The Derivative - Taming the Tails with LongTail Alpha’s Vineer Bhansali

Episode Date: March 11, 2021

Forget fat tails, left tails, even tall tales. We’re going into extracting value from long tails of the distribution on the pod in this episode. Vineer Bhansali is a 29-year industry veteran, previously at PIMCO, a Forbes columnist, author of four books on finance, and is currently the founder and CEO of longtail alpha. In today’s episode, we’re talking with Vineer about abstract physics = finance, what constitutes a tail event, negative yielding debt, identifying outlier risks, option-based trend following framework, bond temper tantrums, the start (& current work) of LongTail Alpha, is it the monetization is getting quicker = shorter lived or is it shorter lived = quicker monetization?, figuring out the known unknowns of market nature, and including asset prices in inflation. Chapters: 00:00-02:23=Intro 02:24-17:33=Physics to Finance & Risky Recreation 17:34-35:06=Action in the Tails 35:07-42:09=Monetization 42:10-58:38=Negative Yield & Debt – How it Could End 58:39-01:12:06=Inflation Protection & Identifying Future Tail Events 01:12:07-01:01:18:23=Favorites Follow along with Vineer on Twitter and check out LongTail Alpha’s strategies here. Buy Vineer’s books here. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

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

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. They're smart people and, you know, like the proverbial, you know, different blind people looking at the elephant. Everybody looks at it and, you know, somebody sees the tail, somebody sees the trunk, and they report upon what they're seeing seeing but they don't report on the whole big thing that this is an elephant and this is a great example where the you know the team who is very smart have a lot of respect for them they wrote it based on a very simple metric which was they looked at implied volatility of the vix or the vix versus the implied realized volatility of the s&p 500. And that's one metric, and that metric is not a very good metric for tail risk

because the VIX is not a metric of volatility. The VIX is a metric of the full distribution of option, including the tails. And it varies more than volatility, right? Exactly. So you can't compare that. And secondly, if implied and to realize ratio or differential was the only thing that mattered for identifying richness and cheapness, then you could basically sell options on everything because implied volatility always trades higher than the implied. Always train hard. Listeners, get ready to buckle down to learn about tails, trend following, and trying to protect against the second leg down, because today's guests have become one of the top voices on these topics.

We're welcoming Vaneer Bensali to our pod today. Vaneer is a 29-year industry veteran, formerly of a little shop called PIMCO, Forbes columnist, author of four books on finance, and is currently the founder and CIO of Longtail Alpha. So we're excited to be sharing all his knowledge with our listeners. Thanks again for joining us, Vaneer. Thank you for having me, Jeff. We were just talking offline that you have this nice warm sunshine glow on you from Newport Beach Beach while the rest of the country's in a deep freeze. Do you feel guilty or you're fine with it? I've just gotten used to it. I get, after the market close, I get to look out and enjoy the sunshine. A little bit guilty, I guess, yeah.

No, don't. We all want to be you. Except in Chicago here, we say, okay, we have all the snow and the cold, but we don't have natural disasters. So we have pension disasters, but not natural disasters. So we try and justify it that way. And so Newport Beach, that's about halfway between LA and San Diego. How long have you been there? The firm has always been there? PIMCO was obviously there. Yeah, so PIMCO is only one or two blocks away and I moved here

in 2000 from New York. So yeah, I've been close to 20 years now, a little over 20 years. There you go. And where were you in New York and before New York? So yeah, so before New York, obviously Long Tail Alpha, my current firm has been around for almost six years now. I was at PIMCO for about 16 years. Before that, I was on Wall Street in New York at Credit Suisse, First Boston, proprietary trading for one year. Solomon Brothers, Arbitrage Group, the group that followed the Liar Spoker book episodes. So I was in that group, bond trading, fixed income bond trading.

With Merriweather? John Merriweather? Oh, well, yeah. So Merriweather was actually in the main part of Salomon. He was one of the, I never saw him. I never knew him because, you know, he he was very senior he had left by the time I got to the prop desk and he had already they had already left and started LTCM by that time so I got in the group that kind of took over from Merriweather and his team in the prop team

and then right before that I was a Citank. I was there for a few years, four or five years, trading exotic options. And before that, I knew nothing about finance. And I had finished my PhD in theoretical physics at Harvard. Wow. Okay. What was the trick to get you from theoretical physics to finance? So there was no trick. I remember when I was finishing my PhD, I got a couple of calls. This was now, gosh, I'm going to date myself, but back in the late 80s, early 90s, and every Wall Street firm was looking for physicists and mathematicians to come and work on their research team or their trading team to trade exotics and hybrid options

and things that required a lot of math and simulations and yeah i just got a call out of the blue and um from goldman sachs and i went and i interviewed and i was sitting across uh from this elderly gentleman who was taking a lot of notes and he told me that he was also a physicist and i could read his handwriting upside down. Basically said that, you know, he's very good at math, but knows absolutely no finance, et cetera. And I came back and I told my roommate who was an economist that I had this interview with Goldman Sachs.

And there was this gentleman by the name of Fisher Black. Does he know Fisher? Wow. Of course, I got a job offer in the Fisher Black research team. I did not take it. I went and ended up working at Citibank instead because from my perspective, I was only going to be there for six months to a year

before I became a postdoc in physics. Yeah. Here I am 30 something odd years later, I'm still doing it. You ever wish you'd like stuck with physics and were doing like string theory and stuff? So I did do that. And that was kind of my research was somewhat related to string theory and very abstract. That's about as far deep as I go on it, of knowing the name of it.

Yeah. No, I mean, no, not really. I think, you know, I keep in touch with my colleagues, a number of whom are professors at various universities. My old faculty advisor who, you know, believe it or not, when I was at PIMCO, he came and worked with us in finance and the two of us ended up writing a book

on fixed income. So a physicist writing a book on finance and a finance person from physics. Yeah, it's all a big hodgepodge. I get enough of physics going to Caltech and, you know, sitting in the presentations and seminars and being on the department chair's committee and all that, I don't need to do that as a job anymore because that's primarily

publishing papers to essentially hold on to your job. Unless you want to become like Neil DeGrasse Tyson and make a personality out of it, right? Exactly. And yep, that's right. You like him? I kind of like him. I do like him, yeah. And my own personality is more suited to rapid experimentation and feedback from the markets. And so I think accidentally, certainly accidentally for me,

I found something that I enjoy doing and have been enjoying for 30 odd years. Yeah, physics, you might have to wait several millennia before some of your hypotheses would pan out. Exactly. Yeah. So talk to me a little bit about PIMCO. So were you, did you run across Bill Groves? Or what was the what was the scene like back then? Oh, sure. Absolutely. I mean, Bill was actually one of the main reasons when Solomon Brothers was getting shut down or actually maybe before it got shut down but we had inklings. This was back in 1999-2000. I was at Credit Suisse and I'd already started speaking with PIMCO and

the main reason I started speaking with PIMCO was because of Bill. Other than Salomon Brothers Bond Group, I thought PIMCO and Bill were basically the place to be for fixed income. So I did get interviewed by Bill. I did manage to get hired and I did co-manage some portfolios with Bill and Bill and I worked together for 15 years. And from my perspective, he is one of the greatest investors. And, you know, despite what you might have heard or read, I always had extremely good interactions with him. And like all my other PIMCO friends, he is still a good friend.

