The Derivative - China Tech, Carbon, and Option Overlays in ETFs? Yep, with James Maund of KraneShares

Episode Date: August 22, 2024

Today’s episode on The Derivative,  Jeff Malec sits down with James Maund, a veteran of the financial industry with experience spanning Goldman Sachs, the NYSE floor, and his current role at KraneShares. Maund provides a unique insider's perspective on the rapid growth and innovation within the ETF space while outlining KraneShares main investment pillars – China Tech, Carbon emissions/cap-and-trade, and options-based overlay strategies designed to generate income and downside protection. Maund shares his views on the challenges and opportunities facing both established ETF providers and new entrants, as well as the importance of education and alignment with investor expectations. The conversation delves into the role of market makers, the impact of regulatory changes, and the potential risks and benefits of increased options and derivatives usage in the ETF industry. Maund also offers a glimpse into KraneShares' plans for the future, highlighting areas of focus such as alternative investments and the continued growth of the carbon markets. Whether you're an ETF enthusiast or simply interested in the evolving landscape of investment products, this episode provides a comprehensive and insightful look at the dynamic world of exchange-traded funds. Chapters: 00:00-02:02=Intro 2:03-9:15= Loyalties to the East coast, Goldman Sachs and the NY Stock exchange 9:16-20:38= KWEB – The China Tech ETF, Carbon Emissions and downside protection 20:39-34:53= The Pillars of Krane Shares: Liquid futures, writing calls and important tickers 34:54-48:34= The Evolution of the ETF, ETF options, starting an ETF and the challenges that come with it 48:35-58:02= Further developments, Unique ETFs and new ETF restrictions From the episode: The Derivative podcast episode with Nancy Davis Follow along with James on LinkedIn and visit KraneShares.com for more information. Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, 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

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. Hello there. Welcome back. I hope you're enjoying your summer, getting outside, and unplugging from boring old stuff like this. But it's not all that boring.

If you're on a plane, on a walk, or whatever you're on, I think you'll enjoy this one. We've got James Mon from CraneShares, a leader in the ETF space, bringing his experience at Goldman, the New York Stock Exchange, and now CraneShares to the table as we explore their main investment pillars, China-focused tech, carbon emissions, and of course, alts. James shares his insider's perspective on the rapidly

evolving ETF landscape, whether options overlay strategies are eating the world, and the challenges and opportunities facing both established players and new entrants in the ETF space. Send it. This episode is brought to you by RCM's Outsource Trading Desk, where ETFs like GrandShares come to trade unique global futures markets, like carbon futures. How do those work? Right there on RCM's 24-6 Outsource Desk. Check it out at rcmalts.com slash 24. rcmalts.com slash 24. Now back to the show. All right. We're here with James from Crane Chairs. James, how are you? Doing great. Thanks for having me, Jeff.

No worries. What's new in New York City these days? Well, it's pretty quiet here mid-August. You're the only one there in the summer? We have a handful of people, but it's definitely noticeable that it's August, given the lack of crowds out there. But it's been good. We were talking a bit offline. You go to your Escapes Vermont. That's right.

Yeah, I spend a lot of time in southern Vermont most winter weekends. We've been spending some time there summer weekends as well. It's been really nice this year. What's your ski hill there? I went to school at Union College. We used to jump over to Vermont to ski all the time.

Yeah, so we're on Stratton Mountain. Nice. Yeah, it's great great i think that would maybe my favorite um kellington upset me two years ago we were there in the summer and you buy the whole pass and half the stuff was closed i'm like hey we're just driving through here i want my money back like sorry clearly says yeah yeah it's it's a tough business you know it's weather dependent and it's it's it's uh It's hard to keep things going year round, but they do what they can. I hear you. So let's talk a little bit about your background before we get into Crane Shares.

So you're born and raised East Coast? New Jersey, Montclair, New Jersey. And I've been in this area my whole life in the New York area. So I went to school at Westland up in Middletown, Connecticut. And a week after graduation, moved down to New York City and been here kind of ever since. So it's been a good run. Early in my career, I started at Goldman Sachs in the middle office. Yeah, I learned all about the equity derivative products and the operational aspects, nuts and bolts, all the way from trade through settlement and beyond. And from there, I took a job with the ETF specialist group on the floor of the New York Stock Exchange. So that was a legacy piece. Goldman bought a business from Spear Leeds and Kellogg that had a big floor trading operation and an electronic trading operation.

So it's kind of legacy Spear group making markets on ETFs. At that point, there were about 300 ETFs listed. This was in the early ETFs. At that point, there were about 300 ETFs listed. This was in the early 2000s. This was before or after the flash crash? Wasn't Spear Leeds involved in that a little bit? This was, yeah. Well, unfortunately, it was a flash crash involved all the market makers at the time. Spear had a big group and a lot of others did. So yeah flash crash was uh was may of 2010 so this was uh years before that i'm talking uh 2004 5 6 um so i spent a handful of years on the floor of the new york stock exchange and then about a year and a half on the floor of the american stock exchange which was still

