The Derivative - Defensive Equity, Flex Options, and the Future of Quant at PGIM

Episode Date: February 12, 2026

In this new episode of The Derivative, host Jeff Malec talks with PGIM Quantitative Solutions’ Devang Gambhirwala and Lorne Johnson about managing over $100 billion in quant and multi-asset strategies inside a $1.5 trillion asset manager. They break down the boom in options-based ETFs, from covered calls and defensive equity to buffered and defined-outcome strategies powered by flex options, plus what today’s volatility and rate environment mean for investors. The trio also tackles the impact of AI, fiscal imbalances, and even gold’s renewed role in portfolios. SEND IT!Chapters:00:00-00:46= Intro00:47-07:25= From Newark to Quant: Devang & Lorne’s Paths to PGIM and the Rise of a $100B Quant Group07:26-17:06 = Inside PGIM QSG: Trillion‑Dollar Roots, Quant Investing 101, and the Rise of AI-Driven Models17:07-28:30= Options Boom: Democratized ETFs, Flex Options, and the New Era of Defensive Equity28:31-42:38= Defined Outcomes, Tail Hedges, and Building Portfolios for an Uncertain Macro World42:39-56:24= AI, Gold, and the Future of Risk: PGIM’s Take on What Comes Next for Markets and JobsFollow along with Devang Gambhirwala and Lorne Johnson on LinkedIn and be sure to check our PGIM's website at www.pgim.com for more information!Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-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, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠⁠⁠⁠

Welcome to the derivative by RCM Alternatives. Send it. Hey, everybody. Welcome back to the show. I'm down here in sunny Palm Beach for a couple meetings. Have a great show for you today. I think we have one of our largest managers we've ever had on the show, P-GIM. I gave him a little ribbing for the name.

It's always confused me that name. P-Gim had two of their guys on. They managed hundreds of billions of dollars. Devang, Gabinwala, and Lauren Johnson of P-Gim. Here to talk about what they're doing in the option space, how they think about risk. and how they think about generating returns with that big of assets under management. So send it.

All right, welcome, guys. Thanks so much for coming on. We are here with Devang and Lorne. I'll let you guys pronounce your last names so I don't butcher them. It's not that hard. I'm Devon Gamberwala. Lauren Johnson, great to be here.

Lauren Johnson, I could have got that one. And where are you guys today? It looks like a fancy studio you got set up there. That's how it is here in Newark. You're in Newark? New work. Yeah. New work.

How's that airport situation? Working out for you. Last time I went, it was all right, but yeah, had a few bumps in the road last year. Yeah, that was a mess. But they got it all fixed up? Seems to be better. Love it. And where to both of you live?

You commute to Newark from the city, from the area? So Devong and I are pretty close together. I'm in Hoboken County. Devon's just a little down the street in Jersey City. Love it. So some Jersey voice. I see the Statue of Liberty out of my balcony. So it's right adjacent to Manhattan, downtown Manhattan.

Yeah, yeah. We got some of Chicago's finest driving by me right here. So New Jersey people, you jets or Giants fans? 49ers. 49ers, there you go. I'm a Dolphins fan, which not much to say about that. Yeah. I mean, a little bit better than the New York teams, but not much.

Well, hopefully we meet, our bears meet your 49ers in the championship game. We both got to get an unlikely win. to see that happen. We'll get the same outcome we got a couple weeks back on the 49ers played Chicago. Yeah, that was a fun game, though. So, Devang, let's start with you. Give us your role there, and then we'll dive into your background a little, and then we'll circle back to Lauren. Sure.

So again, Devon, Amber Walla, I'm managing director and portfolio manager at Pigeon's Quantitative Solutions Group. I'm responsible for portfolio management, for our quantitative equity strategies. And, you know, as part of that, I've been overseeing all our long short strategies since the inception about 20 years ago. I oversee a portfolio portable alpha strategies more recently. But I've been with a PGM for almost 40 years. So I've been here right out of college. So it's been a long tenure. More importantly, relevant to a conversation today, I've been managing options-based defensive equity strategies.

for over 30 years. So I've seen a few market cycles, shall we say. But seriously, yeah, it's been a fun ride. I've with my long tenure, I've seen outlived to five potential CEOs. We've gone through our, went from a mutually owned firm back when I joined to having an IPO in 2000. We're now a listed company. You know, we've, you know, been able to deliver good, you know, client outcomes over this

period and we continue to do so. Again, it's, you know, what keeps me going is working with the great bunch of people, both colleagues past and present, including Lauren here, and then, you know, our clients who keep us on our toes. So, so that's, that's been the ride. What was your role when you first started? Mailroom or something? It wasn't exactly the mail room. I actually joined as a summer intern. You know, I was going to say my undergrad is in computer information sciences here at New Jersey Institute of Technology right here in Newark. So we basically was supporting the working in an investment area, supporting the portfolio managers, running screens.

And this is before the PC area. So we're working with these IBM mainframes. And we've come full circle. Now we're back on networks, as you can imagine. Yeah, again, learned a lot. And that's what got me joined the firm and been there ever since. I completed my MBA here at Rutgers University, again, a couple of blocks down from us. That famous Big Ten school?

Yeah. And you predate Rutgers being in the Big Ten. That's right. Lauren, he's raised you 40 years. What do you got? Can you call him? Not quite 40 with PGM. I've been in the business a little while.

