bit what we're doing here with our programs because ultimately we're after human reactions, overreaction specifically on the intraday programs. And he has a very interesting book about why humans react like that

and what kind of biases we have, which are embedded in trading activity throughout markets, despite the fact that we're using algos and all the other things, because ultimately human beings are programming these algos and the biases are still there. And we benefit from that with our trading approaches.

So it's a cool book. It's an interesting guy as well. I think a doctor in psychology. So good one. We'll put that in the show notes. Well, thanks so much, Asim. Be safe. I forgot to even ask if you're working from home or what the situation in Zug is, if everyone's sheltered or what? Yeah, split teams. Half of the team from home, half of the team in the office. But we don't take public commute all by car, don't see anyone else. So it's more or less shut down, actually. We try to not spread it to actually help the older and weaker ones.

Yes, flatten the curve. Flatten the curve. Well, be safe and keep doing what you're doing. You guys are doing a great job, and it's been impressive to watch your growth over the last couple of years. So congrats on all that, and thanks for your time. All right. Thank you for having us, and stay safe as well.

Talk soon. Bye. Bye-bye. Bye-bye. Bye-bye. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalt and visit our website to read our blog or subscribe to our newsletter at rcmalt.com. If you liked our show, introduce a friend and

show them how to subscribe and be sure to leave comments. We'd love to hear from you.