separate from the nyse at the time um and just uh as an an ETF specialist in a variety of products, international ETFs, it's US listed funds with international underliers. And then worked with some of the select sector and S&P 500 funds toward the end of my time there. Was the feeling even back then, so this is early 2000s, was the feeling like ETFs, this is going to be huge? Or was it like, oh, these are some new things, let's try it out? No, I think there was definitely a feeling that it was going to be big. The market was still dominated by mutual funds at that point, and ETFs were pretty much focused on equities. All the assets were in domestic equity ETFs. International ETFs had a little bit more of,

they were just kind of coming onto the scene and a little bit more interest. And then fixed income ETFs were just getting started very early days for fixed income. So I think people were just starting to get a glimpse of how ETFs could be a wrapper for a lot of different underlying asset classes, and just starting to get a glimpse of the growth potential. But certainly, SPY, the Qs, the select sectors were all very successful at that point. And people were just starting to get the wheels turning on how big this could be. And then I ask all the Goldman alums we have on, did it feel right? I can't remember who Matt Taibbi or something was that, uh, I can't remember where he wrote from, but he called it the vampire squid around the GFC and everything.

So having been on the inside and knowing people there, is it a vampire squid or is it just a normal firm trying to make some money? I think it's, it's, you know, more than a lot. There's certainly a lot of very smart people there. But I think there's, you know, from my seat, from my perspective, making markets and ETFs on the floor and all the interactions I had when I was there, it was just a lot of smart, hardworking people trying to do the best they could, you know, moving the needle for the business and for all our young listeners how hard is it to get that seat uh well at this point it's impossible because there's there's no more floor

based training yeah i would say it's the best job i'll ever have uh it was a really really cool environment uh to go to the exchange every day and yeah i was was at Board of Trade. So ditto that. Can't do that anymore either. Yeah. Yeah. But no, it's certainly gotten, say, a lot more competitive. I think there were a lot of folks back then, particularly on the floor, who worked their way up. It was more like kind of an apprenticeship sort of situation where no matter what you did in school or kind of what other experience you had, it was very unique working on the floor, being able to think on your feet and do a lot of those things kind of human to human that are now a technology trip. It's interesting to hear you say that because I'm

always saying, oh, New York versus Chicago. The Chicago pits were truly that, like, you could just be an athlete who didn't go to high school and they'd be like, all right, you're big and you can scream. We'll teach you how to trade. Versus New York, I always argue like, well, you had to still go to a good school and know some people to get in somewhere. Yeah, that's fair to say. I think the pit-based trading, I had a good friend who worked in crude futures on the NYMEX for a couple of years. And again, you know, physical presence and, you know, that was a much more kind of physical environment. The New York, you know, is a little more, you know, a little less kind of throwing elbows and a little more thinking on your feet. Exactly. And then I've also thought that Nework smartly kind of co-opted chicago

futures markets by wrapping them into mutual funds and etfs and and all that which we can get into later but you know 20 years ago you had opened an account at a futures brokerage to get the type access now you can just get with an etf yeah so half of me is bitter at that being a futures guy but half of me is hey that's the way the world works that's progress that's right so let's get into crane shares you guys do a lot so help us kind of give us a broad you got some different buckets you guys are operating and give me the the broad elevator pitch and then we'll go from there sure Sure. Absolutely. Crane shares, we're just 11 years old now. Our flagship product is a K-Web, which is a China tech ETF. And that's really where we got our start. Our founder, John Crane, is a serial entrepreneur, spent many years in China building businesses, sold several businesses

there, came back to the US and was talking about all the growth he saw there and all the opportunity and realized when he was talking to friends and family about this experience that it was actually really hard to access investing in China. And he decided to start this asset manager, Cr to provide that access. And that was really the genesis of the firm. And we're still heavily focused on China and China thematic funds are a big piece of what we do. They're our first pillar and our largest pillar. And we provide not just the access through those products, but a lot of resources around investing in China.

We have a daily note, China Last Night, that our chief investment officer, Brendan Hearn, writes as a large following. And we really try to be more of a resource for our clients and help with providing information that, again, it's a traditionally harder to access market and information on the market, kind of unvarnished, you know, kind of unbiased information or maybe biased differently from what you'd get in the Western media is a little bit hard to come by. So we really try to focus on putting that information in the hands of our clients and our investors. We also have two other pillars. Let pillars. I'll dig into China first.

Okay. Sure. Yeah. Talk to me a little about the interest from back when that K-Web started or China tech was hot versus today versus in the middle. Has it waxed and waned and gone cyclical or has it been a straight line up? Yeah. No, certainly far from a straight line. It's a pretty volatile space to be in. And you have a country that's growing rapidly. You have a technology environment, whether you're trading China tech, US tech, any area of that market is going to be growing quickly and changing a lot. So it's very dynamic. And that fund's grown quite a bit. I joined Crane Shares January of 2020. Our AUM was about 3 billion. And then just about two years later, it topped out around 17 billion. K-Web itself has grown substantially in that time.

Obviously, if you look back at the price history of some of the China tech names, K-Web peaked in February of 2021, about $110 a share. And in all of my time on Wall Street working with ETFs, it's really the only ETF that I've seen as the price came down, we actually saw net creates. So shares outstanding, more than quadrupled, almost quintupled from about 40 million out to about 200 million out in that time that the share price came down for a variety of reasons from its peak in February of 2021 to the low in October, a little over about a year and a half ago now. Who was the big holding that wrote it up to those all-time highs? Tencent or one of those?