I joined our quantitative solutions group in 2018. I'm responsible for portfolio management, portfolio design, and multi-asset research. Prior to joining our quantitative solutions group, I was leading a portfolio management team at State Street Global Advisors on the multi-asset team there. I've also had some stints in the public sector. I was an asset allocation portfolio manager with CalPERS, also a portfolio manager at ABP investments in the Netherlands. where I was doing quant investing and also the hedge fund where I started out at Kaxton.

So a little bit different road than the Devong and jumping around. But I've been with the PGM, the quantitative solutions group for my eighth year now. Prior to coming into the industry, I did my undergrad public administration and history at California State University Chico. So there's a little bit of an indirect path coming into the business. I did a master's in economics at San Jose State and finally a PhD at the University of Washington in economics. When I started that program, I was clear what I wanted. I wanted to be a professor. And that was why I went into a PhD program.

That's kind of what you've got to do if you want to be a professor. As I worked a lot with data, my dissertation was essays in empirical economics. I found I had an aptitude working with financial data. And that put me on the road to doing interviews with different firms and asset management. And I'm very grateful that that's where I've ended up. Are you grateful they ripped you away from the beautiful West Coast and put you in the metropolis? I did get back out there for a little while when I was with CalPERS. I was Sacramento.

But it just seems that life has taken me here, spent most of my professional career here on the East Coast, both in Boston and now down here in the New York-Newark area. Love it down here. Actually, I'd been in New York before when I worked at Kaxton, lived in Brooklyn, so I was excited to have the opportunity to come back here. So CalPERS might be the only thing nearly as big as P-GIM, right? Well, if I see where I worked, it was kind of on that scale of CalPERS, that's not as well-known here, but that's a Dutch pension fund.

So let's talk about P-GIM. Give me the rough history. I got to say, and hopefully this doesn't upset the compliance, but what's with that name? It's always rubbed me a little bit the wrong way, right? When did you switch to PGM was like six years ago? Yeah, something like that, maybe 10 years ago. Right.

Used to be, you know, Prudential investment management, but, you know, yeah, now PGM, just a quick overview. We're, you know, we managed a $1.5 trillion in assets. We're the global investment management business of Prudential, a parent. We're building off a legacy of 150 years. You know, we celebrated 150th year as a firm last year of, you know, stability, strength, and disciplined risk management as part of our insurance legacy. You know, gone over, I don't know, I've gone through five market cycles,

but as a firm, we've gone through probably 30 market cycles, you know, over this period. And, you know, our PigeM's global client base, you know, includes public and corporate pension plans, foundations, endowments, sovereign wealth funds, multi-employer pension plans. And we also sub-advise, we have sub-advised accounts with many other financial service firms. So, yeah. It runs prudentials insurance premiums as well, like prudentials cash or no, is all outside clients. No, we manage both the money for our affiliates within the prudential family, but yeah, and third-party assets. It's going to stretch my, when I was on the trading floor, I can't remember the sign for Prue. There's something like this, but right, Prue had, what they called them Prue, first of all, but they had was a little facial sign that would be the signal for Prue's buying 500 or whatever.

So what's it like, right, 1.5 trillion in assets, the quantitative group is about how much you're managing? So, you know, our P2C, you know, what we now are the quantitative solutions group, we manage over 100 billion in, you know, in institutional client assets and, you know, across both our quantitative equity platform and our multi-asset strategies. And we manage against a whole wide range of benchmarks, domestic and international. So, yeah, pretty broad footprint in terms of what we do. Yeah. But I'm saying, like, do you ever wake up and pinch yourself and be like $100 billion, right? You look in the mirror every now and then and be like, this is a huge responsibility, or it's just like you're just adding a zero, you're adding more shares, you're adding more contracts.

It doesn't really bother you in the quant sense, but. Yeah. Look, I mean, we've, yeah, we're institutional money managers. So we manage, you know, huge pools of money. But, you know, we're fiduciary. So we take, you know, our responsibility very seriously. Yeah. But it's interesting to me, right, 150 years, all that money, institutional.

I'm sure you've been called boring and, right? But here you're doing, not you personally, but the front, right, here you're doing Quant, you were early to Quant, you're doing long short, you're doing defensive equity. You said, you mentioned portable Alpha. So how do you kind of square those two things? Lauren, I'll let you jump in. How do you square like that being that fiduciary, being very risk controlled with moving into kind of more, I won't say, esoteric.

It's pretty broadly used across the space now, but at a time, right, was a little niche at the time. Yeah, well, Quant can mean a lot of things. I mean, high level quantitative investing is a systematic approach, often using models to transform data, either in a cross-section or over time and making decisions based on that. And in contrast to a fundamental manager who is looking at information and kind of making a call, it allows you to work with a lot more data in quant space. Its breadth is our friend. In our quantitative equity space, we're looking at 70,000 different stocks, but we're also doing quant on the multi-asset side, just in terms of the spectrum of what could be considered quant.

There's a side of the spectrum that could be called sort of quantum mental. People look at models, information, and okay, they're informed by some systematic process, but ultimately there's more of a human element. And then there could be pure systematic. It's all model. I'd say what we're doing is more towards the systematic, but you always need human intervention. What is a model? So I was just looking at dictionary this morning, right? Well, there's seven definitions for model. Let's put aside different types of cars or fashion. A model is a simplified

representation of a system, which can be very powerful because it can lead you to some inferences and answers very quickly that you couldn't do without that systematic framework. But ultimately, models will miss things. And so it's very important that you have a human at the controls to evaluate the information and to know something may be going on that's outside of the model. And also part of quant is risk management. So there's, hey, what can I do to beat a benchmark? I've got these great factor models.