And I have nothing but admiration and respect for him. And he's quite an amazing investor. Yeah, I feel bad from the last thing we've heard of him was that video of him in his backyard or whatever with the neighbor. I don't know what was going on there. We'll leave that be. Cool. So then you're at PIMCO and decide, OK, I want to break out on my own. I want to do my own thing. How did that come about? So I've been doing it for many years. You know, I was lucky enough back in 07, 08, I was running already for a few years at tail risk related portfolio.

And in 07, 08 crisis, that portfolio did extremely well for clients. We had a number of large public pensions and other investors. And that kind of put tail risk hedging for us, at least on the map. And that business grew very rapidly. And I got the opportunity to start a number of other quantitative strategies at PIMCO, including trend following that we'll talk about and some other systematic strategies. So I grew that business. It was a small but quite successful business. And then somewhere, I guess, towards the end of 2014, 2015, after Bill had left, it sort of became obvious that it would be very hard for me to kind of keep doing what I wanted to do in that direction. And at the same time, it seemed to me that volatility had gotten to a very low level

and the markets were being set up effectively for some large tail type of moves, which seemed like the right time for me to actually spin out and start my own business. 100 or maybe 200 yards away from PIMCO, Long Tail Alpha exists. And we're a small firm and we've been able to kind of, you know, translate some of these ideas into practical things.

Awesome. So that was six years ago. So you were a little early on the tail thing, right? Yeah. So in those first years where you're like, oh, no, what have I done? We might be low volatility for the rest of my life. Yeah, certainly 2017 and 2018 felt like that. But, you know, I've been in the business long enough and I know the cycles and I've read enough history to know that low volatility breeds its own insecurity.

And I've written a number of papers on this topic on how when you're faced with humans, faced with a certain type of economic condition, it goes in large cycles. And I'd like to say we were early, but at the same time, the timing was very good because it gave us a couple of years to build a framework, build a team out, build infrastructure, the software, the relationships and all that. So from being able to be in the markets at the right time, fortunately, it worked out very well for us, that timing, that little bit of delay. And then I was listening to you on med favors podcast and you're a snowboarder yeah so i am not you know i didn't start until much later because i grew up in the

desert i started fairly late in life but but i love the sport and i've been doing it and i've been doing a lot of backcountry stuff actually i just came back from a uh snow camping overnight snow camping trip where you camp on snow and make shelter in the snow and all that primarily for survival reasons and before that an avalanche course and so i've been doing a lot of backcountry you know what they call skinning yeah um and i found a group of uh other people who also enjoy it so uh yeah so start a volatility trader slash skier conference or something. We need a trend following one where a couple of guys would go out every year. Yeah.

Yeah. Where's your favorite place? Do you go out to Mammoth Lot there in California? Yeah, you nailed it. It's very close to us. As a matter of fact, I'm heading out tomorrow afternoon. Nice. I know the place very well.

I know the mountains. I have a number of fact, I'm heading out tomorrow afternoon. And I know the place very well. I know the mountain. I have a number of friends who live there. I have a number of guides slash professionals who live there. So I know the mountain very well. I like the space and it's very close. So yes, that is indeed my favorite place. We just tried, came back from Taos, New Mexico. I'd never been there before.

It was, it's like a skier's mountain. Not a lot of frills, not a lot of, um, fancy stuff, but it was fun. Um, and so how do you square like your whole business, your whole career is built on like identifying outlier risk. And to me, you're like out there in the back country where there's huge outlier risk, right? It's like your personal life doesn't match up with the professional life or you, you think you can control the, the avalanche risk and whatnot. Yeah, that's an excellent, excellent question. So, you know, I have a couple of other hobbies slash activities.

Also, I'm a pilot. I'm rated as an ATP airline transport pilot, which is in the U.S. the highest rating. And I also run ultra ultra marathons, 100 mile races, and so on. And, you know, each one of those things, you can ask the same question is, you know, are you taking risks that you might not be able to manage? And how does that kind of square with how we manage financial portfolios? And I wrote a paper on this also in this topic about four or five years ago. I think it's a matter of quantification. I mean, none of these things are exactly quantifiable,

but you can certainly get a better idea of what the hazards are present in any of these activities. And by following a process, by following a process by following you know a disciplined approach you can actually not eliminate certainly but you can mitigate a lot of those risks and you know coming back to avalanche terrain uh there's experts there you know bruce tremper out of colorado is one of them but there are people who spend their whole lives and careers thinking about avalanche risk and you know looking at the slopes and the aspect and the and the wind and the conditions and the weather and new snowfall again it's not 100 just like in financial markets nothing is 100 predictable but

you can you know handicap and you can start placing odds, same thing with running long distances, same thing with aviation. As long as you follow general safety guidelines, there's no guarantee that you're going to be safe, but you have a better likelihood of avoiding putting yourself into a bad situation. So certainly I think a lot of those perils very naturally take over to what we do here.

Yeah, and my guess is there's not many unknowns, right? There's known unknowns of what if this avalanche triggers or that, but I know that that's an issue. Versus in the markets or whatnot, there's unknown unknowns you have to protect against and can't be outright shortfall or something like that, right? Yeah, and it is true. I mean, again, market and in nature, I think the limit of what we actually know, I mean, it's very limited of what we actually and what we not know. So a high degree of humility, obviously, is always warranted. And, you know, the markets additionally are more complicated because it's not just nature.

Nature is somewhat predictable. As a physicist, I can say that there are certain equations and certain conditions that you can replicate in the lab that are likely to hold true. In financial markets, that all goes out the window because financial markets are made out of individuals. And individuals, I mean, there's some predictability, but at the same time, environmental conditions can be completely different. Right now, we're in an environment of 20-odd trillion bonds trading

and negative yields, which has never happened before. That's not something that you can replicate in a lab. So I think financial markets are definitely even more complex. The avalanche isn't going to go up slow, right? In financial markets, it could go up the mountain.

Exactly. Give us the 30,000 foot view of what Long Tail Alpha does, the elevator pitch, if you will, and how you... Yeah, so what we do here is we provide a set of diversifying strategies. And we are market agnostic. It's not focused on just downside or upside. But we think of our strategies as those that can result in better portfolio construction. So whether something like a better cash management strategy or better options-based strategy or better trend following strategy. And we think of all of these things in one unified fashion.

