The Derivative - Global EQD ’23 Breakdown with Jason Buck (part 1)

Episode Date: June 8, 2023

Didn’t get the chance to head to Vegas for the Global EQD conference. No worries. We’ve got you covered. We're teaming up with the one and only Jason Buck of Mutiny Funds, he of many volatility-focused podcasts and manager of a long vol fund of funds. Together, Jeff and Jason walk through their notes from attending the annual equity derivatives-focused conference put on by the good folks at EQD. Make sure to head over to www.eqderivatives.com and signup for their official notes. Meanwhile, they go deep on many topics, from accessing commodity markets and traders in China, addressing liquidity concerns on execution desks, and exploring the nuances between variable annuities and index-linked annuity products.  Jason and Jeff delve into alternative correlated hedges with cheaper volatility, examine volatility strategies in ETFs, and analyze the role of leverage in finance. Jason also shares his hot takes on various topics, including the allure of Las Vegas to the fascinating world of greenflation and energy, where wind farms and Dr. Copper play a significant role. No EQD stone is left unturned — SEND IT! P.S. Mark your calendars for Part 2, dropping over on Jason’s Mutiny Investing podcast, where Jeff and Jason will take you even deeper into the fascinating world of finance, energy, and investments.  Chapters: 00:00-02:04= Intro  02:05-7:20= Vegas Hot takes: $200 mins = inflation, 6 to 5<> 3 to 2 07:21-21:21= Greenflation/Energy: Windfarms, Dr. Copper, Commodities, & trouble areas 21:22-40:57= Institutional Hedgers, Insurance hedging, the sticky nature of assets & finding alts with cheaper vol 40:57-59:29= Volatility in ETF Wrappers: Not all strategies are created equal with ETFs, Too small/too big, & branding matters From the episode: Check out Jason on the Mutiny podcast and make sure to subscribe to catch Part II of this episode premiering soon! Follow along on Twitter with Jason @jasoncbuck and @MutinyFunds for all updates and also check out the website mutinyfund.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. Get ready for some good shows following this one. We've got Corey Hofstein coming on to talk through his recent thoughts on replication, which I seem to be seeing more and more of in the systematic and trend space of late. And then our taping of RCM's Vegas Vol Panel the following week with Jem Carson, Zed Francis, and Luke Ribari.

So a bunch of good guests coming up. Subscribe today so you don't miss a show. On to today's episode, we have the one and only Jason Buck of Mutiny Funds and the Pirates of Finance YouTube show on. We did this last year, if you'll remember, and listeners appreciated the color and insight into an institutional level conference on volatility and derivatives and options. So Jason and I are back this year to take a stroll through our notes from the global eqd conference in vegas a few weeks ago we split this into two parts with the first part going up here

on the derivative you're listening to it now and then the second part going up on the mutiny investing podcast send it this episode is brought to you by rcm's vix and volatility specialists and its managed futures group we've been helping investors access volatility traders like the ones we talk about in this episode for years and can help you make sense of this volatile space. See what I did there? Check out the newly updated VIX and vol white paper at rcmalts.com under the education menu, then white papers link. And now back to the show.

All right, we are here with the one and only Jason Buck. Going to do part two. I guess we did two parts last year, so this would technically be part three, but season two of our Global EQD Conference Review. I think we called it last year Overheard at a Vol Conference. So this is Overheard at a Vol Conference, season two in 2023. How are you? Couldn't be better, Jeff.

I was throwing me off hearing you on a microphone instead of the way we're normally talking to each other. So hearing your deep air tone on the mic was throwing me off for a second um and as we both know in this podcasting world of like you have to put on the show show must go on break a leg even if you're not feeling the best so i appreciate it um so let's jump right in uh I liked what we did last year. Let's do a few seconds, minutes on Vegas. My hot take on Vegas this time around was inflation is real, and I'm seeing it in Vegas. The tables at the win were $200 minimum. That's a big jump from back in the day. Maybe my brain is addled, and I can't remember. I'm thinking there was a linear jump between 15 years ago and last year, but, uh, right. $200 minimums at the wind.

That was pretty substantial. Yeah. During the day, did you hear anything like, uh, like $50 minimums or did you see any of that? Cause I mean, typically,

you know, the wind's going to be higher no matter what. But I, I remember when we walk around, you pointed that out. Um, I was staying across the street at the resorts world willer which is a good uh tip trick for anybody that new resorts world by hilton is actually

nicely newly refurbished place i guess they're really pushing to get like a lot of the djs and parties there but other than that like the rooms are refurbished and new and it was obviously a lot cheaper and just being across the street from the wind and then they have a a mall inside there that was you know it's kind of analogous to maybe the Aria mall or stuff like that. It was pretty, pretty interesting. But like you said, yeah, I think even walking around there, I want to say I saw like 25 to $50 minimums. So maybe that's where I saw the $50 minimums. And so like to your point, it's inflation. The other thing was that I guess I should have been prepared. I didn't realize we were going to Vegas or didn't register with me, but all of a sudden like it's like

explosion of people by the pool and all that stuff during summertime. And so that's always highly distracting. It's very awkward to go. Everybody's in suits going to all these events. And then meanwhile, you're just walking by all these people in their pool attire, walking through the casinos as well. Did you see that article this week on Vegas blackjack revenues? A billion? Because most, like 70% of them have switched the blackjack odds to 6 to 5 instead of 3 to 2.

Right? So most people are like, oh, that's about roughly the same. But roughly the same and the same is not the same. And a lot of me thinks that also has to do with the um they have all these little side bets now right of like you can bet on your top your two cards plus the dealer's card that's up all that kind of stuff so i'm sure that just has super edge and then my life to me yeah go ahead sorry go ahead go ahead i was gonna say what's concerning to me is like i've been to a couple more think, like finance events at the Wynn since last year. And what mile from my room until you get into the conference area of the Wynn.

Like a quarter mile getting out of your hotel, half a mile across, quarter mile in the hotel. And then always the bathroom breaks and everything. So did you look at your phone? If I recall correctly, I was getting just over 15,000 steps in a day, which, like you said, meanwhile, sitting in conference rooms for most of the day. Yeah, I didn't look, but yeah, I would assume it was that. My rings were closed on my watch. And then my last bit on vagueness is just I played a little bit of blackjack.