It's also very much about risk management. And frankly, a lot of what we do in the quant space, may not even be about alpha. It's about delivering an outcome based on somebody's risk preference. It's a broad spectrum. What's quant, to your point, 35, 40 years ago, there wasn't a lot of quantitative investing. The early movers, including the PGM quantitative solutions group,

took advantage of that. But as more players come into the space, a lot of the anomalies that you can make money on, they go away. So you constantly have to innovate. And now, you know, we're in this age of AI, which is kind of a supercharged version of what Quant was before. The amount of information that you can process and do things with has just leaped from those early days where it seemed just amazing that you could take information on thousands of stocks and come up with a combined view. Well, now we're looking at things like natural language processing where you're processing

millions of words coming out in news releases and saying, hey, there's information there that can inform my quantitative process in real time. Just closing the loop on, you know, what does that mean using that information I talked about looking at it over time? There's also how quickly you want to use that information. So you could trade once a month and perhaps with the right amount of information, that's fine. And that goes all the way to quantitative strategies trading intraday or vol control strategies that are evaluating the market every few minutes to see in my position where I want to be in terms of an exposure basis. So always could go on and on different types of quant. I love it. Two follow-ups. One follow-up. Do you view each of you personally,

do you view it as a solvable, like is it a clockwork machine you can put back together? Or is it forever unsolvable and you're just trying to get as close as possible with the model? It's probably closer to the line. Yeah. Yeah. You know, I wish it was as simple as, you know, we've got it figured out here and we could just run the model and, you know, let it go and it's going to deliver us a positive outcome every day. It just doesn't work like that. And as I alluded to earlier, the model is great, but it can't have everything in it.

You know, there are the black swans and things that happen. So you need a human at the helm when something that nobody's expecting happens. And that's often a risk control exercise, right? Let's take our wrist down until we get a little bit better picture here, things that are outside of our models. So, you know, again, there's a balance. If you think about the quant as a science, there's an art into how you're going to use it in your investment process. I was going to, you stole my thought there of like, is it a constant red queen race, right? Of like you have to be constantly moving.

Like it's not about creating a new model. It's about fixing the old one that stops working. There was some research a couple years ago of like once a factor becomes known, it's basically no longer a factor, right? So how do you guys protect against that of like, hey, we came up with this nice thing, but do we publish it? Do we tell our clients? Do we not tell them so it remains as viable as possible?

Whoever wants to jump on that grenade, go ahead. I threw that out early that, hey, back in the day, quant investing, I'd say it was easy, but the kind of money you can, could make just having a simple model of four or five factors, it was a lot easier than it is today. So indeed, once people know about the anomaly, it can be arbitraged away. So you've got to be a step ahead. We're doing something a little different. It may not be that the concept that you're using is so far removed, but maybe your transformation of the data or the speed at which you're incorporating the data. And that's very much a theme today. The way that complex information can be

brought together in real time. Some older quant models, maybe you have to wait until the quarterly earnings release for some of that information. Well, now you can listen, you can analyze thousands of news stories and come up with a signal every day that's giving you some of those fundamental insights. It seems to me randomly that people will start to go backwards. Like, hey, let's go dig up the old models from the 60s and 70s and see if anything's working. Or let's slow everything down and maybe that works better. Everybody's abandoned the old stuff because they don't think it works anymore

and maybe now you could you could start again. Let's switch gears a little bit, DeBan. You're a options pro. Is that fair? I mean, 40 years with one of the largest asset management of the world. Come on. Give yourself a little credit.

So there's a lot of buzz in the industry. A lot of people are doing alternative income, which is really option strategies, buffered, covered calls, all this stuff. Tell us a little bit about how you're seeing the whole space kind of has grown up in the use of options and how you guys view it. Not as commonly used, like exposure, but, you know, as you can see now with the kind of proliferation essentially of options-based strategies primarily through ETFs, this, what was available to a few

is now broadly available to a, you know, a much wider investor base, right? And ETFs have truly, you know, democratized all those, you know, active ETFs are having a moment now, right? a lot of the flows are more inaccurate as opposed to what we saw over many years, passive index ETFs, for example. But now a lot of the money flow is in the active ETFs. And the fastest growing segment of that is options-based strategies. And they're trying to, whether it be for income or whether it for limiting your downside. And, you know, do you have any worries that it's too democratized, right?

That people can chase GameStop up and put their whole paychecks in there and do a lot of that maybe they shouldn't be doing without the 40 years of option knowledge? Right. You know, like, don't try this at home, right? I mean, you know, look at you can. But they are. Yeah, but they are. Like, no, I mean, there's a whole class of, you know, of investors now who do a lot of things at home, you know,

in front of five, you know, three screens and there, their real-time fee. But you do need to understand kind of the, you know, how it's not all, you know, easy. And, you know, you have to be mindful of a lot of things, you know, options by the very nature. You have to be mindful of the risks. A lot of people get into it and saying it's just a one-way lottery ticket, right? Yeah. Yeah. Lever is it. But yeah, I mean, it comes with the risks. It really helps to understand options. The systems, you know, the scenario analysis, for example, and I really understand option payoffs and how they work. It's a great tool to have, to add more flexibility to what you do in your overall portfolio. But, you know, you don't want to bet the farm on, you know,

and a stock or an option of given stock, right? Yeah, one thing I would add is there's a perception that maybe, you know, if one is not very familiar with how these popular option strategies that Devang alluded to, particularly in ETFs work, thinking that options are very risky, right? And you could certainly take crazy risks. You could write a naked call, which means basically you're going to pay for any amount the market would go up. In theory, the market could go up 1,000 percent. You'd be on the line for that.