So what we're trying to do is try to create optionality for investors without necessarily having to just buy options. Optionality comes in many different ways. Having cash is optionality. Trend following has optionality. You might think of fixed income as having optionality. You can think of the whole thing in one unified framework. And I've been working on this for the good part of two decades.

And essentially what Long Tail Alpha does is brings this portfolio of option-like strategies to large investors and small investors at the same time. And so from outside looking in, Long Tail Alpha, do you sometimes get put in the long volatility bucket and you're saying, hey, we sort of are that, but we're more absolute return as well? So we have one strategy that's primarily absolute return, but other strategies are dedicated towards long ball, whether on the left side or the right side. And yes, you're exactly right. The name was chosen to remind ourselves, to remind me primarily that we are a

long tail provider. There's a lot of providers with short tails and shorting volatility and so on. And they're doing a great job, many of them. Some of them aren't. We're not that. So we do something specifically, I believe, that people need that might not exist, which is providing exposure to uncertainty,

especially on the tails. And the tails, to to me are very different than just being long wall and that's why we call it long tail and not long wall yeah yeah and so and when i hear long tail i think of like google search and you know long tail keywords like is there any parallel there between like i'm trying to get the right there's too much competition in the if i google snowboards right if i'm a snowboard maker and i'm trying to get the right. There's too much competition in the, if I Google snowboards, right. If I'm a snowboard maker and I'm trying to compete for that keyword, it's too expensive. If I'm way out there at like racing, snowboard,

mammoth, California, whatever, there's a way out there on the, I don't know which tail that would be, but it's out there on a tail and you can better compete there. Is there any bit of that? Or it's more of like when the market creates the tails? No, I think it's both elements but elements of both so certainly you know the word long tail is not something that i invented it yeah it's been around i think it was used in a wired magazine article in a different context which is you know we're evolving into a world and i think certainly you saw it with the whole robin hood game stop episode recently, where these so-called rare events that happen only very infrequently are becoming more central.

And they can happen just to count the number of those events is so large that these rare events, which probabilistically are in that fat right or fat left tail, that shouldn happen are becoming more commonplace and and I think you know in the Wired article they talked about how the future of marketing and the future of sales which is maybe the second part of the question is to not just provide the stuff that's in the middle which everybody can do and it's commoditized but the things that actually are consequential and that matter that are in one of the two extremes. But there's real value added when you want a specific edition of a specific book from a specific writer and only two volumes exist. Yeah. You're in high demand. You know, on a bookshelf seller, but you can go to Amazon and they'll find it for you.

So I think that is really part of the concept that we are trying to provide this completion to investors' portfolios that is very traditionally been very hard to get. And talk for a second, you mentioned that these have become more frequent, these action in the tails, but my whole career in managed futures trend following the last 10 years, not so much, right. There haven't been the outlier moves that trend following classic trend following is needed mainly because lack of moves and currencies and bonds. So how do you, how do you, what's your thoughts on that? Either they are becoming more prevalent or they're,

why aren't they being more prevalent in the trend following space? And then I'll tack onto that later of like, well, you answer that one, then we'll come back to my segment. Yeah. So, I mean, you know, the Jeff and you know, you've done trend following and researched it. So trend following is primarily, it's basically a long option strategy. It was a classic paper by Fung and Shea back in the early nineties that

looked at explaining the performance of trend followers, and they correlated it to basically being long and option straddle. So trend following behaves, acts like a long ball position, and it does it primarily through using futures contracts. So the rules of a option-based trend follower, options framework-based trend follower can be boiled down to something like a delta hedging replication rules. Now, the problem is that for trend following futures or with linear instruments to really work, the markets have to be able to continue moving in a particular direction. The trends have to be allowed to continue. Mean reversion has to be allowed to break down. And in the last decade, at least,

or maybe the last 15 years, we have had a force, the force primarily being the central banks and the need for yield that has basically curtailed the extent to which markets are allowed to move. Governments have become very powerful in currencies. There's been a lot of intervention in rates. As we all know, there's been a lot of intervention in rates. As we all know, there's been a lot of intervention. And so you've kind of bottled up this pent-up demand for trends into a very tight little central part of the distribution. And the natural outcome of that is that you're going to get,

just like a petulant child, if you tell them they can't do something, they'll start doing something else that will be even more annoying. I think what you're going to see is more little bursts here and there because the markets are not allowing, are being allowed to move to what is their natural equilibrium point because they're overly controlled. And I think at some point, the ammunition that the, whether the central banks have or the governments have, it runs out. And at that point, these trends start up again. And, you know, you and I both know trend following isn't new. It has been around for three, four, 500 years. People have done historical analysis going back a thousand years. And there's always decades. That one one you got to send me that one. A couple of French researchers who've gone back and very painstakingly collected data from grain markets and so on back in Shakespeare in England and so on. And what they've said is effectively this exists.

Momentum exists. Momentum has always existed because behavioral biases following past history exists in human psyches and behavior the bottom line is you know for a strategy like this that has been around for a very long period of time there have been decades maybe multiple decades where it hasn't done well for whatever reason but then it comes right back and when it's doing well there's a lot of crowding people come in and the crowds you know maybe three four years ago it was everybody's favorite strategy and then suddenly fell out of fashion and nobody wants to do it because performance hasn't been good so it's going to

result in now it's doing good last four months yeah exactly reminds me of a trans trend that was like six years ago maybe they wrote a nice paper and they were saying taller heads and fatter tails. So I was imagining right there, squeezing the distribution, pushing the head up. But where is that going to go? It has to go somewhere. So it's going to pop up. Exactly. We're squeezing that head.

It's popping up. We just haven't seen the tails pop up yet. Yeah. I mean, this is very Minsky, you know, Minsky economy. Low volatility generates fatter tails. Low volatility, fatter tails are exactly alike. And that's, I'm glad we're having this discussion because to me, volatility, which is standard deviation, is extremely different than the tails. These are different beasts. What's happening in the tails, it's like

saying my automobile insurance and my catastrophic earthquake insurance are the same thing. They're not, they're different things because one is about ensuring day-to-day fluctuations. The other one is ensuring ruin, right? Yeah. Right. We all, yeah yeah so those often get conflated right of like oh i'm getting this tail product so i can protect against volatility but not necessarily the case i don't know right today we're down two and a half percent when we're recording this or something um vix was up slightly but a lot of people will be like oh did your tail hedge pay off today like well not really this wasn't really a tail event but uh and that comes back to me with managed futures were sold there for a time i might be guilty of some of it of like crisis period performance tail hedge right