The corollary between gamblers and investors has never been stronger, right? I just saw in my limited time you get a guy who comes up and just wants to right he buys in for nine hundred dollars plays three hands of three hundred dollars and and leaves you get the very conservative person who puts in 250 and plays fifty dollars a hand for four hours um and then you get everything in between you get the quants who always hit on 16 you get the gut feel people who never hit on 16 right so it's like amazing to me of like it feels a lot like investors of like i'm just going with this because it's hot i'd like to do super conservative i'd like to do it super quanty i like to go with my gut

well i never i never really play the tables but what always used to bother me like i remember back in the day if like you sit down at blackjack and everything i like how the people around the other positions will like yell at you for what you do. Like you affected their cards. Like it's. Yeah. We had that. The guy called a guy. He's like,

you jackass. And he split twos against a six. I'm like, I'm pretty sure that's the, by the book play, sir. And then he walked up and left, but it's like,

right. And of course he had lost the end. If he hadn't lost, he probably would have called him a jackass and probably wouldn't have left. Exactly. All right. On to the conference.

So part of, there were some invitation only things with some investors. We're not going to get into that. The first panel we saw was similar to last year's where they had the guy. It was a little more interesting last year to me because it was talking commodities and inflation and trend right when all the commodities were rocking higher this had a similar tone but it was on greenflation and the energy transition which the guy touched on last year but that was more broad-based this was specifically about greenflation um so you got any quick takeaways or you want me to roll with that one first no i i got some some notes on that but before we even

get to that you're skipping the night night before rcm alternatives did a did a panel uh discussion with some of all the experts um so yeah you want to talk about that a little bit like who did you have on the panel uh i do except that's going to be its whole own podcast. So tune in on this channel later for that excellent panel. It's going to be a nice preview. Exactly. Jem Carson of Chi Valtility, Zed Francis of Convexitas, and Luke Rabari of Equity Armor, and myself hosting them.

So yeah, that was a lively conversation. Tried to get into the zero DTE debate, which we'll talk about a little bit more here, but didn't quite take the bait. I thought Jem and Zed were going to go after it a little bit more, but they politely disagreed whether it's a big deal or no deal at all. Yeah, I think we're going to have that.

That's going to be a through line on almost a lot of the discussions is how that would seem to be. The topic du jour was zero DTE. But to preview yours for the podcast comes out is that, yeah, you had a great question of like, is it really important or does it not matter at all? Right. And two of your guests were like, it's very important. Other ones doesn't matter at all. So you'll have to listen to that uh to see what happened then also related to that i'm starting to uh i'm trying to relate to you jeff so you know you had a lot of your your smart list references smart list podcast references while you're doing that panel so on the way back from vegas i was watching the uh the smart list tour i think it was on on max hbo max by the way hot take why in the world would you ever give up hbo you know why this would why would it be like the one of the best brands in the world yeah i i maybe i need to read into this to see what happened but i couldn't imagine any scenario why you would get rid of hbo and just go with max

well i think they went hbo max and then people like that's dumb yeah so they dropped hbo like well that's dumber unbelievable like their mps score and the quality and the reinvention and like the shows the movies i mean why in the world did you ever reach hbo but i digress so going back to uh to greenflation um it was uh sock gen and so i'm trying to uh just find exactly ben hoff from he was global head of commodity strategies for sock gen and so there was it was very commodity heavy like you're saying almost like last year so that had some interesting pieces some of the more anecdotes i wrote down is that all the bovine population in the world uh produces the same greenhouse gas waste as the united states

so that was just like an interesting kind of like anecdote or statistic um that i found interesting so he was he was kind of more moving away from that and talking about uh other issues. And one of the things is, we're always talking about supply chain over the last few years. And he was talking about how the supply chain for rare earths is very difficult. So he was primarily, the top of the conversation was not necessarily greenflation, but it was greenflation in relations to switching to electric vehicles. So that was the primary kind of focus of the conversation. So he was talking about, obviously with electric vehicles. So that was the primary kind of focus of the conversation. So he's talking about, you know, obviously with electric vehicles, you have the batteries, you have the construction of the actual vehicle, especially within the battery, you have a

lot of those rare earth minerals. And so that's the primary point of his conversation. So that's why he's saying the supply chain is incredibly difficult for that because you have, you know, a lot of that supply chains is either in China or sub-Saharan Africa. And so obviously, you know, we have weather, we have a cold, silent war with China right now or whatever you want to call it. And then also the Belt and Road Initiative, where they're taking over, you know, large swaths of Africa. That would lead, like they're saying, to maybe conflict over, you know, quality and getting

to these rare earth minerals. But what I think is interesting, at least from my perspective, is those are the countries that refine the rare earth minerals, where if you do your research, it's like the US has tons of rare earths. The problem is politically and socially and just optically, we're unwilling to refine them. I mean, it's very dirty to refine them and it can be quite toxic. So we actually have tons of rare earths in the United States. It's just we don't have the wherewithal maybe to refine them i mean it's very dirty to refine them and um it can be quite toxic so we actually have tons of rare earths in the united states it's just we don't have the wherewithal maybe

to refine them so it'd be interesting if we do actually go full on war with china like will we just you know kind of spin up you know rare earth refining capacity within the u.s you have any thoughts on that a lot like intel plant outside columbus ohio and like chip making back in the u.s right which is a similar path um i to your point i liked he was moving basically making the point that agriculture isn't as big of a deal as everyone's making it right to be right of like he had a pie chart it was 15 percentage or something where transportation was really the big, huge piece of that pie chart. And I also appreciate when I hear smart people in that space, it drives me crazy.