Yeah, exactly. Tencent, Alibaba, Pinduoduo, all of the big, you know, big China tech names are the largest holdings in the fund. And I think for a variety of reasons, this was into the COVID bust boom, however you want to think about that. And then the ensuing back and forth between growth in the US and the political rhetoric there, growth in China, you know, a lot of different opinions and a lot of different actions to try to, you know, kind of figure out the best path forward for those companies. And I think we're at a point now where we've been in a consolidation phase for quite a while. And, you know, it looks as though the share price has bottomed. So hopefully we'll see, you know, a nice recovery in the coming months and years. And I've heard, I've been on my pod this last week,

but someone was saying, oh, stocks don't always go up. Look, China has been a growing economy where the stock market's been flat for X years. I don't have the data to support that. So if you agree with that or not agree with that, and then contrast that with the tech piece of China, is that the same story or a much different story? No, I think it's certainly you have these strong demographic factors. You have a growing middle class. You have this rising tide in China that still exists, still growing. You've seen US markets and US tech expand very quickly and reach very high multiples versus China tech, which has been much more muted growth over the

last few years. So if you look at the difference in valuation between China tech and US tech, there's a big gap right now. And obviously there are a number of different opinions about why that is and where the valuations are between US tech and China tech. Like PEs and everything or just pure valuations? Yeah, no, pure valuations, PEs. There's obviously a number of different ways to look at it, but I think you've just seen this huge run in U.S. tech that in the past couple of weeks here, we've seen maybe some cracks, maybe some downturns. Again, a variety of opinions about whether this was a short-term pullback in the context of a continuing bull market or something else.

But, you know, there's certainly a big kind of gap for China Tech to make up in that regard. So it's pretty compelling from that perspective and then i'm sure you get this from potential investors or maybe not that's of interest but right how do you answer that oh it's government manipulated whatever name five complaints about china like what i guess what are some of those complaints and what are your answers to those complaints well again i mean government plays a big role no matter where you are. Certainly, you know, China's a centrally planned economy, and there's a lot of influence there, a lot of direct influence as well as indirect influence. You know, US regulations are impactful on US tech,

European regulations are impactful on Europe. And now so many of these companies are, you know, have such a global footprint. If you look at a lot of what are thought of as the larger US companies, companies like Apple and Tesla, and you look at the amount of earnings that they derive from China, it's really global. It's really hard to say, oh, one government is maybe having an impact on companies in that country, uh, that don't exist for, you know, other companies or other countries. Uh, so I think there's certainly, you know, a different, uh, different approach in terms of how regulators in different parts of the world think about, uh, you know, the companies that do business there. Uh, but there,

there certainly, you know, we're not in a scenario where there's one country or one region that has a lot less regulation. I think it's just a matter of as one economy, one market continues to evolve and grow very rapidly, and you have some other economies and markets that are a little bit more established, you're naturally going to see more volatility in the growing economy. It surprises me they don't just basically pump up the stock market and have all these flows and all these ETFs, everything tracking the index and be like, it seems like an easier way

to make money for them, but perhaps it's gotten too big for them to control in that way. It's a bit of that. I mean, there's certainly this concept of home team buying that you see from different analysts. And that's real. I mean, the local kind of top names in the indexes and a lot of the local ETFs are being bought by the home team. There is significant government investment investment

there and um you know that's that's all part of it certainly it's been supportive and if you look again at the economic growth trajectory and you know valuations um it it looks like you know a really strong long-term investment. And again, we've seen a lot of our clients, you know, if they liked it at a hundred, they're loving it at, you know, 50 or 25. And that's just reflected in the growth of shares outstanding as the prices come in. So I think a lot of investors believe in the long-term fundamentals there. And, you know, again, you can't argue with a government kind of eating their own cooking or, you know, anyone eating their own cooking and putting their money where their mouth is.

And what's it look like in terms of, right, it's the basically tied with the US for largest economy. Yeah. But I got to imagine it's like as a percent of global portfolios, what less than 10, less than five, what is it? Yeah. Yeah. It's, it's, it's well under five. Um, and you know, it's, it's certainly, uh, there's a huge imbalance there, right? So you have number one versus number two, and you have a couple of things in play there. Certainly, you know, a lot of growth, uh, in the last 20 years coming out of China, getting it to position and rivaling the U.S. in terms of, you know, largest economy. But you also have this, you know, this element of

like Yankees and Red Sox, right? You have this like negative rhetoric going on between the two. You have, you know, obviously a lot going on in politics and a lot of rhetoric out of political candidates. And, you know, on the one hand, you have a rival. You're always going to have that in one versus two. But on the other hand, you can't really have one without the other. And they both, you know, through that competition, encourage tremendous growth and innovation. So I think it's really natural and healthy that rhetoric is part of it, but it's also, you know, leads to healthy competition and tremendous growth. I love that. I can be, right, I can love the Red Sox bullpen. They just signed all these new

hitters. If I'm a Yankees fan, I'm not buying the jersey. I don't care how good the team is. Yeah, and look, you're going to be hard-pressed to get a Yankees fan to pay a compliment to anything the Red Sox are doing, right? But at the end of the day, those are the games that everybody wants to go to. And those are the games that bring out the best in each team and the players. So I think there's a strong parallel between one and two in any sport, one and two in terms of the largest economies in the world. And just so we're clear here, the Yankees are the US and the Red Sox are China, just so we can upset all of our Boston people.