that they're going to perform and then the next crises which were short-lived but you know 2012 2018 2020 to an extent they didn't deliver so yeah to me it's like how do you do you still believe in trend following will be a tail hedge but it's a it's a much bigger and longer term tail i guess yeah i think that's exactly the way to put it right so so you can't just say there's only one tool that some people say trend following is the only tool for aging some people will say options are the only tool some will say trend following is the only tool for agitators. Some people will say options are the only tool. Some people will say cash is the only tool. The way we think about it, these are different tools

for different depths of movements in the market and for different extents or length of time. So trend following works beautifully if you have a deep sell-off which lasts for a few months, like 08, 09. Cash works beautifully if you have a deep sell-off, which lasts for a few months, like 08, 09. Cash works beautifully if you have defaults. Lehman bears turn crisis because then you need cash. And optionality works extremely well, like we saw in 1987. We saw back in February of last year, and we saw in the melt-up

because optionality delivers very well in short periods of time. So there's been a lot of academics and maybe a lot of self-serving industry participants who've said, well, trend following is better than XYZ or duration is better than trend following, et cetera, et cetera. We take a very democratic approach and we just wrote a paper in the Journal of Portfolio Management coming out. It's called diversifying divers right? The whole point is don't try to be too cute and say, you know, do only one thing, do everything. You're trying to protect your portfolio. Why wouldn't you use all the levers? And what we actually demonstrate in that paper is that

even if you didn't follow an optimization rule, but just did all four or five of these things, having cash, having trend following, having some duration, having tail risk hedging, and just ran a back test from the mid-80s, early 90s to today, the silly equal weighted rule actually did almost as well than a perfectly cherry-picked hindsight, perfect optimized portfolio. And that just tells you that markets change, things change, and trend following might not have done well in three out of the four crises, but that doesn't make you should throw it out. It's still a very good thing for the next crisis, potentially,

if it's long, long enough. And so is that your guys' kind of mantra, go anywhere, tail hedging? So would you be at one point like 80 percent trend following or 80 percent options will you dynamically shift back and forth like that yeah so that's a great question so we have individual strategies for individual folks who want to talk you know just do options based or just do trend or just do duration or just do cash but then we also have commingled strategies where we can combine them, where we can combine it either based on an investor's idea

of what the allocation should be or them giving us the degree of freedom to say this is how much you should do based on market signals. So that's what we do in one of our main flagship strategies. And so talk through that a little bit of like, what was it like in April, May, right? When the option prices are through the roof, trend following is getting whips out, like what's the answer there?

Just cash? No, so you do all four. So this is a great question because you can never, just like you would never put your eggs in one basket when you're thinking about building a stock portfolio or a bond portfolio, you diversify across these four strategies. So the way we look at it is say, what is the implied option premium, whether it's duration. Duration is an implied option premium because when you buy a treasury, you're giving up something else. You're giving up the opportunity to buy credit or equities or whatever, right? So that's an implied option. And what's the most you can get?

If the equity market goes down 40%, you know, treasuries could go down 150 basis points. How much would you make? So that's a trade-off between price return versus implied premium. So you can think of every single asset in those same terms and say, well, how much does a short-dated equity index option give you? Or how much does trend following the premium is your whipsaw risk? And your payoff is a deep protracted sell-off. So once you build that framework and you say, well, what's my best strategy? My best strategy is, well, where do I?

Well, the combination of these four is that I get the most, right? So just like an optimizer would never say don't do anything or do zero. Same thing here. You can always do something of each one of these four strategies or five strategies. But how do you scale them up and down depends on the market and the pricing and all that. And I was just, we're having this debate internally on some portfolio work of, if the future's unknown, how do you weight that, right? So you, I mean, you can know

what you're going to spend on the premium. I guess that's how you would answer that. But the future's unknown. You don't know whether each bucket's going to be outperformance pass, underperformance pass. So it seems like a do no harm approach would be just equal weight, right? Well, yeah. And the other thing you can do,

one very powerful thing that investors ignore in my view is not thinking at the level of their own portfolio. So if I have zero, let's say I have zero equities and I have all in cash, then I don't need a tail hedge because I am already all in cash. I have 100% then I need it. So the minute you recast the problem and think in terms of what am I worried about? What am I trying to protect against? The solution provides itself in a matter of time, right? If you're a retiree, let's say, and you can't afford,

you're going to retire, you can't afford to lose a lot of your, right? If you're a retiree, let's say, and you can't afford, you're going to retire, you can't afford to lose a lot of your wealth, then you better have some tail risk hedging with some sort of explicit option because you don't have the time to wait for current falling to tail.

So depending on your environment and what your own portfolio posture is, a certain kind of mix makes sense. And that's how what we advise people that there's no one solution for everybody even though the future is unknown there is a better strategy and a worse strategy because of your own initial conditions in your own portfolio yeah um and so coming back to that march even so even then when everything seems expensive in terms of tail hedging, you're still saying we have to have at least a minimum on in case,

in case it continues down in case there's a second, third leg down. Exactly. And the way we think about it is that very, you know, qualitatively and quantitatively that you, nobody knows the future. So, so what am I willing to pay today for having a protection on, which is very expensive now? So we've taken some protection off. We've redeployed it into the markets. Now we're sitting there and saying, okay, we've got a lot more risk on. Now, what am I comfortable at my portfolio level? What kind of stress shock can I bear from here on? And how much am I willing to spend? And I have a number of choices. I can de-risk and go into cash.

I can increase my risk by some more options. I can diversify as long as I believe the diversification is dependable, which sometimes it isn't like today, it was not. So how do you actually square all that stuff? And yes, exactly right. So even though we did a lot of monetization in February and March,

and we wrote a paper on this topic, we still had a fair amount of money in the portfolio with explicit option hedges that lost money subsequently as the markets rebounded. But that's okay because the underlying portfolio that they were combined with made a lot of money. Right. It's allowed you to put more into the underlying portfolio. Exactly.

So you mentioned the monetization paper. I think I asked the question, I don't know if I was in person or anonymously on the EQD conference of like essentially your paper. And I admit I didn't read the whole of like, essentially your paper, and I admit, I didn't read the whole thing, but essentially your paper saying, Hey, if you monetize more quickly, is that correct?

Way oversimplifying it. But essentially, if I monetize more quickly, my thought was, if everyone starts doing this becomes a self-fulfilling prophecy, and each vol spike will get shorter and shorter live, which is sort of what we're seeing in like over the last five, six years. Right. So what are your thoughts on that? Of like, are people, which one's feeding which? Is it the monetization is getting quicker and that's what's causing the shorter live things? Or is it because they're shorter live that monetization is getting quicker?