I've corrected my kids. I'm trying to correct their friends. When you drive by a wind farm and they call them windmills, like they're not, there's nothing being milled there. It's not a windmill. It maybe looks like a windmill in your child children's books, but it's a,

right. A wind turbine so one of the interesting charts he had up there of what a hundred megawatt wind farm which i looked up is about 60 to 70 turbines it is 30 000 tons of iron ore 50 000 tons of concrete 900 tons of plastic and 150 tons of copper for offshore, 50 tons for onshore. And then he had that interesting stat that was like 70% of the copper is actually not in the turbine itself, but connecting all the turbines to get all the energy from each of the turbines into the grid or whatnot. So I found that super interesting on on that panel and then i'll just

go on on my other bird swatters instead of windmills like and and a shameless plug from three years ago if i had uh jeff dr jeff masters who's a weather underground on the pod and asked him the question of like does right if if we have all those wind farms and they're converting wind into energy, what doesn't that have some effect downstream? Right. Is there less wind, right. Say they were all on the California coast. Would no wind get to the wind farms in Nebraska and whatnot?

Uh, which he was saying, he agreed, like, yes, it's taking energy out of the equation. So that's always like a big picture, philosophical weirdness to me of like, okay, what do we really know what's happening in the world if we're taking all this wind energy solar energy geothermal wave energy out of the equation like what's the other step that happens on there i don't know and you also the transmission right like uh it doesn't matter if you have hydro wind solar you still have to you still have to um distribute that across the system and you still have to, you still have to, um, distribute that across the system. And you could have, you know, hundreds or thousands of miles that you have to, to transmit that energy over. And that can be prohibitively costly as well. And then people go,

well, you know, eventually battery technology will catch up for us to be able to store and harness that better. And it's like, now you're increasing the batteries as well. And, um, I'll give you one of the other stats. Maybe you had this written down, so I don't want to front run you, but like part of that, uh, what goes into a battery, a thousand pound lithium ion battery for an EV requires 25 pounds of lithium, 30 pounds of cobalt, 60 pounds of nickel, 90 pounds of copper, 110 pounds of graphite and 400 pounds of steel, aluminum and various plastic components. And we're supposed to go from, yeah, we're supposed to go from 11 million electric vehicles today

projected in 2030 to 145 million, so that's 13x growth. That's a lot of batteries. A lot of metals, yeah. So that was his whole point of, right, that's why it's greenflation of as we move towards all this greener energy

storage and transmission and generation, that's going to mean a lot more batteries, that's going to mean a lot more batteries that's going to mean a lot more rare earth uh items he didn't quite get into the political as you were touching on right of like yeah that mostly all comes from china today i hadn't read some of the stats you had of some of that is in the u.s uh i just knew that um from from reading i'm just pulling that you know out of my ass from reading about it over the years. We actually have plenty of rare earths. Optically, it's difficult to refine them and it is a pretty toxic thing. It's one of those things where we've offshored a lot of our environmental degradation due to greenhouse gases, et cetera, right? We offshore those to the third world and then we complain that they don't adhere to our standards. So it's a little bit of both there. But the one thing that I thought was interesting though, that he, as a crowd of investors, traders, et cetera, and like you're saying, especially in

commodities, is that many of these transition metals are spot markets and they don't have liquid future markets. So that was kind of the kind of topic conversation. I'm not sure if you gave any answers or if you heard any of like, how do you trade? What's your trade, right? If you see this 13X growth in EVs and you believe in that and you believe all the batteries and what goes into them and where we're headed, If you don't have liquid futures markets, you're not necessarily, you can't trade spot markets. And then maybe you could then go to resource equities, but then now you have secondary and tertiary effects of like, who are the people running these companies? What's their debt load? All those sorts of

things that could go wrong making those bets. Yeah, for sure. You want to own commodities, not commodity companies that come with all their hair. But I think the answer there is practically copper, right? Copper, deep liquid market, futures market. You have basis risk there, obviously. I don't know. At some point, he may have mentioned you would switch over from copper to some other metal if it became prohibitively expensive, right? If it was 50x the price or something. Yeah.

But generally speaking i agree with you like yeah you're he's trying to scare investors saying here is greenflation is coming big time you need to prepare here's where it's all going to reflect is in the metals but i agree that wasn't answered or even questioned by the audience of like okay what's the trade how do i trade it well yeah that's like you said, without the futures markets, it makes it difficult. And also the audience is kind of, you know, first session of the day. So not a lot of questions probably. And then I'm curious, I don't think I've ever asked you, what are your, do you believe in

the whole Dr. Copper thesis? Like you've been around, you know, physical trading commodities for decades. I've never really asked you, would you have any thoughts on Dr. Copper kind of leading the way or, and then now the change of Copper's ability you know transition from you know previous more industrial metals to now ev vehicle metal i believe in dr copper probably more than i believe in what what's gold's name ghastly gold or something i don't know relic yes i believe in dr copper way more than the barbarous relic um but it's had some infamous false signals and non-signals so just like anything tough to really hang your hat on but uh yeah for sure it's a piece of the puzzle there and then what that was from last year which we'll

just bring up of like those copper mines have been 20 30 years of under investment in building them out in infrastructure so yeah i'm all for copper buy it up uh and as you mentioned it how do you get access to these other metals i'm going to jump ahead to the third panel today was a guy from ai la indices let's switch over and tell you what panel that was. Brandon Yao. From the carbon commodities. Yeah, which he didn't really talk about carbon, but part of his was like, hey, if you want to get cobalt and lithium

and there's no liquid futures market, how do you do it? And his group had created these indices, which basically do different percentages of the liquid markets to mirror and mimic the illiquid markets so a bunch of trouble there in my opinion right of like well it worked in the back test it worked in historically how do we know it will work moving forward there's basis risk there's correlation risk there's's dynamic risk. Like if you have that model, it has to dynamically adjust. But anyway, that's, I think, part of what investors are doing of like, okay, cool, I get it, but how do I trade cobalt?

Oh, well, you just trade 60% copper futures and 40% gold futures or platinum futures or whatever. And hold your nose and pretend you're getting cobalt. Yeah, this sounds almost like a DMF for like kind of replication. But also I would, I'm curious for you, this made me think about you guys work with a lot of like Chinese commodity traders, et cetera. Like, is that an access point really to, because, you know, the Chinese markets have much more nuanced or maybe more illiquid markets that we'd really don't see too much coming out

of like London or Chicago. Yeah yeah they definitely have access those rebar so concrete and they have uh i can't remember the name but some plastic nickel so for sure the trick is uh and we'll try and be short on this but basically the trick is they've opened up 11 of those markets, I believe, to outside money, except none of the onshore futures brokers will take US customers. So if you're a non-US investor and most likely institutional, not a two-legged investor, you could open and get the access to those markets direct through China. And yeah, as Jason mentioned, RCM is doing a bunch of stuff trying to create that path also through a Cayman vehicle and add some protection. So you're not just sending money to a random Chinese broker and hoping it comes back.