Most of the strategies that have attracted the AUM and the ETF space have been strategies that actually manage risk, that reduce risk relative to, say, a long-only investment in the S&P 500. So the options are allowing you to target these more specific outcomes in a way that was not available, as Devong mentioned, say even six, seven years ago that most of this growth in the active ETF space and options-based strategies really just happened in the last several years. Put your tinfoil hats on of what could go wrong there, right? Could the tail wag the dog? Could options become bigger than their underlying that they're supposedly representing and things get a little wonky? If we keep seeing this growth?

observing both the option space and the ATF space, what's interesting is there's no fixed supply the way there might be in an individual security. So because it's so straightforward to create a derivative on something, there's not a limited supply that there's just not enough options out there and the price is going to go up. There are actually the mathematics behind options are such that you can price them very, very precisely. And I would be. not be someone to say that, you know, too much money goes into something, that there could be some risks that are created there, but it's unique in this flex option space where the options are created and also taken out of circulation if the demand isn't there. Similarly, ETFs are something

like that, that they are ways to invest in something underlying. And if I come in with a tremendous amount of money to buy a particular ETF, an option-based ETF, for example. There will be shared on a derivative. There will be shares created. So I'm not chasing something that's in fixed supply. So there's not going to be a distortion in the market with that. On the flip side of that, if I want to sell out of that position,

the shares will be redeemed and come out of the market. And the market will be back in equilibrium in terms of supply and demands. Again, I will be the last person to say there are no risks on anything, but as it comes to options, particularly flex options, and the ETF ecosystem, it's very self-equilibriating and in many ways is less risky than what you would be doing, going after a specific commodity in fixed supply or specific stock in fixed supply. A lot of it, kind of the products we see out there, a lot of it are on like these broad-based indices, like the S&P 500 index or the NACs or the NAM.

NASDAQ, these are, as you know, broad and deep markets in the largest in the world. So that's kind of easy some of the concerns. Now you go after, you know, less faded stock that's very volatile, and then you buy an option or ETF on that. That's a different story, right? That's not where the growth is. The growth is in these, you know, let's say SNP 500 or NASDAQ kind of based products, which is where most of the, we see all the asset flow, right? And there you can tailor things and, you know, to meet specific outcomes, as Lauren pointed out.

But there's significant liquidity in that, right, and kind of the, especially in the U.S. markets, these popular indices and not only in, you know, you know, in just underlying, you know, index investing, but in the option space, in the future space, in the swap space, you know, so there's extreme liquidity there. And we've been trading these, you know, let's say as S&B 500. index options and now, you know, SP5, the ETF options are equally liquid, if not more, sometimes. Yeah, very broad and deep markets. We get very tight quotes. If we go out to quote, you know, an option price, whether it be, you know, one month, tenor or it could be, you know, five-year tenor. We see a lot of breadth and depth and a lot of market participants, as I mentioned, from brokerage firms

to hedge funds to, you know, retail investors. So again, not an issue at this point. So, you know, the market can easily absorb kind of the products that we've been talking about. And do you guys model that this flow? Like, has that become a new input of like all this new retail or ETF flow into those options? Like either from an execution standpoint and or like in the models themselves of like this is showing us we've got support or resistance, whatever? Yeah, I mean, whenever we have to go out to trade, you know, an option or, you know, a pair trade. We're buying and selling something or we're coding. something for, you know, for a buffer ETF or what have you.

We see there's, you know, a lot of participants, and that's one sign. So there's enough market interest and market makers who are making markets in these. And in the pricing, you can see it, whether you're buying, you know, buying something for $10 million or you're buying for $100, you know, again. So you see it in the both in the liquidity numbers that there's no issue. And in fact, things have improved, I would say, in terms of liquidity and, you know, and the kinds of things you can get pricing on. There's a lot of market participants and a lot of market interest,

and that's not because things became more profitable. In fact, there's a lot more competition in that space. So we like all the growth in the option space. Yeah, one of the indicators, sorry, go ahead. I was just, it'll be quick. One of the things that we see in our research in pricing options is that, and it's an indication of just how liquid the market is, the spreads that are on,

options that are that are traded have narrowed to almost nothing, especially if it's something, say, close to at the money with a horizon of, say, a month to a year, there are more and more players coming in to serve this space to play both sides, right, to buy and sell options. So you can go out there, whatever side you want to take and somebody's on the other side to provide liquidity. This is a little wonky, but have you seen it affect volatility pricing? Like, is it dampening volatility, all this new volume into the TAMS? like artificially so we maybe could argue.