Depending on where you live, I have friends and family in New England who certainly would take exception to anyone saying that the Red Sox are not the US in that analogy. But it seems like John Henry's kind of given up on them anyway. So we'll let them be. We'll save that for another pod. I cut us off on the pillar.

So pillar one, or what do you call them? Pillars? Or what do you call them? Yeah, we think of them as kind of pillars of our offering. So pillar one, or what do you call them? Pillars? Yeah, we think of them as kind of pillars of our offering. So pillar one is China. Pillar two is climate, specifically carbon. So carbon cap and trade, we launched a little over three years ago now. The first carbon cap and trade ETF, KRBN, holds the four largest carbon emissions markets in the world.

There's a European market, which is well established. It's more than 20 years old and covers all of the majority of the emissions that are produced in Europe. There's a California market, a CCA market. That's also the largest in the US. The UK, after Brexit, has its own market, which is the second largest UK emissions. And then there's something called the Reggie, which represents the east coast of the US, the regional greenhouse gas initiative. So those are the four largest markets in the world. And again, their long-term goal is to reduce carbon emissions by putting a price on those

emissions and having a cap on the emissions licenses. So it's really a market-based mechanism for reducing carbon emissions over time. And it's something that we're also seeing in other regions of the world. China launched a similar program recently. There's programs in New Zealand, Korea, other regions of the world. So it's been a space that has grown rapidly over the last few years and has seen a lot of interest, both from people who are more environmentally focused and climate focused, but also people who understand the kind of economic value of a market that is structurally designed to have prices go up over time with decreasing

supply and steady or increasing demand from required participants. So it's been a really interesting space that's grown a lot. And again, similar to what we do with China and providing information, it is a market that it's a little harder to access information. It's not necessarily something where it's front page news what's going on in the California carbon emissions market. So we have Luke Oliver, our head of climate investing, writes a weekly piece, Climate Markets Now, to kind of keep our clients up to date on recent developments in those markets. And how do you explain to the everyday investor how that works? It's sort of confusing, right? So you're essentially just buying the carbon credit futures, is it? Correct. Yeah, it's a futures-based exposure. And it basically provides that access and that exposure in a way that's really liquid.

So again, it's a 40-act fund. It's an ETF. So we have to have daily liquidity, daily transparency. We hold the December futures for all of our funds in the carbon space. And those are the largest open interest, most liquid futures. And that's really a space that I think, again, is grown in popularity over the last few years for investors. And I think it's hard for the everyday investor to understand that trades like any other market. Yep.

Right? So every year, I'll throw out random numbers, but every year the credit starts at $10,000, say? And I'm some company in California. I have to buy that in order to use my due emissions. And then next year, that's going to be $15,000 or whatever that math is. And so every year that you have to spend more, it's like rent. It's like environmental rent, basically, right? So that's one way to think about it. And it's priced per ton of emissions.

And this is a really interesting thing about carbon markets is depending on where you are in the world and which emissions program you're part of, they price carbon at different levels based California is pricing carbon in the low 30s per ton at this point, topped out just around cap and trade program, uh, you may have different prices per ton, but it allows, um, you know, a tangible, uh, price for emissions. And it also allows not just an investment vehicle, uh, but it helps companies think about and plan for the cost of emitting carbon. And as that cost goes up, maybe it makes sense for companies to invest more in technologies that will reduce carbon. Maybe a power plant switches from burning coal to burning natural gas. At some point, there are these kind of tipping points that at a certain price per ton of carbon emissions encourages industries or companies to invest in lower emissions kind of technologies. And as an investor, if I'm buying carbon credits, do I get to feel good about I'm saving the economy? Is there any of that piece to it or is it just this is another different way for you to make money?

Well, it's both, right? We certainly have investors who care more about the economic impact. They care about the investment case. It's one of the few markets I've ever seen that's structurally designed to go up in price over time, even though there are short-term price fluctuations. The long-term goal of cap and trade is to have decreasing supply and increase that price. But we certainly have a lot of investors who care deeply about the environmental impact. And from that perspective, it's a really compelling asset class and a really compelling investment. And obviously, you'd expect to see a little bit of both, where that's one individual is making an investment decision and cares deeply about both.

But in other cases, we've been on calls, particularly with institutional clients where there's an investment committee and there's somebody who's deeply passionate about reducing carbon. And there's somebody on the other side of the table who's deeply passionate about maximizing returns. And it's one of the few investments that allows for, it resonates with both of those people. Yeah, it seems like it could get caught up in politics. And I'm not touching that woke thing and all this stuff, but we won't get into that. It stands alone as an investment product is the bottom line.

It stands alone as an investment product. the bottom line. It stands alone as an investment product. And from that perspective, it's interesting because a lot of the interest we've had in the product is from that kind of more fossil fuel type of crowd where they're looking for a hedge to what they're doing. Exactly, exactly. So it's a great investment vehicle from that perspective as well. And then the risk there, as I've always thought of it, is there's some sort of COVID or something and they pause the increase or they cut back the increase to generate more economy growth, right? So it's regulatory risk is the main thing you're trading off there. People watch the regulators closely.