But yeah, I think that's for sure. And why do they have those? Which comes full circle. Why do they have those futures markets? Because it's there in their country, right? They're refining and producing most of that action. All right. Panel two.

Panel one. That was even the pre-panel. Right? Because it wasn't even a panel. It was just a talk. But the first main panel was my guy, Braj, who I love. Multi-asset in a time of multi uncertainties so they had Sarah Pollock of S&P Dow Jones indices with Braj Agarwal the Goldman Sachs lady

wasn't there right she was on the agenda but she wasn't up there Devang Gambarwala PGIM and Sugata Sark of fm global so this is always a fascinating space to me if these are big huge institutional hedgers essentially um different flavors of it of like okay they've got a huge uh liability portfolio they have premiums coming in they have payments going out they're balancing those items with the volatility of the market with their expected monthly quarterly annual bogey for returns and risk um so my note was they didn't talk much about multi right the panel was the topic is multi asset they talked mostly about uh equity vol and a little bit of rates vol, I guess.

But yeah, what are your thoughts on that panel? So like to your point, like the panel that Browder was on last year was probably our favorite, right? Because they're talking about things that we don't have much purview in and not necessarily things that either of us are associated with or trade or invest in. And so that was it was a really interesting panel last year to hear, you know, how these enormous insurance companies are hedging or running their book. And we were, they were talking about some of the new rules and what the outlook was.

This year, the panel was kind of a dud. I don't want to like, you know, disparage anybody on the panel, but it was kind of a, it was kind of all over the place and not a lot was said. And maybe they're talking about some of the nuances of some of the rules they had to deal with. But there wasn't a lot. I didn't take a lot of notes. One thing that Braj said was it was kind of the – he said rate ball is too expensive to buy but then too hard to sell. So it was interesting how that's going to be another through line is people talking about rates vol versus equity vol um but i think braj kind of nailed that one is like you know where

it's running now it's too expensive to buy but too hard to sell so it was it was an interesting point that sometimes vol gets to a place where vol is medium or medium to high um and you don't want to be on either side of that trade and so that's kind of you're saying like this is a time to step away and then braj was the first one um that's going to come up many times just to bring up uh zero dte options um but the way he was talking about is basically they were using them for positions they established a week or two before and they're using to kind of close out or hedge the position on like the final day going into expiration so it wasn't really the uses of zero dte um and he said he but he did feel that those zero DTs were very liquid,

but they were being very specific and choosy about which counterparties they work with. And I'm sure maybe we'll get into this a little bit later. You know, there's a lot of liquidity there, a lot of volume there. And things tend are seem to be fairly equally weighted and benign. But as soon as things start to break, you're going to be very concerned, I guess, about who the counterparty is and how that can create a cascade of consequences, even if you are on a listed exchange. Yeah, and for sure, I think that was the first. I don't consume nearly as much content as you do, so you may have heard someone else, but that was the first time I've heard an institutional investor actually say

the words out loud of like, yeah, I trade zero DTE. Right. We've all been dancing around and like, who's on this side? Who's on that side? Is it all retail? Is it institutional? So that was the first time I've heard institutional say, yeah, here we are.

And then I, I, his favorite thing I wrote down was him just complaining about some of the junior traders on execution desks. And I guess they call and they say they get a mark, right? They're saying like, I need to buy 50,000 options at whatever. And they give him a mark. And then he's saying these junior traders are calling back like, it moved, it moved.

It's three points down. What do I do? He's like, relax. This is what it was like in the old days. I know you're used to zero realized ball. So he was having fun at their expense explaining that and then on the rates yeah that was a shout out that was a shout out to you old school traders right that like you guys you set them give a quote and then the the market would move tremendously

and you still have to fulfill that quote so that's what he was kind of joking around about uh and then on your rates walk point is a great point because we want to sit there and you talk to ball managers and write okay i get the model when falls low you buy when falls high you sell as everything not quite that simple right in this case they don't want to sell because they're scared it high it's high and could go higher um and they don't want to buy because it's high and could go likely going to go much lower right it seems like it's peaked out but with any type of all you never know how high it can go it's like it's um convex to the upside right yeah and so the well the other part of that is like none of this is investing advice but like the irony is that like a lot of times actually low wall environment is actually when you want to be selling ball but that's scary as shit

if you take like same thing yeah right it's like the the implied to realize spread you know like a 2017 like you crush it when you're selling ball but like it's really hard to sell ball you know it's in the single digits because it can just explode in your face but those tend to be the richest times to be selling ball so ironically people want to sell it when it's higher like you said if it's higher um you kind of expanded the distribution it can still rip your face off and then i believe these guys also got into a little bit of the liquidity you kind of expanded the distribution, it can still rip your face off. And then I believe these guys also got into a little bit of the liquidity and that you see the top of the order book in ES or something, right? And it shows there's not a very deep market, but they were saying they have no problem getting off huge size.

So we've talked about that before on different pods. And what you see on the screen, especially in today's day and age, is not the true measure of the liquidity of the market because of algorithmic execution because of people being smarter than just showing their whole hand on the screen um so i think a lot of that in the old days was handled by humans of not showing your whole hand maybe in the early days of being on screen they showed a lot on the screen and now it's kind of transitioned into this i'll show it when i need to show it but that was an interesting point that they have no problem of being on screen. They showed a lot on the screen and now it's kind of transitioned into this. I'll show it when I need to show it. But that was an interesting point that they have no problem getting their size done.

Yeah, that was a consistent theme throughout the few days. Executional liquidity would seem to be just fine for most people. Next one was after a nice networking reception sponsored by MyEx, the Spikes Futures guys. How are higher rates, regulation, and liquidity affecting insurance hedging programs? Maybe we can talk about this.