Yeah. So our recommendation, just to be very clear, is not that you should monetize quickly or slowly. Our recommendation in the paper is some monetization is better than no monetization. And that's simply because once the value of an option rises a lot, its time decay becomes very, very painful to bear and pernicious and so on. So you can do better than to stay in that option. You can restrike and move and monetize or take it. Okay. So that's the first part of the question. Some monetization is better than to stay in that option. You can restrike and move and monetize or take it. Okay. So that's the first part of the question is that some monetization is better than others. We have some rules, some discretion and so on. But the second part of your question is the more interesting one is how is it impacting the market? So it's absolutely true that with the

central banks kind of coming in and protecting and giving a put, so to speak, to the markets, it has encouraged people to monetize more frequently. And it has been rewarded because monetizing allows them to then play off this implicit put that the central banks have provided. Now, the question is, will history keep repeating or not? And I'm not so sure if it'll keep repeating. So it's anybody's guess whether more frequent and quicker monetization is going to be better going forward. Maybe the next time we get hit with a market sell-off, we'll look back and we'll say, we should have waited to monetize. So anyway, so yeah, so I think.

But I think the basis was make sure you have a plan essentially, right? Like have some rules in place because there's no way you're going to top ticket. If you're going to wait for it to feel right to get back out, it's going to erode right away from you. Exactly. And so you're thinking the shorter and shorter duration of vol spikes is due to that ever-increasing Fed put, ignoring people monetizing? Well, they're both, right? So in one paper that I wrote with Larry Harris on short vol strategies,

everybody's doing it, I think people have been rewarded until very recently for selling volatility. And monetization is one way of shorting volatility. The Fed put is a way of selling volatility. Even trend following is, in the portfolio construction, is shorting volatility. High-frequency bid offer has some component of that. Buying credit has short volatility. So there's an ecosystem that exists where selling volatility gets rewarded and has been rewarded over and over and over again. And what we're seeing in the last decade or so is just a manifestation of the fact that faster monetization, i.e. selling options as soon as options spikes happen, is more rewarding.

But that's past history. Yeah. We don't know if the future is still going to look like, I mean, if you have a massive inflationary episode and the Fed cannot protect the markets by buying treasuries, and let's say they have to wait for some sort of approval before they can buy stocks, which I think they're going to end up having to do at some point if you have a massive meltdown. I mean, they came very close to it because they started buying corporate bonds, which are just a cousin of buying stocks. So between here and there, meaning between the stock market sell off and the central banks buying stocks directly, you might have a very massive spike that does not fade. But people have been conditioned.

I mean, the wall, the street writes papers. And there were a few just in the last few days saying how, you know, the VIX should be shorted and so on and so forth. I'm not sure I buy into all of that stuff. I was going to ask you about it. Was the JP Morgan paper, like the VIX is the asset bubble because it hasn't come back down so yeah no look I mean there's there's smart people and you know like the proverbial you know different blind people looking at the elephant everybody looks at it and you know somebody sees the tail somebody sees the

trunk and they report upon what they're seeing but they don't report on the whole big thing that this is an elephant and there's a great example where the team who is very smart, I have a lot of respect for them, they wrote it based on a very simple metric which was they looked at implied volatility of the VIX or the VIX versus the implied realized volatility of the S&P 500 and that's one metric. And that metric is not a very good metric for tail risk because the VIX is not a metric of volatility. The VIX is a metric of the full distribution of option, including the tails.

And you can't compare. And variance more than volatility, right? Exactly. So you can't compare that. And secondly, you know, if implied to realize ratio or differential was the only thing that mattered for identifying richness and cheapness, then you could basically, you know, sell options and everything because implied volatility always trades higher than realized. Yeah. Which a lot of people think is a good strategy right until until it isn't

um but is that also saying like hey maybe this is needed right so for this big institutional vol selling to come back in and to make these tail hedges cheaper i mean i'm speaking for people in the long volatility space you and i have like sure promote that get people to come in and sell vol because we want to buy it more cheaply, right? So maybe it's net-net a good thing for the world. Yeah, I think that's a very important point, Jeff. I mean, there's option buyers and option sellers. And I don't think either one of them can always be correct and is absolutely correct.

So long vol and short vol is not absolutely correct. I think you have to have a balance in your portfolio. Some things, like when you buy equities, you're short ball. When you buy corporate credit, you're short ball. And you balance it with something that doesn't take you out on a stretcher when the bad stuff happens.

See, every portfolio, very simplistically, again, after doing this for 30 something odd years, every portfolio is just a combination of short optionality and long optionality and you just got so let's get back to negative yielding debt um so 17 trillion what's it at now is that the number you mentioned yeah it's probably 17. I have a book coming out with the CFA Institute, a monograph they asked me to write

on negatively yielding markets. And I'm hoping the due date is next week. And I'm just hoping that it stays negative for a little while more so I can get the book published. But yeah, it was 25 trillion when I wrote the last version of the book last week. And I think it's closer to about 19 trillion right now. It's a book or a paper? It's a monograph. It's a book.

It's a whole monograph. They call it monograph for the CFA Institute, CFA Research Institute. Got it. So let's talk. Why is it bad? It sounds bad, but why is it bad? Negative yielding debt. Yeah, again, so I should say, you know, I have my views. I don't know if I can say absolutely it's bad or it's good, but I can say it has consequences, right? So just like going on a beautiful,

sunny slope right after eight feet of powder, like we just got in Mammoth last, you know, two weeks ago, is, you know, it's not bad or good. It's just dangerous. eight feet of powder like we just got in Mammoth last two weeks ago is not bad or good, it's just dangerous. I think it's very good when you're on it and nothing happens but if it happens you're dead. So it's the same kind of thing with negative yields is that the whole financial system is levered to negative yields. The negative yield effects have gotten exported around the world, especially from Europe, where, I mean,

they have resorted to cure for a bigger problem, then they create a bigger problem, then they've reverted to another cure. For instance, the banks were losing a lot of money because of negative yields because they had to deposit at the ECB at negative rates. So they had to give the banks a freebie where they said, if you make some loans, you can borrow money at negative one. And you deposited at negative 50 basis points.

So you can see how funny it gets, right? When like you are, you're borrowing it more negative and you're depositing it slightly and that's negative. So you have a positive. So there's a lot of bizarre things that are happening in the system where the full, the market has gotten levered up and very simply mathematically, the discount factor is a function of interest rates. And if you think about the discount factor as inverse of the rate, one over one plus R to whatever power,

if R goes negative, both goes below zero, the discount factor grows. Effectively, all asset values get bid up above their fair value. It's like instead of getting a guaranteed par in the future, I

would prefer to get 1.05. Which we're not seeing any of that, are we? Yeah. You have taken a huge amount of future cash flows and accelerated it to today because of this negative yield effect. And that's part of the reason why growth has done well. NASDAQ has done way better better than value because in this very perverse world, you prefer to have $1 30 years from now than $1 tomorrow. Yeah. Well, I've read some stuff on that is that's a demographic issue that people literally have enough stuff. So they want the $1 30 years from now versus today. Yeah. There's some element of that. There's some element of that, there's some element of

insurance, there's some element of public pensions and insurers having to buy it because they're required for liability hedging. There's speculations in my monograph or actually the paper that has already been published on this topic. I'm happy to send that to you. I list about eight or nine different reasons on why, even though though the sellers i.e. the issuers are issuing it you know negative debt Italy Greece right I mean countries that are technically in a lot of trouble yeah are getting away with basically getting paid to borrow why does the buyer of the debt actually part with money for sure. Why would you absolutely say, here, take my money and I'll pay you interest? That's because there's a lot of institutional reasons why they've been forced to do it.