I've heard that argument made that the apparent volatility in the market is suppressed because so many people are going in and participating in these strategies. I don't think the world's changed that much. We saw in April the Vick spike to 80. Risk didn't go away. There was a lot of uncertainty at that moment. It's it's calmed down a bit. If something comes into the market that is at odds with people's expectations or their

view of the near future that is going to be a lot of the future that is going to be a lot of the market going to change behavior, we can see vol spike, and that's going to pass through into option markets, absolutely. I'd argue what's happening is there we're getting fatter heads and fatter-tint, right? So it's like we're pushing all this volatile. We're getting rid of all the normal volatility with all this option in market making, and we're kind of suppressing the normal down. But what happens, that makes that April move volatility goes up that much higher when it does happen. But that's my pet theory. I mean, you could argue that, right? A lot of these options selling may tighten the

and people have argued the VIX is no longer the fear indicator because of what kind of the growth in all these covered call writing or put writing call writing. But as we touched on earlier, I mean, when uncertainty raises his head or there's a, you know, market moving event, yeah, you will see it in malls. I mean, and the VIX is just one month kind of, you know, right, an aggregation of kind of the risk. And we look at that indicator as the be all and end all. But even if you don't see it in the VIX, you will see it when you're trading in the market. And some would say that risk has been overpriced in many ways. And that's really a reflection of three years of equity markets and that, you know, why would I buy?

The cost of protection is still high, but that the reality is that, well, the market is, you know, just going up. But of course, that I'll predict will not happen forever. Yeah. Well, you can argue there the relative cost to those people who've made so much money is not that high. So the absolute cost is yes, is still high, but the relative cost isn't. Before we finish up on options, can someone give an example of a flex option, like an actual, what it would look like just for the listeners who don't know exactly what that is? I'll put my hand up as one of them.

Yeah, so options have particular characteristics. So a strike price is what the level of the option is. So it will determine whether you're going to make money or lose money on an option. If I buy a call 5% out of the money and the market goes up 10, I'm good by 5%. So that that strike price is a term of the option. The maturity of the option over what term? Is it one month? Is it one year?

Then the type of option, European or American, European option only is exercised at the end of the life of the option, American option you can exercise early. And then now there are options to cash settle or not. So these are all conditions of an option contract. And on a listed option, there are some limitations that there aren't options at every single maturity for a week out or a week and a half out or five years out won't necessarily be available or at a particular strike. Now, what the flex option allows you to do, I can go to the market and ask for the terms

exactly that I want and these are very important for things like defined outcome where there's a specific amount of protection that I'm looking for exactly 20% downside protection and I want it for one year and I want an a European option and I want a cash settle and I don't have to go and look at the listed option see what's the closest thing for me I just go straight to market with that and that that's how the flex works and then it goes so like if the SMP is at 6943 20% of their is some weird number that's not the exact 6200 strike or whatever. I need a 6216. I just calculate what that is and that's that's going to go in my order exactly that level. So it should be called custom

options, not flexible options. I get essentially what they are. I mean, and I can trade it. I mean, and the additional duties, I can trade it and, you know, Delta just to the close, meaning I can trade it at 3 p.m. and get the close at 4 p.m. and they will adjust the, the, the, the, the, the strike accordingly. So, yeah, again, a lot of innovation has gone into the, even in building out the flex option platform from the exchanges and the dealer. So it's really great, yeah, where you had like one, two, three months, six month, you know, standardized to strikes and maturities. And then, you know, things launched on the third Friday of the month. Yeah, with flex, you don't have to rely on all that. And that's why we've seen that explosive growth, you know, so when we can customize it and you

can say, I want to start at the beginning of the month and the year, exactly a year later. or however you design a product. That degree of freedom has been very important. Options, you know, they still behave and all do the same things, whether it's a call or put option. This kind of customization has really open up, you know, a lot more opportunities for folks to design products. And that's what people want to do.

Who's on the other side of that? Just the primes. That's where I was just going to go. The great thing is you actually have virtually no counterparty risk because after that flex option is created, It's listed on the OCC website, Option Clearing Corporation. Essentially, your counterparties the OCC, not whoever came in and filled your order. So it's in some ways, well, it's certainly less counterparty risk than if you do an over-the-counter transaction with a bank.

I mean, this is why we started kind of starting investing in flex options back when we did in the mid-90s. Full transparency, right? It's listed. It's fungible. It's not like an OTC option where I buy. from counterparty A and then I'm locked in with them. And exchanges price them daily the end of the day. You can get a quote from multiple brokers.

So yeah, it's really been very, very helpful. And I think everybody in this ecosystem understands like why that that's beneficial, not just for everybody, but you know, for the end investor. Target a specific date and kind of an outcome makes it a lot more predictable. So that's really fueled the growth also of the defined outcome, the buffers of how, how the groups can put those together. Right. And more and more product is coming out all the time with different terms.

So, you know, a simple version of a defined outcome, 10% buffer, right? You're predicting the first 10% of your losses. There's a cost to that. So you're going to have an upside cap. Let's say it's 15% on that 10%. Well, you've got other variants that have come out that offer 100% protection. You have different outcome periods, three months, six months, two years.

And by the way, these are very similar to a lot of products in the insurance market, which I won't get into, which are also hedged with options. And so with the flex options, right, I can come up with anything and I don't have to go see is that available in the market. I can create it. And I know we touched on it, but the counterparty risk is a big thing. I mean, when the OCC has gone through all these market crises in the last, you know, at least I know in the last 40 years.

years, you know, has made good on every contract. So there's no failure. You're not worried about, you know, counterparty not being around, you know, five years from now or not, not, not getting your payoff. Really very important. Yeah, you're in court for two years fighting over it or whatever. No, I mean, that's that's a big advantage. That's helped with the whole growth of the options and flex options. You don't have to do what, again, many investors you do in the OTC market back then. And it was, again, very limited institutional clients. You take the paper of a counterparty. None of that.