Obviously, there's a strong correlation between economic activity and carbon emissions, right? During COVID, when people weren't out and about, you have less demand for this stuff. So the price of emissions is going to drop in an environment like that. But then it also drives home how important it is to keep emissions low, the validity of these programs. So it's a double edged sword. But certainly, you know, you'd need the government to stay, you know, stay the course in terms of, you know, what they've laid out and what they've committed to do in these programs. And as long as that happens and they're sticking to the plan that they've laid out, we're going to see long-term growth price of carbon emissions. In my world, we've seen it added to a lot more managed futures portfolios, trend following portfolios. And they're just like, i don't really care what it's doing it's just another price right that we can track and

see trend and and do different things and trade on so that's been interesting yeah yeah for sure which leads into pillar three that's right that's right and that's kind of what we think 33 how many are there again total of three okay good sorry. I was worried there for a minute. This is the final pillar for us here today. And that's really what we think of as more of an alts type of pillar. So it encompasses real assets, as you just mentioned. We're partnered with Mount Lucas Management on KMLM, which is a real assets fund based on the strategies that they've had in place for many years. So they manage that fund. We also have, you know, Ivol, which is interest rate

volatility hedging. And that's run by Quadratic Capital and Nancy Davis, who I know you mentioned you've had on the podcast here before. Yeah, we'll throw a link to that pod in the show notes. That was a fun one. Fantastic. And then we also have a suite of products that are options overlay. So we launched a product called Clip that writes covered calls on KWeb. One thing you get with China tech is a lot of volatility. Anyone who's been in those markets or been in those investments has experienced that. So we figured out why not monetize that volatility and produce some income. So writing at the money calls 30 days out. So the fund just holds KWeb and writes calls and we pay whatever premiums we earn out to our investors. And that fund is averaged about 4% per month in terms of distributions to investors.

That's allowed, you can write calls on your own ETF? Yep, yep, absolutely. Yeah, so it's been a great way to use the liquid options market that we see in KWeb and the volatility profile to generate income for investors. So that product's been in the market for about two and a half years and seen a lot of interest. We also have some strategies that provide downside protection along with some

upside capture over time, kind of structured notes sort of outcomes, KBuff and KPro, that offer either full protection and some upside capture over two years. So that's the full protection product is KPro, and that has about 24% of upside capture. So if KWeb goes up 24% or more over the next two years, we'd see that from K-Pro. And then K-Buff is a 90% protection. So you have 10% downside. You have about 42% upside over the next two years. So we're trying to use the options profile on K-Web to offer different solutions to clients who have expressed an interest in a

protected version of KWeb. Again, they love the story. The volatility is hard to stomach. And they say, look, if you can provide me some protection on the downside, I'd be happy to capture some of the upside. So that's some of the stuff that we've done more recently. I was going to ask, did you see other traders kind of putting these option structures around KWeb and say, oh, we should offer that ourselves? Or was the client saying, I want this?

So it's a little bit of both. I mean, it's the long story of ETFs, which really hasn't changed since inception, since the original ETF came out in the US in 1993, is providing access to these asset classes that are traditionally harder to access and these exposures that you can now get

in one trade with an ETF that used to take several different likes of a trade. Yeah, and we've seen cases with some of these options wrappers and some of these other products that we're now putting in an ETF where individuals were doing it on their own, even with ETF models. You know, people say, well, love the model, but don't really want to be responsible for trading and rebalancing to the model. And we'll launch an ETF that actually tracks the model and provides that investment in one ticker, in one trade. So it really simplifies that access. And you guys got some great names, KRBN, CLIP. How does that whole process work out? I think we've asked, Meb Faber's been on here before and was telling me that is kind of the fun part of it, right? It is. I mean, there are a lot of, if you're in the ETF business, there are a lot of

things. And tickers are always fun to figure out what's going to represent the product. You get four letters, so you have to figure out the right way to have that ticker represent the product. Also something that's going to be commercially viable and memorable. And that's always a fun part of the process. And we take a poll internally and there's a lot of strong opinions about tickers on different products. And who, SEC approves that? I heard you can't have a bad word. That'd be even be more fun. I think it depends on your view and how you want to be represented. But yeah, they're at the exchange level.

So when you list with an exchange, you tell them what tickers you'd like to have. They tell you what's available and the exchanges can reserve the tickers for you when they're available. But it's not like back in the old days of buying up all the URLs and sitting on them forever. Like if you don't use it, I think it comes back available, right? That's right. That's right. That's right.

Yeah, you can't reserve a ticker indefinitely. But yeah, it's definitely, you'd be surprised. It's pretty rare that we bump up against a ticker that's not available. And if we do, we usually have a strong support for the second or third choice. We have good outcomes there. Circling back on the alts a little bit, what are you seeing in terms of investor interest?