And it feels, if I asked my nine-year-old daughter, like, hey, I'm going to, I have all this money, I'm going to give it to someone to watch for five years, and then they're going to give it back to me. And I asked her, do you think I should pay them or they should pay me for that? She'd probably say, right? Like, no, if they're watching your money, you should pay them something to watch it. So that's the justification. That's the insurance justification. Yeah. We're giving it to the German Bundesbank or the ECB or whoever it is now,

because we know that five years from now, we need that cash back. Right. So that's a great, excellent, excellent point. And I will absolutely buy that as an alternative hypothesis. But let's say it was a double B rated corporate issuer. And so you are going to give it to a person who has every incentive to default and not give your money back. So tell that to your daughter. I'm going to give it to a person who has every incentive to default and not give your money back. So tell that to your daughter. I'm going to give it to that person on the street and I'm pretty sure he's not going to give me my dollar back. Or my 95 cents back. Yeah. He might give me zero back. Should I still pay him? So that's what is a counter example to your example is because there's a lot of corporate issuers with you know not junk but really bad

ratings and they have no ability and incentive to pay you back right then you could even go into the individual euro countries that could right are triple b i don't know what their actual ratings are but they're not the strongest in prince yeah yeah what about the collateral argument right of like sure but i all these new rules and i need collateral and if i'm a prop firm and i got to Yeah. Yeah. What about the collateral argument? Right. I'm like, sure. But all these new rules and I need collateral. And if I'm a prop firm and I got to put up five hundred million dollars, I don't care if I have to pay something on that because I'm making 10 percent on that capital or whatever. Exactly. So that's another one of the reasons that I listed in my in the monograph is that negatively yielding German Bund has a collateral recycling effect because you can put more money against it. But then your question is, why

are, again, corporate bonds trading at negative? They don't have the collateral effect. Or Greece. And that's because many central banks, including the ECB, have bought up many multiples of the net corporate and government bond supply. They have to suck it out of the

market. And there was a beautiful paper by actually ECB researchers who showed that the bonds that are eligible, corporate bonds that are eligible versus non-eligible, they have a massive yield differential. Really? Yes. So the market- Did the workers get fired or they still work there? Well, I think, I don't know. I don't know. I like that. Like you're sticking it to the ground. So what's your view on how this all ends? So my view is that... Or how it could end. Yeah, I don't know if you know. It could end. I mean, it could continue forever because, you know, when the government's in play, they can keep printing money and keep it yield negative. Japan's done that for a long time, so it can continue. But I think that's for the survival of capitalism, the way we have known it in the long run, that this cannot persist, which means I think it starts with a cascade, not unlike the one we've seen in the last week in the U.S. bond market, which then creates a sequence of second order effects, you know, like mortgage convexity hedging and maybe equity selling off like they did today. And then corporate bond spreads widening out, mortgage spreads widen out etc etc etc and it results in a sharp correction perhaps of some sort

if it is not stopped my my central case is that at some correction you're saying yeah or any economic correction all the above And well, asset correction for sure. And if the asset correction is not then stopped very aggressively by the government, because they're the only game in town. By just having more negative yielding debt, that's where it gets into the crazy cycle, right? There you go. And at some point, if it doesn't get stopped for whatever limits and reasons, then it could be very ugly.

And we could deflate it. What are the ways out of it without it being ugly? So the easy way, the soft landing way of this huge amount of debt that developed countries have incurred, which they have to now work off, is one is to keep rates low and negative so they can just work it off because then you don't pay. You've probably read the statistics that the total outstanding debt is the highest it's ever been, but the total debt servicing cost is the lowest it's ever been proportionate, but it's quite incredible. The percentage of debt is- We need that in Chicago. Yeah, exactly. Well, just see if they can buy their own bonds back. Right, someone's working on that I

hope. Yeah but the problem is if you can't keep interest rates low then the next and you can't default we have a sovereign, this is the theory underlying MMT obviously is that if you have a sovereign who can keep printing money, we're going to keep printing money because we can pay debt with more printed money. So everybody who we owe money to, we're just going to say, Hey, yeah, we know we owe you a 4 trillion. Here's 4 trillion. We just printed that special dollars for you to pay your debt back. So I think we'll just print a whole bunch of money and then everybody's going to get

kind of wise to the game, which means it results in a surreptitious default, which to me basically means devaluation of the currency. And so because the

US dollar is still the reserve currency, again, no predictions here, but the natural trade, if this hypothesis is true, is for the dollar to get weaker and weaker and weaker. While everybody's jaw-boting and saying we believe in a strong dollar, the dollar is allowed to weaken and weaken. And you come back 20 years from now and the dollar is, you know, 50% of its current value. And seeing that, how do you, so that didn't seem like as one of your buckets of like this massive fiat risk

or massive devaluation, right? So in theory, trends not going to catch that or options might not catch that, right? Do you cash, if you're in cash as one of your hedges, that wouldn't catch that? Well, the cash will catch it because then your cash will get devalued but not as quickly as everything else right trend will catch it trend will catch it because trend followers as long as your rules allow you

as long as it's sustained right yeah but there's not hey, I need to hold 50 percent in gold or something like that. OK. Yeah. Now, Bitcoin. Right. I mean, you think about, you know, I'm no fan of digital currencies. And I wrote a paper recently on my Forbes blog on why I think the natural next step after negative yields and after bonds being bought back by all the central banks. The next thing, I believe, is a digital central bank currency, a digital dollar, a digital whatever, right? Because then it's very easy to tax. Now, you have to step back one second and say, why is this happening? Why does all this negative view thing actually exist in the first place? And it exists because in countries like Japan and in regions like Europe, there is no fiscal mechanism by which they can transfer wealth from some countries to other countries. are actually just presented at the January AEA meetings on this topic on how monetary fiscal convergence is happening.

And anybody who thinks that the fiscal authority, meaning the taxing in the Senate and so on, and the monetary authority are different, is just kidding themselves. It's one government, and there's just a way of transferring wealth from one to another. And in Europe, it's a very explicit manifestation.