This is all exchange traded, exchange listed, transparent. That's really been helpful to. Are you still seeing the demand and the want from your clients for what I might call like classic option protection, right? Of like steep tail downside protection, asymmetric. I can spend one, two percent a year and get that huge payout if what Lauren said might one day happen again. Right. Look, I mean, I've gone through the, you know, the GFC, the big market, the S&P was down over 50% or that year and a half period. Yeah, defensive strategies can approve their medal, right, at the time. So we thankfully, we haven't had a big drawdown like that since, but we've had, you know, things here and there.

We had the COVID kind of drawdown, it was a sharp. And that's the other thing. Things move very quickly now. You know, it doesn't take, you know, 18 months, 20 months to get from peak to trial. off, but now it can happen in a month. We lost 34% right in those 35 days in February of 2020. So yeah, any strategies that you have in place that can protect on the downside or a way to draw down. Less ground for you to recover. Now we had a sharp recovery, but again, some of these products and strategies we're talking about, they're adaptive, right? So they'll, they can protect on the downside, but then they can also participate on the upside. So that's, again,

one of these nice kind of features of these products. A side benefit is like, you know, these products allow you to remain invested in the market. So you're not, right, coming out at the worst time at the bottom and then you miss that whole kind of rebound. So that's another benefit that these products offer. So you remain invested, which we know is good for you in the long term as an investor. Yeah, I would say that for the current environment, if one is concerned about valuations, we've had this big run. But you don't want to walk away from this big rally. But you do want some protection on the downside so that that asymmetric convexity, that means,

hey, I'm going to participate more when the market's going up and less when the market's going down. And a long-dated call option gives you that profile. And if you were invested in such a strategy, then, yeah, you'd capture it a good amount of what's gone on the last three years on the upside. But if something happens and there's a shock, it's adaptive. It changes its colors at times the market for you. How long-dated are you seeing most interest in that being? So we see the best convexity outcomes investing about five years out. And but then they have to.

Right, like a car, many to take it off the lot, they start dropping in value, right? The decaying instrument says, you know. So if you, the reason you go out further in terms of the tenor is to prevent that time decay, which, you know, like if you buy a five-year option, as Lauren mentioned, first couple of years, the time decay is minimal. So you're still able to get all the benefits of having, let's say, a call option, but without having to worry about, you know, time decay, eating away at the value of your opportunity. Yeah.

And then you're rolling it before the, before the theta kicks in. Oh, I was going to say, I wanted one of you to say, like, oh, my God, all of the clients are giving up on their tail risk, and this is a huge signal. But no, there's no, nothing like that of the client's seeming bored or complacent. If one is following the flows in these defensive strategies, they just keep going up and up and up. I mean, you know, there's enough kind of quote, you know, uncertainty and risk out there, right?

I mean, you know, those are good, earnings are good. The economy seems, you know, healthy enough, you know, maybe not for everybody, but generally can see in the markets don't necessarily follow the economy, but they've been doing well. But yeah, we have, you know,

stretch valuations for some time in the equity, in the, at least in the U.S. equity space. We're seeing data issues in consistency, especially with the government shutdown recently so that adds a level of uncertainty from policy and rate risk you know what the fed going to do or not going to do and then you know and then of course now the geopolitical kind of

tensions are going to add to the mix so again you know shifts from the administration what have you there's a lot of things to you know maybe keep you awake at night so strategies like what we've been talking about can definitely take some of that uncertainty out of a foreign investor while not necessarily being out of the market, right? So you kind of, kind of hedging yourself, if you will. Wait, there's geopolitical tensions. I didn't know about this. The, you mentioned something offhand before, but I want to circle back to it of like that sometimes you're not trying to get alpha, which seems like a weird thing for an asset manager to say, but kind of explain that and what's the other side of that? Just matching a benchmark or giving

their defined outcome. You know, thinking about the range products that are out there. So a lot of these defined outcome products I mentioned that you're fixed outcome period, right? So the guarantee that you're looking for whatever protection level and the terms of your upside are provided at the beginning of each outcome period. You can scan across the now multiple offerings that are out there and decide, well, given my objective, look, I've got almost everything I need saved. If I can squeak out another 5%, that's great, but I sure don't want to lose any money. So what product offering out there lines up with that the best. Whether you're buying a boat or you're financing your kids college or something like that.

Buying a home or down payment. Right. Now, for a longer term investor, maybe that simple defined outcome is an ideal. Now, the strategies will reinvest. It isn't as if the ETF goes away at the end of the outcome period. It'll just reinvest in a new term. But there's some risk there. What is the outcome going to look like then?

Or do I even want to bother having to time that? There are products that are called ladders that just invest in, say, 12 monthly vintages with one-year outcome periods. That's one way that you can kind of smooth it out. Or maybe you would want something like these asymmetric convexity strategies that are more set and forget. And there's none of that timing involved. You're uncapped, which over longer bull markets is going to matter a lot, that you're going to be able to participate more on the upside. And then you're not resetting the outcome period. So the downside protection in an extended drawdown just continues because we talk about the delta's, right?