Is that one of your growing areas? Are they, right? I know Managed Futures had a great 2022. That's right. That's right. And then it's been a little bumpy since. So a lot of managed futures people I talk to are like, oh, well, it's just like 08, 09 again. I'm taking a break. Yeah. Talk about that space for a minute if you can. Yeah. No, that space has grown quite a bit. Like you say, the last few years have been strong and

there's certainly a long-term investment case you know no matter where you are in the market cycle um and how you think about timing markets um a lot of interest in managed futures a lot of interest in in the covered call strategy producing income yeah um and we've seen that space grow uh tremendously across uh all etfs, the growth in options overlay ETFs has been amazing. There's about 50 billion in AUM now tracking those sorts of strategies. From zero or from what? Call it three years ago, it was close to zero, certainly sub a billion. And that's been a hugely popular space. And do you feel like anyone's just throwing anything that's doing similar to that out there? Or is it like you guys had a nice way to do it

where it was different and selling them on your own product versus everyone else seems like a very competitive market? I mean, it always is. You have to come up with an idea, not just that is creative, but also viable from an investment perspective. So I think you always hear this adage about ETFs that people just throw things out there and see what sticks. And I think while that certainly has been the case, it's also a situation where hindsight is 20-20. We talked to a lot of investors, a lot of managers that have phenomenal ideas that maybe the timing isn't right, or for one reason or another, it just doesn't resonate at the time. It doesn't mean it wasn't a great idea. It doesn't mean there wasn't a great investment case for it, but it is hard to stand out in this space. So I think the heavy lift is launching the fund, but then there's a heavier lift in terms of getting the word out and getting investors to make that investment. We'll probably see a couple of firms launch some short yen carry trade ETFs over the next couple of months. That would be timely or at least popular.

So expand on that a little, if you could, of like what's from your time in ETF space and what the firm itself is seeing. Is there too much product chasing too few assets? Is there an unlimited new flow of assets that are looking for new product? What's your views there? I think there's a balance, right, between a lot of assets that are invested in ETFs that track more traditional indices. And again, you get that low cost and liquidity transparency. It's really a phenomenal vehicle, but you also have a lot of new asset classes coming into the wrapper. We talked about carbon, which was really hard to access for investors before the ETF came to market a couple of years ago. And you talk about these options overlay strategies, these defined outcome type of strategies. Unless you were a wealthy, sophisticated investor, even five years ago,

it wasn't really possible to access those strategies. So now they're coming to market. And then the market speaks. There are products that, again, will see a lot of success and inflows and the ones that don't. Those issuers will go back to the drawing board and figure out where there's a viable appetite for investment. But it's always an innovation. I think back historically, you have, again, I talk about early to mid 2000s with fixed income ETFs. ETFs started as equity products that held equities. And I remember even at Goldman,

the equity trading floor that traded ETFs was in an entirely different building than the fixed income trading floor. And a lot of the meetings that we were having when I left that seat and joined an issuer a few years later, we were introducing the equity traders, the ETF desk to the fixed income traders for the first time. There's a lot of operational work that had to be done in terms of creating the piping and connectivity between those two desks to trade bonds within the equity ETF wrapper and think about how do we price this? How does the create redeem process work? How do we settle these trades and how does it all work?

And that infrastructure and wiring took years for people to build out efficiently and understand efficiently. And as we see new asset classes come into the ETF wrapper, we're seeing that work being done over and over again. And there's a lot of innovation that goes into that as well, that it's kind of behind the scenes that people don't see when they're buying the ETF on screen or putting it in their portfolio. Yeah, I know from our seat, we've helped a few half a dozen firms get really up to speed very quickly on accessing the different futures markets and and doing things that weren't exactly in their wheelhouse uh in the etf structure uh want to circle back you mentioned kind of stuffing the

bonds in there right the covid crash that was oh is this are we finally seeing cracks in the etf model i can't remember which ETF, right? But its NAV was way below what the bonds were trading at or vice versa. And it was kind of that duration mismatch of like, well, we can't trade the bonds in real time like the ETF is trading. So some were arguing that means the ETF model is broken. Some were arguing like, no, that's how it's supposed to work. You could get, if you wanted to, this was the real-time pricing, even though it was

disconnected from the portfolio value. If the portfolio could have sold there, it would have been this much lower. So I don't know if there was a question there, but if you could comment on that. Yeah, no, it's an important topic and certainly makes a lot of sense. And what you get with an ETF, because it does trade, you know, it trades all day, every day when markets are open, you know, and you have full transparency, it really is that price discovery vehicle. So you may have underlying assets that don't trade as much. It doesn't mean they can't trade as much. It doesn't mean you couldn't access it if you needed to.

But you do get that kind of immediate feedback in terms of pricing, risk management, and hedging. And the prices that you see for ETF shares are reliant on where the underlying basket should be trading or what it's worth, where you can hedge that exposure if you're making that market, if you're making that price to the market. So you have this constant feedback loop of trades in the ETF shares, market makers and trading desks thinking about hedging that exposure and where can they put that hedge on and what's it worth and how can they put that risk on, work out of that risk efficiently, and then having that all go through the ETF Gregory Dean process to actually source the

inventory necessary to fill those orders that people are trading on when they're buying and selling shares. So it's a really efficient mechanism for price discovery. And I think it is useful. I think in the fixed income space, we've certainly seen a lot of innovation. You might have Q-SIPS that don't trade at all on a given day or maybe for weeks at a time, but they're in a basket, they're in an ETF that's providing price discovery every day. Right. It's almost like you get futures, for lack of a better word, on these individual bonds that are part of this ETF and you can trade the ETF on. Yep. And that exists for all underlying markets. I mean, the seat that I sit in, we're providing exposure to China tech.