When you don't have a unified fiscal policy, you have to buy the bonds of the weaker countries at a higher price to transfer money. And how do you transfer money? Negative yields. You give them money. So that's what's going on. And to me, we've let the genie out of the bottle here in the US of the stimulus payments. Like, I feel like we're going to get held hostage every six months now. Like, no, we need another stimulus round. And so it's like, we've almost backed into basic income or something of like, every year, at least there's going to be this debate of like, we need more stimulus, we need more stimulus. Yeah, I mean, I'm not sure. I mean, I can't opine on the social aspects, but maybe, you know,

or to narrow the inequality, something like that is needed. But my point, just from an investor creator's perspective is exactly what you just said, is the market has now priced that in. They'll have their temper tantrums if it doesn't get paid out. And the bond vigilantes, as we used to call them in the old days, they're going to tighten policy like they just did today. They're going to...

Central bankers can say till they're blue in the face that we're going to keep buying 80 billion, 100 billion, 200 billion of bonds, but the market is way bigger than the resolve of any central bank or they it will tighten long term talk to that a second is that is that a real thing like you always say like oh bonds are having a temper tantrum or what was it taper tantrum yeah right like our traders actually

sitting there pimko being like we're not going to buy any bonds today to show them who's boss or something like or is it more of a nebulous of like everyone starts doing the same thing at the same time well i'm not at primco anymore so i can find you but somewhere like but generally traders and i am a trader and i am i have been doing this for long a long time and i know other people uh yeah you're exactly right that's how they actually that is that is what a tantrum looks like is, you know, the market is an aggregated thing, but it is made out of individuals. And when individuals look at what's going on, they react and they influence each other. And it, you know, like Robin Hood and so on, it just, it's like conflagration. It's like a fire that breaks out and everybody goes on strike, so to speak, right?

Because it's like, well, I could step in and I could be the hero, but if all of them believe that this is a bad policy and inflation's going up, hey, I'm not going to be the hero, right? Yeah, I guess it's a no, right? Like it's the philosophical, how does it start? Is it one desk it's like i guess it's a unknown right like it's the philosophical how does it start is it one one desk that's like not today this is getting too crazy we're not we're

not buying anymore today we're starting to sell and then the next desk says like okay there's a little less volume here i'm going to do it and then all of a sudden it becomes an aggregated like the bonds are doing this the traders are doing this yeah The traders are doing this. Yeah, so this is another great point. So look, we don't, like the Reddit, Robin, we don't do that. Nobody, professional investors, does that. So we use market information to figure out what everybody else is thinking. We're kind of implying it from market action and market information. And at least in my own experience of 30 years of doing it, there are

times when the markets can get distorted and controlled and the information contact can be eliminated like it has been done for the last few years because the central banks have been such a big participant. But most of the time, the market tells you quote-unquote what it's thinking.

And that's a basic tenet of trend following, right? Yeah, right. You don't have to be that smart. You just have to follow what the market is telling you. Just be a follower of the market. Right there in the name. There you go. And that's why it works,

is because the information is there in the price action. And so one last piece, on your last, speaking of MMT and stuff, you were saying in your last Forbes piece, maybe we should include asset prices and inflation. What do you think about that? Yeah, that's like,

you know, like a lightning rod that's like property taxes in California, rating? Yeah, that's that's like, you know, like a lightning rod. That's like property taxes in California, raising property taxes in California. It's like taxes and financials. Yeah, exactly. So economists have brought this up numerous times. And this beautiful paper that I quoted in there from the 70s by Alchin and Klein shows theoretically why this is a natural thing to do because when investors or when individuals and households make decisions, they are not always myopic. They are looking at how much do I have in cash, my bank account, my house, my stocks. That's how they think about their wealth. So that's how they react to pricing. Now, what has happened is somehow

it's because it's inconvenient to bring asset prices into the inflation metric, because then you have to index it to a volatile time series, et cetera, et cetera. It has kind of been swept under the rug. And practically speaking, it hasn't been measured. And the question is, well, we can measure PC inflation or CPI or PC, you know, PPI, the traditional metrics precisely. And they're smooth and we can index on it. So let's just go there. But wait for a second. You know, that's not what the Fed is doing today. The Fed is reacting to asset prices. We know that.

So on the one hand, they're saying, let's target inflation. That's slow moving now average inflation but they react to financial conditions and they write about it and they say we react to financial conditions because that can upset the markets and so on and so forth so my point is very simple is that if we're doing it already and investors are doing it and households are doing why don't we just bring it in and you know and it's incredible if you look at the two cumulative time series and investors are doing it, and households are doing it. Why don't we just bring it in? It's incredible if you look at the two cumulative time series. The CPI since 1990 has gone like this, in a straight line, slightly up.

The adjusted one where we do 50-50 weighting, 50% of traditional inflation metrics and 50% of asset prices, it's gone straight up. The rich, obviously, and I guess i'm part of one of those categories you know they benefit disproportionately from having inflation protection in assets right because they liquidate and protect themselves against stuff that they need to buy. But others don't. So that's part of the reason for writing this. It's not a social thing.

Let's look at a better metric. Yeah, I want to throw in there property taxes and private school tuition. I've got some other ones I want to throw in that are like, those are the things that I'm in my stage of life right now. The things I'm paying are like on a nearly straight line up. Absolutely. And everybody tells me that people say. Tuition, right. Healthcare and childcare basically are like the highest risers. Yeah. And then you mentioned GameStop. I wanted to circle back to that.

I'm like, do you guys have any talks internally or anything? I'm like, Hey, this is stupid, right? This was a crazy thing that happened, but maybe it's a thing now. Do we need to add some metric of look at, right? And there were articles of hedge funds saying, hey, we got to monitor these chat boards and that kind of thing. Because at the end of the day, it's a huge asymmetric payoff, right? So it's like, what are your thoughts on like, hey, how do we think about this in the future of identifying? And even you mentioned Bitcoin too, like how do we identify these tail events that aren't really on our radar now? Yeah, that's an excellent question. We wrote a research paper. It's unfortunately not public, but I can kind of give you the gist of it on this exact topic on how do you identify the next thing? So before we get

into how do you identify and how do you position for it, which is ultimately what we do for our clients, the first question is, is it silly or is it not silly? Is it stupid or not stupid? My view is that it's actually completely rational. And I wrote a paper. And why is it rational? I'll give you a very simple reason or analogy is that if you have a free, or not free, but if you have a gift that you get a check in the mail,