I don't quite understand the difference between these guys and the previous panel. I think the previous panel, they were a little more the traders in and around the traders inside these things where these people were more of the insurance people themselves. But I love this guy, LT Grant, of Protective Life Insurance. He was kind of won the panel, in my opinion.

I couldn't help myself. so i want to say this is why i think you're saying this because i i may be misremembering it but i think last year braj was on the panel with emmanuel lt and fallen like so that was maybe part of it as well like lt like you said is a very straight talker which is appreciated yeah and he he had a great i think we're going to show it here but he had a great um chart up explaining the whole insurance industry in terms of hedging uh and then they went deep into the product side of it right of the variable annuities fixed index annuities uh i don't know what it stands for but rela is a new type of annuity. They were saying there's tons of growth there, tons of growth in the FIAs.

And kind of talking through, and every time they talk through this, they talk through, oh, we have this legacy product, this annuity that was paying X. So it's interesting to me, right? The whole concept, right? The insurance company has a bunch of money. Premiums are coming in, but they have to grow that money in order to pay out future liabilities, right? So how do they do that? One way to do is sell annuities out there and they get a fixed string of income coming in.

And then these guys have to hedge the risk of that annuity. So it does blow up. So I lost my train of thought did you take a photo of that i i thought i took a photo of that chart but apparently i didn't because yeah like rela was one of the ones i was talking about most um now i can't remember what the acronym stands for we'll pull it up we'll pull it up other than other than what i did write down is rela equals selling puts to increase yield but i want to know what the acronym stands for. It's probably going to sound the opposite of selling puts to increase yield. Registered index-length annuities.

So I just have some anecdotes I wrote down. And one of them was from Fawn. He was saying that there's been record sales in the last like year plus in annuities. And you're saying the returns are getting up to the 12 to 14% range, which was kind of shocking to see how high they're kind of getting. One of the ones that Sonan pointed out is that people have been switching from equity link to fixed income link. And so that's interesting. You're seeing across asset classes or across vehicles, when we were talking to pensions and endowments lately, they're really focused on their LDI

fixed income ladders than they are on equities anymore. And it sounded like Sonnen was saying, the insurance companies are switching their annuities from equity link to fixed income link to hopefully, I think they in theory theory, would be to reduce vol, but we could argue if that reduces vol or not. Sorry, were you going to say something? I can keep going. I think Rela is basically just linked to the index purely versus the fixed-index annuities. They give you a floor.

It's more like a buffered note inside of there. So it has a floor, but then it also has a cap. So the Rela products would give you a floor it's more of like a buffered note inside of there so it has a floor but then it also has a cap so the real products would give you unlimited upside you know going as high as the uh index will go that's what you're selling puts like to also juice that income a little bit so no wonder they're giving you know all the upside but that that downside is going to be quite painful yeah but and to your point on this panel was highlighting for me of like why are people going to buy equities when they can do some of these insurance link products and get like you're saying five six seven eight ten percent so you're saying there's a huge huge

demand from investors retirees all across the the board on these yields on these things so a lot of times we want to say okay yields are higher what did that do to your model is that killed your model and they're basically like no we have the same spread and now the investor gets higher yield so they're flooding in they they want it way more and then there was about the spread yeah and there was talk in this panel and elsewhere like with yields this high there's not we don't have to get as creative. We don't have to do as many complex things in order to generate the yield to meet our requirements, to meet the investor requirements, which made me feel a little safer. I think last year was some talk of like, well,

yeah, but we have a hundred year forecast. So if the market's down 40%, we don't really care all that much. Now it's kind of like, well, the rates are high enough where we can just give them a yield and we're all good. Yeah. It was almost like a throwback to a bygone era, right? Where they can play around with fixed income and equities and create more balance. And like you said, as long as they have that spread, then they can really hone in on more LDI and fixed income products and do much better as an industry than having to go out the risk curve and really focus on equities. And for example, like Emmanuel

said, they're moving also to call spreads on the S&P 500. So they still have that equity exposure, but he said they're also moving to one year out. Well, I should say moving too. It's actually, that's their shorter term. Speaking of like you're saying the hundred years it's like we trade short term it's like can you define that and he's like one year out call spreads on the sap 500 so that's that's kind of their idea of short term um and then the other thing i thought go ahead i was saying our world that's like what one year out that's's intensely long term. But anyway. And speaking of even longer out, LT said the liquidity has been smooth in one to five year options. So as soon as, for those who don't know, you can go beyond Leaps and get ISDA contracts and you could trade seven to ten year options. But LT was talking about they've mainly been trading in the one to five year option range and liquidity has been great.

And he said, you know, historically, they've been worried more about like that long dated Vega flow. But he said right now, they're, they're, they're willing to just just wear that risk. So that was another thing, too, is like, like you were saying, they getting back to quote, unquote, more normalized times, they're not quite hedging as much. And they're, they're willing to wear a little bit of the risk and move the book around, the book around across fixed income and equity so they can warehouse some of that risk themselves instead of really trying to offset a lot of it. Yeah. I think their comment, there was finding alternative, quote unquote, correlated hedges that they can work with when vol with cheaper vol, right? Which comes back to that

rates conversation. But they were sort of bleeding into that equity ball has remained pricey as well. Unimplied. Right. The the realize has been low, but the implied has still been high. And I thought it was is it related to that, like Sonan said, that they've actually been rolling shorter term now. She's even been coming inside a year because equity realized vol has been so low and then there was also the comment that they're starting to rebalance into just outright equity exposure right like as it gets lower in throughout 22 okay which we've seen right which helped keep a lid on bob like cool i'm going to monetize and i'm going to buy back the actual thing that i'm hedging uh which they were also talking about with gold as well yeah related to that like

i brought up earlier like pensions and endowments as they become they've gotten closer to funded or fully funded or near funded is like they they reduce the equity exposure like we said so that's why you saw almost just that consistent stair step down in 22 where you didn't see any liquidity crashes because everybody was pre-positioned for like uh 2022 and so there's not a lot of rush for the exits or rush to hedge um but it was interesting like emmanuel was saying that the he does see the stress if we did have a equity down rates down environment um that's where that's right we could yeah could see some stress pick up but also uh this is just a total left field anecdote but i thought it was still interesting is like as we move from library to sofa he said they've seen the liquidity picking up so quickly in sofa that