When those markets are closed, we're open. We see a lot of transfer of risk, a lot of exposure, trading hands on China tech at a time when the local markets are closed. And there's an efficient mechanism that allows all that to happen. How hard is it to get the market makers on board? Do they have to really understand what you're doing and, like you said, be able to create a hedge model that they can put their neck out there a little bit? So market makers, yeah, there's a balance. I mean, it's a business for them. There's a cost of capital. There's a cost of hedging. They provide a huge service to the market in terms of providing that liquidity and pricing. But they're also taking a lot of risk. And there's a huge cost. There's a lot of technology. They hire a lot of smart, hardworking people to figure out those nuances. So I think it's really interesting to think about how they view the world. And in a lot of cases, they're not necessarily looking at exactly what the fund

is holding. And that's a great place to start and a key piece. But they're also looking at the risk they're taking on, how they're going to hedge that risk, the correlations that they're also looking at the risk they're taking on, how they're going to hedge that risk, the correlations that they're looking at. So they have a really interesting multifaceted way of thinking about pricing, managing this risk and trading that allows for a real robustness in ETF markets that goes beyond the ETF share represents an index. And there's that one-to-one relationship. There are other elements that they can bake into thinking about that, that allows them to be really nimble and efficient in terms of provided pricing. And then if they don't totally understand, or if it's kind of a dirty hedge, you'll just see the

spread be wider. Is that how they fix that? Correct. Yeah. You'll see that reflected in the risk they're taking on and the level of kind of pricing uncertainty they have. And you'll see that for the domestic equity markets. You know exactly where every underlying share of stock is trading that goes into that index, that goes into that ETF. So it's really clean. And if there's trading activity, you're going to see a really tight bid ask spread in those products because there's not a lot of uncertainty. There's not a lot of risk and it's risky. You can hedge pretty quickly and directly when you get into other asset classes, whether it's, you know, international markets or fixed income or, you know, some other asset class where you don't have that ability to immediately have price discovery on the underlying and hedge the underlying, they're taking a little more risk and they're pricing that in and you're

going to see that reflected in bid-ask spreads. It might be a little wider. Which leads me to, so if it's a new product, they might not just say no, they'll say, okay, but here's what we're going to spread it at. Yeah. And there's a conversation that goes on there between the issuer and the market maker. And the issuer has a decision to make about whether that's going to be a viable product at those pricing levels. And the market maker is going to be honest about what they can offer and where they're going to price risk. And in some cases, you see a product that gains traction quickly and is popular. And you have a lot of market makers competing for that flow,

and you see bid-ask spreads tighten very quickly. And in a lot of other cases, you're going to see a longer, more drawn-out process for that product to take on some assets and gain some traction, and then you get that competition coming in and tightening spreads. And along those lines, what's it look like? I'm a new guy. I've got an idea. It'd be an awesome ETF. I've got 25 million bucks. Is that a pipe dream? Is that doable?

Like what's the cost to start up and run an ETF successfully? Yeah. I mean, it depends on how you want to do it. Now there are a lot of firms that will provide access. They'll provide all the infrastructure because it's not just having an investment thesis and bringing that to market. There's a lot of infrastructure around it. There's a lot of compliance that's required. Marketing and sales effort is of key importance to help clients understand what your fund is and what the investment case is. So there's a lot to it. So we see a lot of managers who come to us with ideas and they want to partner with us to launch a fund. And we're always interested in having those conversations. In other cases, clients will have an idea. They'd love to see

an exposure, particularly if it's an institutional client that does have an investment, they can make it in that strategy. We're happy to work with them and figure out the right way to get that product to market. And then you have the benefit of a publicly traded fund. So you might have that client who comes in with that initial investment. But now that investment's available to the broader investing public. And you can really get some assets, strike a board with investors that leads to a really successful ETF. But help me understand, give me a bogey of like, unless you have X in assets, you really probably shouldn't do it yourself. You're going to go broke trying. Well, it depends on the strategy, but I'd say broadly, you're going

to hear that a break-even point for an ETF is somewhere in the 50 to 100 million AUM level. Once you have an ETF up to 100 million AUM, it's going to be an economically viable fund because there's a lot of fixed costs that goes into offering an ETF and managing the underlying, again, all that infrastructure I talked about. So that's generally the case. And what you'll see with a lot of the successful ETF issuers is they have a core group of flagship funds that have sufficient AUM to support some newer funds that are coming to market. So you mentioned the new ETF rule that essentially took off some of the restrictions on alternatives, leverage. Could you summarize that rule? I don't know if that's

possible or just kind of how you guys view it. Yeah. And what it really did was it leveled the playing field among issuers. So over time- Some people had no action letters and they were out to do some things, others didn't. Exactly. So it really standardized all of those, what had previously been exemptions or not, and standardized the rule set around ETFs and bring ETFs to market. And it allowed a lot of clarity basically for issuers who may see something in the market that works a certain way based on exemptions that existed at the time they came to market. And those are no longer available. And now you have a much more kind of transparent level playing field. So is everyone mostly happy with it? Or I