It's like your beta. How much are you exposed to the market? Well, in a down market, you're going to participate less and less in the drawdown. And your ultimate drawdown is going to be a lot less than even what's a fixed drawdown, say, in a defined outcome. Does anyone ever worry we're becoming too smart at all this? Like, we're going to take all the fun out of investing? Right? Or does everyone, does it every, everything just converges to the risk-free rate because we've taken out all the risk? I think it's almost limitless the number of offerings that you can do in the space. And it's evidenced by new ETFs coming out almost every week in this space. So defined outcome or income offerings. So we didn't talk a whole lot about it, but you mentioned covered calls earlier. That's over $100 billion space in ETFs from basically zero.

zero just six years ago. And there's a lot of different variants there, but is it a specific level of income you're looking for? Or you want a certain defensive profile, because these covered call strategies are also defensive strategies. And you could take a lot of risk. So there's doing a cover call on the S&P 500, and then there are single stocks that there are ETFs that have cover calls on,

on single stocks. Now, you are taking on a lot more risk there. I would kind of move that off the category. of almost everything that we've been talking about here today, which are generally risk reduction strategies. Yeah. And I could zag on that and say, just do less stock, right? Just instead of owning 100 shares, do 50 shares,

and you're equalling your covered call and you can go put that extra money in some income producing thing. But people love them. I agree with you there. You can rely with the flows. So let's talk a little what you guys see. It's always funny, right? Because if you think the world's going to end,

you're not shifting all your models, right? Your quants, it's quantitative, but still I want to know your opinions of what you see for the rest of this year. We've kind of already talked that it's high valuations, political, all that good stuff. Whoever wants to go first, jump on the 26th outlook. Well, I know, I mean, we've had- Rochambeau. Yeah, three good years in a row in terms of the U.S. equity markets.

And now have you seen both, you know, the EFA and markets, you know, the developed and emerging markets kind of catch up. 25 and kind of outperform the U.S. market. So that's good. So there's a little bit of a broadening out of, of, which was like the first time that happened in many, many years, right? Many, many years, right. So, yeah, so, you know, again, we've always believed in, you know, diversification.

So that's finally, that's kind of paying off as opposed to just like the magnificent seven, kind of that we've seen a run for the last many years. Yeah, you know, again, you know, with AI, you know, new technology, what have you, I think, kind of coming more and more into fruition with every passing year. So there's opportunities to participate in all the benefits. We still believe we should have a fair amount of exposure to equities, you know, mindful of all the uncertainty and risk we touched on. On the interest rate front, things are a little more uncertain, right?

We've had our cuts from the Fed going forward. We'll see how we do on the inflation front. And, you know, if any of these other risks kind of pop out, and kind of influence the direction of the Fed going forward. So, you know, you can be a little more cautious on the fixed income side of things, shorter duration in terms of kind of limiting risk. But, yeah, I mean, I think, you know, in reference to all what we've been talking about, I think those kinds of strategies that kind of limit your risk make sense.

Again, for the benefits of not being out of the market or trying to time the market, and you can get these fairly, you know, fairly cheaply in terms of generally, the fees has become a competitive market in terms of what the ETF surprise stats. I think we can, you know, from my seat, I can just see continue growth in this options-based ETF space. So our multi-asset team view is similarly constructive. So that would mean maintaining exposure in risk assets, although cognizant that there continues to be policy uncertainty of the market is rich.

Maybe thinking beyond the context of a calendar year, right, there are some interesting themes that we're paying attention to. So for one, profligacy in government spending is not just a U.S. thing. It's global. There's a lot less talk to discipline and maintaining budgets and things. And we're seeing kind of an explosion everywhere in fiscal spending. Now, that was one thing when interest rates were really low a few years ago. They are a bit higher, even though the Fed is cutting. and they've come down a little bit.

And then around the dollar, so the move to raise tariffs and so forth, at least initially, there was a pretty violent reaction with the dollar selling off and concerns that people would dump their dollar assets. That has been allayed a little bit with some of the initial tariffs being rolled back.

But we are seeing some interesting things outside of what we'll call it the most traditional assets. So precious metals, setting new records, you know, these, these are trades that could be interpreted, a number of ways to address a geopolitical risk. But I think of put silver aside, which is just going up like crazy, but gold as something of the alternative currency, right? And if you think all currencies are going to have problems because of this unsustainable fiscal stance and that everybody's going to have to debase their currency, well, there's gold, which has a fixed supply. I would have never bought gold years ago, but actually I don't think it is such a bad thing right now, given the concerns about the fiscal situation globally. And does that include, I mean, you do see some ETFs that are including gold in space, right? They're following the market, but do you view it as a defensive asset in that way?

It's kind of a different, as you said, it's for inflation, for debasement of the currency. Yeah, I don't see it as a traditional asset class play where, for instance, if you're buying stocks, you're buying future earnings and you want to participate in that. If you're buying a bond, you're buying a contract basically that you're going to get paid a certain coupon. Gold doesn't have any of that, but historically it has played a role of either being explicitly something that backed currency or now everything's on a fiat currency. It's the alternative currency. Yeah, it's a safe haven asset that's become, you know, it's kind of like, would we still look at U.S. treasuries, but yeah, this is kind of a proxy. And so now you've led me to Bitcoin.

Any exposure there at PGM, or do you still, that's too risky? And do you think of it as a safe haven? Our multi-asset team is not allocating to crypto. Full stop? Or because? Full stop. All right. We won't wade into that quagmire.