he thinks everything's just gonna be just fine with that transition right and i had that down as well like they were saying like it was just cool tuesday we're switching and it just it just switched over there was like they thought there'd be a little more pushback or or trouble in the systems and whatnot and even i find myself right like i don't know if i knew exactly what sofa was two years ago and now i'm like just it's part of the normal lexicon right like oh i'm so for plus two so for plus yeah isn't that all the finance like yeah i guess anything is in that it becomes part of the lexicon you pretend like you're an expert in it um and then they did spend a couple minutes talking about how insurance didn't have the contagion effect of svb and the regional banks

and whatnot um and just talking through the sticky nature of the basically their revenues right so they don't you can't just move insurance companies like you can move banks, on your phone especially. So the sticky nature of the assets. But then also, they were touting their own horn, but the long-term experience and risk controls and everything they do on a day-to-day basis, much better. And we've seen the SVB congressional hearings and all that stuff of like, yeah, there wasn't a lot of sophistication there in terms of hedging the interest rates and whatnot. So that was an interesting side note too, of like, hey,'t a lot of sophistication there in terms of hedging the interest rates and whatnot so that was an interesting side note too of like hey we watched it interestingly but mainly

what it was doing to rates fall and equity ball not in terms of our assets are at risk or anything like that yes i think the same reason why we like this panel flash too is because it just gives us an entirely different perspective like they said they use allegedly use like 100-year time horizons right and they they they're building these huge books and so like you're saying like they're these large enormous cargo ships so they move very slowly and turn very slowly but it was uh that's why it's always interesting because it's a dramatically different perspective to the things like we work on i just had a little uh new yorker cartoon pop in my head of like they're the cargo ship and there's like a little boat sinking svb guys like save me oh by the way i want to get before we move on to the next one i want to give

shout out that was moderated by dan corcoran at volos and i was telling dan later like his his depth of knowledge on multiple subjects is is incredibly solid especially when they're really you know the products they're creating at volos are are totally outside that realm of kind of like insuranceed products. It was always fascinating to me where you can cross over and run a conversation like that. How do you do that?

You just plug right in and know this stuff? Then I did have one more note here, which echoed the previous panel. Like, hey, no, we're fine with higher rates. These are allowing us to have greater hedge budgets, which you don't think of the previous panel like hey no we're fine with higher rates these are allowing us to have uh greater hedge budgets right which you don't think of like okay i can spend more on premium now basically i can spend more on my bleed because i'm getting more interest on the other side of the

book um caps and participation rates so also like okay now more people want to buy the annuities and whatnot so i have more revenue coming in i don't have to get creative, which we talked about. Well, that related to that, whether people want to agree or disagree is not the point, but like, uh, Warren Mosler, uh, you know, love him or hate him. When he talks about when the interest rates get raised, he said, he calls it UBI for the rich, uh, because now you just have that more income, right? Like you said, it just normalizes, not normalized. That would be in quotes things to like where people now are just moving over to fixed income and right because they they

just want that yield and so he calls it you know universal basic income for the rich because they're the only one with assets that can actually uh capture that yield and actually increases their income so whether that's insurance link products or just having a large asset base as an individual never knew but they seem to be doing fine with no rates either. So, I don't know. Yeah. Well, you get both, right? You have enough wealth to accumulate assets

and say equities that go up in the last few years. And then you also, on the other side of your book, then when rates go up, you've got an income stream. Right. Market. For sure, there's a lot of that going on like if what what age would you be where you're like screw it i'm just throwing this all in t bills or right today i don't know like i i'm always like i'm fascinated by ldi ladders right

and attenuating them to your liabilities uh yeah it's it's it's very fascinating and you know plenty of people have done research where even you know bonds, bonds have outperformed stocks over a multi-decade time horizon. So, I don't know. It's always interesting. Almost like you should have some of that exposure in the cockroach. It's almost like we do. All right. I touched on this next panel was the, whatever I said his name was on these custom index products, which was some. Yeah. That AI LA indices.

And there was a carbon and commodities. I unfortunately had to step out for a meeting during that, but sounds like I should have been in that one. Sounds like you found those interesting. Interesting, but like brings up all those questions like you said with dbmf and like how far can you push replication actually like it seems to work until it doesn't um do you want to be first in next in last in i don't know if there's a lot of just got talladega knights if you're not first you're last you're last right um right to me it seems like you want to get in first until it stops working right like okay yeah so the next panel

volatile volatility strategies built into etf wrappers uh so john black a friend of ours over at nasdaq hosting this with jason have you ever heard of this guy, Corey Hofstein? No, I've heard he's really short in real life. Yeah. Short, not muscular. Pretty ugly. Paul Kim, co-founder and CEO of Simplify, and Noel Smith, manager we work with over at Convex AM, Convex Asset Management. So again, the title didn't quite match the discussion right they they touched on volatility but mainly it was just a discussion about the kind of nuts

and bolts of etfs it felt like um which paul in particular totally qualified to talk to uh was interesting noel was saying hey yeah i'm not sure why i was on that panel that's not really what i don't run an etf but he more than held his own in my opinion um with some good comments and even though they weren't totally in the etf realm and then cory volatility strategies and then yeah exactly cory and paul stuck to the built-in etf wrappers exactly right you were you're supposed to blend them not take them separately um and then yeah cory was cory started off with his probably you've heard it 17 times joke about i run the flirting with models podcast which the main comment is there's way too few flirting on

here there's no flirting on here what's going on um as well as some other good jokes that i can't remember at this time so yeah fireworks take it um so right away like you're talking it was more about the structure and where the trends have been in in etf products and how people are able to stuff derivatives into etfs and obviously both uh paul and cory are kind of at the vanguard of this and paul was talking about just to have a better regulatory environment than we've ever had for etfs and cory was reiterating part of that is like a lot of the new rules um have allowed for better derivative guidance so in the past it was just like you didn't it was a kind of a a gray area it was like i can put derivatives in there can i can't i and it was it was a mixed bag and there wasn't clear guidance but now there's pretty clear guidance with the bar rules and and what can and can't be in there and then the market makers i think is what um i don't have it maybe i don't have notes on this

but like i think that the market makers have gotten better and better too it's like as you have wolverine virtu citadel like their ability to make markets and more derivatives or exotic products has been um, they're creating tight spreads, everything. So everything dramatically improved with regulatory guidance, with better market makers. So it has really opened the door for a lot more interesting strategies going into ETFs. And Paul reiterated that by saying that he feels the exotic product trends are just beginning. He mentioned, you know, one of the things that I think,

I can't remember if they're working on it, or he said he could see people working on it. It's like an ensemble of QIS strategies. Like, so, you know, basically quantitative factor strategies are a way that could be put in there. But then, you know, Corey was talking about other things too, about, you know, Corey and I have talked about this many times privately as well. So I'm surprised I took notes on it.