guess some of the incumbents who had those no action letters maybe are mad at the competition? I wouldn't say that. I think it's really a nice thing about the ETF industry that still exists, and I hope continues to exist for quite some time, is there's this sense of a rising tide lifting all ships. There's plenty of pie for everyone to get a slice and newcomers are welcome. Innovation is welcomed. And I think that's partly because a lot of the incumbents already have such a, such a well-established powerful position. So, so they're not necessarily gonna, gonna view the world in a way that, that, that is, you know, so defensive and ring fence say, oh, these, these new entrants are really going to threaten, you know, our business. I think there's really still this sense of openness and, you know,

excitement about innovation and newcomers to the market. But it definitely seems like a winner take all business, right? Where it's 80% of the assets are with two firms. What is the number? Yeah. Yeah. I think the top three have something like more than 80% of the assets. They've been in this game for a long time. And they have all the low-hanging fruit, right? All the domestic equity funds, all the big fixed income indices. So they have a huge head start and a huge advantage. And it's deserved because they were first to market. They were the innovators. So to look back now 25 years and say, oh, I should be at the same level as somebody who has 25 years of experience and incumbency in this market, that's a tough argument to make. But there's still plenty of opportunity for newcomers. If you have a good idea, if you have

the right partners in terms of marketing and distribution, and you're bringing something to market that adds value to investors, there's certainly a path to success there. And it's not a path, you're not seeing those big three incumbent issuers doing a lot of the things or trying to compete in a lot of the areas where the newcomers are in the market. So again, there's plenty of room for everyone. But having said that, you're right. If somebody wants to launch an S&P 500 ETF or a sector ETF, you're going up against such

huge, well-established competition. And there's no value to the market because there's no innovation there. So you need to figure out, you know, what you can bring to the market that's going to be innovative. So we'll close on that. And what do you guys see as a firm? Are you personally of like, basically what's next for brain shares? What's next for the ETF space? Where does some of that innovation come from? Yeah, well, certainly in the, you know, options overlay space, the derivative space, there's a lot more to do there and a lot more that I think will resonate with clients.

The carbon markets continue to grow, which I think will be exciting for investors going forward. And then just more use of derivatives. You have this whole complex of the options market, which I do a lot with the options market and communicating. There's so much that can happen there that I think will be a game changer for ETF investors going forward. So a lot of opportunity.

You have any worries that that is getting a little like the tails wagging the dog, like the overlays and so much option activity that it's causing events like the beginning of the week or whenever that was last week? Yeah, it's still efficient, right? And it's a way for investors to express a view. And just because they're not necessarily expressing it by buying the actual stock, maybe they're buying an ETF, maybe they're buying a structured product. Maybe they're buying an ETF, maybe they're buying a structured product, maybe they're buying an option or getting some other derivative exposure.

Investors are going to express their opinion on the markets in the most efficient way they can. So I don't believe that there's something artificial impacting something real. I think it's all real. And understanding all those dynamics can be challenging. But at the end of the day, those are investors expressing views through the most efficient vehicle. So there's a place for it. Yeah. My argument would be if all the investors want 2% a month and the answer is sell all these naked options. They're getting their view, but it's long-term dangerous or net zero for them, which they might not understand up front.

Yeah, they need to understand that the risk and reward is all investors do, and I think that's super important and will always be an emphasis. Yeah, but it seems like these overlay products have somewhat done that. Yes, you're short volatility, but it's against the underlying, and the and worst case scenario isn't that bad. want to ensure that their investors have a good experience, that they get the outcome that they're expecting. It doesn't do an ETF issuer any good to sell their clients or investors something that

ends up having a drastically different outcome. So there's certainly an alignment there. That education is important, but also making sure that clients are getting high quality investment products that deliver the outcomes that they expect is, is important. Love it. Any last thoughts? I mean, I'm just excited to see, you know, it's, it's I think, you know, it's going to be an exciting and volatile next kind of six months to a year. There's strong forces in markets that are really going to be interesting to see how things shape up in the future. So I'm just really excited to see what happens. Sounds like you're on the, this was not just a blip, that this may have been the start

of something real. I think it's the start of something real. And I don't think it's necessarily negative. I think it's, you's, you know, there's a, there's always a path to success in markets and that's what makes it fun and exciting is, is solving that puzzle and figuring that out. Awesome. I love it. Well, thanks James. It's been fun. Tell everyone where they can, you mentioned a few of these newsletters and whatnot. Can they just go to the website and find those?

That's right. That's right. Yeah. Our website is crane shares.com. Uh, you know, all the information is right there. Uh, and the, uh, the China last night newsletter, uh, it's China last night.com. Uh, so yeah, happy to, uh, have any of your listeners come to the website and explore and certainly reach out with any questions. We'll do, uh, thanks for coming on for coming on. We'll look you up next time we're in New York. Thanks very much, Jeff. Really appreciate it. All right, James. Thanks, buddy.

Bye-bye. Okay, that's the show. Thanks to Jeff Berger for producing. Thanks to RCM for sponsoring. Thanks to James for coming on. And we'll see you next week. Peace. 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 RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.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.