I think that's it. You think we'll see buffered notes or defined outcomes on gold? Right? There's probably some ETFs already coming out. Treasuries already in a product that's out there? Absolutely. There are more niches to be addressed in this space. So to the extent people identify risks in a particular broad asset class and this is a way to hedge that risk, I see no reason why you wouldn't see more product being offered on more exposures. You've seen it with inequities on different indices.

the most money is in products on the S&P 500, but there's a pretty substantial amount of money on the NASDAQ and a lesser amount in international stocks and things like that. So because of flex options and the depth of the options market, particularly options on ETFs. So you can get exposure to a lot of things in ETFs. You can write options on those ETFs. If it's a gold ETF, potentially you could have a gold defined outcome ETF on the gold. And then I'll ask you both for your AI takes with my lens of it, right? I got a deck that was trying to get me invest in an AI fund. It was basically the pitch was it's going to save five trillion of U.S. labor costs, right? And that's these, their multiples right now are based on

saving $5 trillion in labor costs. So to me, if you take $5 trillion out of the U.S. market, consumer spending, that's a really, really big problem. And if they don't succeed at that, then their valuations are too high. They get cut in half or worse. So where do you stand on AI with that lens? Like does it hurt future productivity and earnings or is it overvalued or none of the above? So I guess I would go as far as saying it is a transformative technology. And historical parallels, I believe, are there in what we saw with railroads at the end of the 19th century radio and more recently what we saw with the tech bubble. Or as others have, it was more of a, it was more of a an internet delivery bubble because really what it was where the investment was is in fiber optics

and things like that. And we know in all of those episodes there was there was fallout. There was a lot of euphoria in the market and there were losers. So there were there were places you could have put your money and gotten absolutely wiped out. But there were enduring investments in things that were truly transformative and there were beneficiaries from that longer run. AI is a little different than maybe the tech bubble because some of the highest flyers in the tech bubble actually didn't have earnings to support the stock price is moving higher. At least as far as your biggest players, your Nvidia's, et cetera, I won't get into the VC funded startups and things like that that are that are on the AI bandwagon and how any one of those is going to work out. You know, there is a

story there. There's actually massive investing going on in data centers. There's beneficiaries to that. Will we need all that capacity in those data systems? I don't have an answer for that, but I would venture at least that this is going to have impact going forward. And whether it's $5 trillion and save labor productivity or maybe better decision making or better health care, that diseases can be identified earlier. I mean, there's going to be benefits from all this investment. Who are the winners and losers are going to be? That's hard.

So I would predict there'll be some fallout there. But I don't think it's a bust as far as we're investing in something that's going to be enduring and important. I don't get anything. I'm just going to say this. We're in the early innings. It's hard to make any, any, you know, from my seat, you know, predictions about the future. It's obviously there's a lot of potential for all aspects of our lives. And yeah, whether it's, you know, overinvestment today or is it going to pay off that that's hard to say.

Again, Lauren touched on important points. So these are not things that, you know, big firms are in. Most of the firms in, you know, in the U.S. and overseas, they are engaging in AI in some way, shape, and form because obviously it speaks to the kind of productivity that can be gained from that. But again, who knows winners, losers, what new industries come into play, things like that. It's a lot of, it's very early innings. So a lot to come, but it's exciting. I want one of you to say, yes, the human race is doom.

Yeah. But to me, it's like the difference between all those other technology. innovations was this is replacing the human brain, right? So there's a, it feels more of an issue there. And maybe I'm just getting old and cranky, but it feels more of an issue of like, this is, this is different this time because you're actually trying to replace the worker there. Instead of just a new technology replacing a worker because they were in the buggy whip factory, right? This is actually in every industry trying to replace the worker. You know, it is disruptive. No question about that can be more so. I'm not so sure about

kind of not having, you know, being as impactful on the, you know, kind of in terms of how employment and, you know, kind of make humans obsolete. I mean, I'm not quite there yet. I think we... Well, not all of them, just a third of them, which would crush the economy. Yeah, no, yeah. Again, if history is any guide, we'd always thought that, yeah, like, all of us will be employed, you know, machines and robots will run the world.

And we know, that hasn't been the case. through the last couple of centuries of the industrial revolution to the information revolution and on. We think that that's around the precipice of something like that, really kind of earth-shattering. You know, we've,

I guess the human mind is unlimited and, you know, the intelligence cannot be, cannot be replicated and, you know, needs to be involved and whatever technology has kind of come to play at a given time. Yeah, I think like all these technological innovations that Devong mentioned, there's big displacement and there's concerns that I'm going to lose my job

and there's not going to be anything else to do. The reality is, we've got pretty full employment here in the U.S. People will be doing different things, I think. There'll be an adjustment. There will be some people that, yeah, whatever function they were doing, that job is going to go away. But I do believe there'll be other ways to take advantage of the technology that creates new jobs. It'll be like Star Trek. There's no hunger. There's no sickness. There's no money. We just ask the computer, it replicates things. All right, guys, any last thoughts?

I think we'll leave it there. This has been fun. It's a great conversation. Thank you. We enjoyed it. Absolutely. It's great to be here. All right, guys, we'll talk to you soon.

We'll look you up next time we're in New York or do the same in Chicago. Thanks again, guys. We'll talk soon. Thanks. That's it for the pod. Thanks to Devang and Lorne. Thanks to Jeff Berger for producing. We'll see you next week.

We got a good one. I finally get to talk about uranium on my own pod, which I've been trying to talk about for a couple years now. So good one on uranium. Check it out next week. Peace. You've been listening to The Deriviviv. Links from this episode will be in the episode description of this channel.

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