Is that how many firms, like all the big firms are copycatting product? I mean, you've seen this a million times. I mean, how many people have called you guys up too? Or they're like, Hey, you see this product over here? How can we replicate it, but put this slight, you know, twist on it. And then we'll launch our similar product. And this is why you have like four to six products come to market at the same time. They're essentially doing the same things. And so there's just like this, this red ocean of competition in etfs right now and so if a big firm wants to copycat your product like good luck to you and so like cory was talking about is like if you don't have a clear path value add value prop and sales tech uh strategies distribution

etc to get to to billions of dollars um you might just get copycatted out of existence. And it's an incredibly, incredibly tough environment. And then I'll maybe tee you up for the next section is that Corey did mention that not every strategy is great for an ETF. So I'll start with the little caveat that just because it's an ETF doesn't make it tax free. So that would maybe tee you up for maybe strategies that aren't perfectly suited for an ETF. I'm going to put that one on hold for a second.

And just to your point, I had three things on Paul's comments. They were like, one, in terms of the leverage and the new rules, he was basically saying, you could put as much leverage as you want. He's like, he couldn't see a scenario where someone would want more leverage than what the rules allow you to do, right? So he's like, couldn't see a scenario where someone would want more leverage than what the rules allow you to do right so he's like 2x 3x all these things can totally fit inside the new rule

um and then in your terms of what cory's talking about of like too small i wrote down if you're too small you won't make it if you're too big you won't make it right so you're too small you can't get the scale you can't get the distribution you can't get the market makers to tighten the spread, you can't get all that going on, and you're not going to get a lot of assets. If you're too big, to your point, Vanguard, BlackRock, they're all going to see the strategy and try and copycat it, and then likely put you out of business because they're the big fish in the room. So that was interesting to me of like, okay, if I'm trying to get into this business, then how do I do it? I have to come in right at Goldilocks and be right in that middle lane, but not get any bigger, not get any smaller. And as you and I both know, you have to be 20 million just to break even, probably get to 100 million to even be able to pay your staff.

And so like, it is a really, really tough business. But they said about the regulatory environment being clear. I still don't understand the VAR rules. Clear to them. said about the regulatory environment being clear i i still don't understand the bar rules like yeah you can use like a 20-day look back for your var or then you can't exceed a certain uh standard deviation of your reference index but i'm like what's your reference index is it you or your firm where you get to make it up do you get to make it up like it was yeah it was still uh clear as mud to me as far as what the the specific var rules are especially if you had you know uh multiple trading strategies within a singular etf and i take it to understand like if or there's

like a safe harbor of use the s&p basically as the reference index and you can go basically two point something x over the s&p which is to his point of like do you do you really need any more of that yeah can you use like a bitcoin index and, you just can't exceed two and a half X, the VAR of a Bitcoin index? And then on the market makers and also what you were saying, okay, managed futures, trend following, maybe not necessarily the best thing for an ETF, which is what Corey was kind of leaning into as well. You're going to get, they roll the contracts, right? So you're getting income every year. So you don't get this long hold period that you get in the ETF. You're going to get a K1 most likely.

You're trading a bunch of different markets. Some markets can't even be held inside the ETF. So you have to put them through a Cayman blocker. The same thing happens at the mutual fund, but that creates a little less liquidity. And then what Paul touched on and touches in with this too, the more complex you get. So they were saying like, this is the new wave of ETFs. Everything's great. But at the same time, you want to say like, oh, I could do this and I could do that.

I could put these QIS drives. The more complex you get, the less ability that market maker, and we're saying these guys have done great, but the more complex it is, the less ability they have to actually make a market. And so just imagine you have some super complex ETF, the market maker's like, I'm going to make it a 2% wide spread. You're not going to get the day trading volume. You're not going to get the volume in there because no one wants to pay 2% going in, 2% going out. So that's an important concept there too of like, okay, it's not just have to be... And Paul was a little bit more on the like, we're just finding client fits.

It sounded like to me, right? Like we find client fits, things we think have a market and we launch those. I think Corey's a little more on the trading side of like, like okay i'm trying to find something that is a good quantitative model that i think works in the tiff wrapper and kind of if i build it they will come a little bit more um yeah yeah i think well there's several things in there like i think if you if you're doing much more vanilla indices like obviously they can make markets in those and then if you're doing pretty vanilla options they're getting much better can make markets in those. And then if you're doing pretty vanilla options, they're getting much better at making markets in those. But like you said, if you start talking about commodities going long, short and using any

of the implicit leverage or margin there, you have to put it in the Cayman blocker. As soon as you put it in the Cayman blocker, they can't really make a market on that, which is going to increase your spread. Where I think Paul may be hinting at that, what you're saying. And I've talked to Paul and Mike Green about this, is like, I've actually kind of come around to is like, if you stuffed it with a lot of product and a lot of more exotic products and a lot of things that are, you know, more complex, is I'm not sure that that spread is necessarily a terrible thing.

If people want to trade in and out, that spread's a terrible thing. But if people want to buy and hold for the long term i mean that spread that it's more just like a liquidity preference for having such complex products um stuffed inside of a single vehicle and i'm not necessarily sure that's a that's a terrible thing yeah like we're going with that of like yeah sure you've got patience but how else you're going to get into it right how else you're going to get access um the question there is okay do i is someone want to buy that if there's only 15 million in the etf because the traders and the market makers can't get in and out well it's another problem too like cory's saying it's like unless you have a clear path to billions like it's exceedingly difficult right and the more assets you have in there the tighter the

spreads they're able to make yeah and then so you mentioned it like part of that was also okay what am i doing with options inside of these etfs um And that's where Noel was coming in and basically like, yeah, I see the products out there, we saw in 2022, I'm buying this long vol, I'm buying this option trading strategy. Oh, it didn't make money in 22. When the market was down, why not? And then you got to go in the whole discussion. It was more of a gamma trade than a vega trade. It was vol didn't pop, which they were big on, right?

Tons of education education tons of education needed uh and go from there yeah i think that that issue is like caveat emptor you know is like everybody always brings it up but i'm not sure how many people dig into any etf i mean there's so many what you consider rather vanilla etfs or like a sector etf and then you don't realize like you have like chinese exposure in there or whatever like because nobody does the due diligence to actually do a look through what's in the ETF and like you know everybody always references like the they get the cabbie or whatever

those like I got our Uber driver I have great stock for you the XIV you know like didn't like realize but like so that that's kind of always going to happen so it's not as concerning for me but and then like you referenced, Noel was another one that brought up brought us right back to zero DTE. Right. And Zol said,

Noel was saying it's not scary trades every day. He does think it mutes like the close to close vol. Right. And you're not really noticing the intraday volatility. So he didn't see any systemic risk. But Paul kind of fired right back with he sees a potential for systemic air gaps so you might not call that systemic risk but um you know if everybody's kind of on one side of a trade or it's not quite evenly balanced you can see some air gap systemically across zero dte but then the question is does a an issue or blow up at zero dte does that have a systemic risk to the entire financial system those are two totally separate things right so they're kind of you know talking

past each other in a way noel was coming back mentioning xiv and be like the products are much better structured these days much more risk control everyone in the in the game including the market makers including the sponsors including, including the sponsors, including the trading advisor who came up with the model, is much more in tune to the actual risk there. We're bringing up how XIV was structured poorly, had basically a floor that if it went below, everyone knew it was going to get blown out. There was also, there's ways to ask questions at the end via the app or via QR code on screen. And one of the people asked Paul about Bitcoin, is there going to be a Bitcoin spot index?

And he said there'll probably be no spot BTC index for a while. And he just said, you know, until we get, once again, clear guidance, whether it's, you know, a commodity security, et cetera, he doesn't see anything in the near future for a spot btc etf and then one of the last comments paul made as they were talking about how to you know grow these firms or you know be a new entrant into etfs like you're saying too small or too big is that uh brands matter in asset management and so you're just speaking my language yeah so it's interesting how like people don't realize like yeah most most even finance is just is branding, you know, we want to talk about a Vanguard and Morgan Stanley, Charles Schwab, like a lot of it is branding. And that I think simplifies doing a great job with their branding there was some talk about it used to be first mover advantage, right?

Like, okay, I got an idea. I got the ticker. I launched the ETF. I got most of the assets. And then hopefully I survived the copycat scenario was the pattern. He's like, now it's become a lot more sophisticated and it's how is your model going to do? Do you have the branding that matches the model? Do you have the education that matches the model? Do you have the branding that matches the model? Do you have the education that matches the model? Do you have the commentary, monthly comment, everything, all those pieces? Does that match what the model is doing?

Is the model easily understood by the investor where they want to put more money into it? So that was interesting. Just like tickers. I think someone said up there, like tickers don't matter anymore, right? It used to be like, I've got the tail ticker or the puff ticker. I threw out two of Meb's tickers, but I'm sure there's another good one. I've simplified the CTA ticker for managed futures. I still think it matters personally, but that was interesting to hear them say it.

From here on out, it's going to be more Morningstar based of like, hey, there's three managed futures ETFs and you're going to pick the one who's performed best or who has the lowest risk or has the risk that matches best with you. Or, you know, it's going to come down to investor appetite and like, how does that match with what you're actually trying to do? Well, that's why they're preaching to the choir there, because that's what we're saying, too, is like you obviously, if you can get a great ticker, get it. And there's great ones out there like that are taken. But at the same time, it's it's education.

Right. And part of education is that that social media marketing, what we're doing right now, podcasts, webinars, et cetera. Like that's what Simplify and Newfound Research are both very good at. It's like it's about education. And as as Corey constantly point, I always say we're all just entertaining each other. Right. So like you said, if you have three copycat ETFs, you're going to go with whichever one you like to cut into their jib. And how do you do that? Well,

you do that through education and social media marketing and branding. So that's why I firmly believe in what Paul was saying about simplify. And that's how, you know, you try to have a more sticky customer base is because you put a face with a name, you educate, you help, you assist, you do everything you can to work symbiotically with the clients where historically, right, like those larger firms that just put out tickers and like stuffed them through their distribution chain. And there's no a person related to it. There's no education related to it.

There's no follow up. There's there's nothing. Yeah, I was in a meeting once with one of the ETF firms. They're telling me about the might have been triple inverse yen or something like that. And they're like, oh, it sat there for six years with $5 million in it. And then the yen had a big year or a big down year. And it was all of a sudden at the top of all these top 10 tables and $350 million or something came into it. So that's kind of that old school of like, yeah, just have the ticker, have it surviving. It's on the shelf. It's going to pop into a top 10 table

and a bunch of people are going to jump at it. This seems like a much more measured and smarter, personally, smarter approach of like, no, we actually want to get buy-in from the investors and not just rely on being on the top of a table. Although that'd be nice too. But that would just double it up. Cool, we have all the sticky money, all the good investors who understand what we're it up. Like, cool, we have all the sticky money,

all the good investors who understand what we're doing. And then boom, now we have all the hot money that's just chasing the latest return. Okay, we're breaking it there for part one. Remember, part two will be over on the Mutiny Investing Podcast. So make sure you go add that to your playlist and subscribe to that one and this one

so you get to hear part two. Thanks to Jason. Thanks to EQD for having us at the conference. Thanks to RCM for supporting the pod. And thanks to Jeff Berger for producing. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel.

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