$1,500, and if you spend it, it's gone. But if you spend it on something that has a potential upside asymmetry that can change your life, it makes sense for you to actually do that. Right now, what the Robinhood and Reddit crowd have been doing, and there's some hallmarks of it, which is in our little tiny toy model, is that if you buy the stock or the call options, if you buy the stock of a low capitalization company with low market value, low dollar price and so on, you can only lose what you paid for it, but you can make a lot of money. So the price of the stock is a call option on the underlying asset value. So if the company does well, you make a boatload of money. If the company does badly, you only lose a little bit

because stock price is lower too. Okay. Now you want to leverage, if you get some money, you have $1,500 in the check or $1,400, you want to lever this up. And the Fed and everybody is saying, let's lever this thing up. We're telling you to lever it up. You want to maximize leverage. Well, what is the most optimal instrument in the world for levering leverage? It's called a call option. So when you put a call option on a stock price with a low price for a small company that has huge upside potential, it's an option on an option. A call option on a call option is the most levered thing you can do. So when the central bank says, rates are going to stay low forever or for a long time, and

we're going to keep buying bonds, we're going to keep cutting the system with money, this crowd is basically doing exactly what they are supposed to do in order to change their future. And I read a quote from one of the Redditors on the Wall Street Bets, which is very appealing. This is probably a 19-year-old kid somewhere. He said, I've been on unemployment, and if I lose, stimmy check, stimmy, they call it, then I'm back on unemployment anyways. But if it goes to the moon, my whole life has changed. So think about a personal call option laid on top of a market driven call option that is maximally leveraged.

I like it. But do you think they're literally thinking that or it's just innate in there? Like, okay, I've got this free money and I've got nothing to lose and boom. I think they're doing it. And I think they're reacting as a collective. The market has found the common denominator and that's what you have seen. And I think these episodes will happen over and over again happening in bitcoin uh people have discovered options i wrote a paper about three years ago called right tail hedging on why call options um will become attractive it was in the journal of portfolio management

and one of the hypotheses there was that if uh there's de-equitization if there's buybacks and if there's a lot of fiscal stimulus and there's possibility of up jumps like we've seen. Yeah. Most optimal strategy is a call option. And I don't think anybody in this group has read my paper, but but but they are doing. Well, and it's record call volume numbers now, right? Like all time. Yeah. Empirically they covered the reality and the truth of that hypothesis, basically. But don't you think the market makers will like widen their spreads and eventually you're buying these call, right? If everyone's doing it, the premium is going to jump out and you're going to, right.

It's going to need a bigger move than you can even imagine just to break even. So I feel like there's an end game there where it's like, okay, this is great. But once everyone knows that this is great, the price is going to be reflective of that reality. Yeah. I mean, just today, GameStop options, you probably saw right after the latest surge where we caught what Drupal in one day, options expiring for tomorrow, We're creating a 1300% implied volatility. Now, what does that mean? It means nothing because Black Scholes options pricing model means nothing for one day. But premiums were ridiculous, but somebody is willing to pay that premium, right?

But you need to do the, just, I did that on my Twitter handle of just like, hey, I just pulled up a random option. I'm like, this thing needs to move, I think it was at 200 and needed to go to 800 by next Wednesday in order for the option to even break even. Exactly, exactly. Crazy. And then the second part of that is like, so how do you guys view that as a firm of like, do we need to be in this sandbox or just be aware of this is happening no we are in the sandbox i mean i can't tell you the exact strategies we are in the sandbox and you know we obviously always play it according to you know the highest professional standards you can and yeah you know there's an opportunity it actually makes sense for us and we have in full disclosure we have been in the options markets and some of

these stocks and we've been in this underlying stock market and these and um you know we've done well on them we have a little framework within which we trade them um i don't think i don't think it's silly uh that people um i think there's money to be made for everybody. If you're careful. Would you take that anywhere? Like if it's like Australian real estate or something, or it has to be like exchange traded. So like,

does the optionality vision extend go anywhere in the, in the world? It does. It does. Yeah. Our framework, part of the reason I actually started this firm and part of the reason we're doing it is because we try to be small and flexible.

And we do believe, I do believe that the world is undergoing a massive change that we want to be unrecognizable, which means that wherever the opportunity of optionality and assuming we have access and we can trade it and transact it exists, we will obviously pay attention to it. And the team here, my colleagues here are all exceptionally talented and they've been professionals and they understand that. And, you know, we move very quickly and we can do things very quickly. So, yeah, so the short answer is yes. I love it. All right. Well, next time when I see you buying up Australian real estate, we'll know it's time.

Cool. Let's move on to some of your favorites. Have you got anything else on the firm or on negative interest rates or any of that good stuff? No, I think that's, I think, you know, I just mentioned it. I think there's a couple of very large distortions that are out there right now, which we'll correct sooner or later. And in that kind of world, when distortions are correcting, anything can happen. So I'd say, you know, my favorite thing I guess I'd say

is just be extremely open-minded to everybody because anything can happen. I mean, oil prices have gone negative. I wrote about, you know, when Tesla stock was, in today's dollar price, was at, I think, 50. I said I wrote a piece called Beauty Happens, which I sell people who buy Tesla don't buy it because of, you know, the old fashioned metrics. They buy it because of other reasons. Yeah. The stock is at 70. Not the car, but the car probably also. Yeah. Yeah., but there's a lot of stuff that is breaking.

And, you know, for negative 40-ish oil price, I mean, it's all over the place. So my favorites are that there's going to be opportunities that I tell, you know, again, people who listen to me, is the world is changing and things will happen. And this is the environment for fat tails to occur. And I think on the disruption or whatever you just said, there's ETFs. I heard you mention once of like, that was March. We saw some NAV versus price dislocation. So what do you say about that?

So I think it's going to happen again. So what you're referring to is back in February and March, if you had liquidity, you could buy very, very bulletproof good ETFs or 15, 10, 12% discount to NAV where the yield was 2%. So you could make five years worth of yield in one day. And you could do that because of the illiquidity. And I think that's just, again, the nature of the beast. The ETF market has some very sophisticated participants and some extremely unsophisticated participants. And, you know, the next shoe to drop could be some

fixed income ETFs where somebody who needs to generate liquidity just sells it and sells something that is, again, has pristine underlying components or constituents for a distressed price. So there will be opportunity there again when the NAV discount blows out again. And could it go the other way where it's vice versa, that you're getting hammered on a premium? Yeah. You have ETFs out there that are very popular. I mean, one of them is legendary, right? The Bitcoin ETF, the Grayscale.

So there are ETFs like that where you pay for access, you pay premium. Go through some of your favorites. Rapid fire here. So favorite type of plane to fly anything i fly everything but helicopters is what i love that's real flying everything else is a computer these days really so how does the helicopter where i've been in some of them you got it there's like 17 different things right there's the foot and the um i didn't realize it moves forward or backward by the rotor tilt, right? Which makes sense.

But so you could jump in like a Boeing 777 or something and fly that? Well, I'm not type rated in it, but I'm type rated in a lot of jets, but I'm not type rated in that particular jet. But if I went for a three-week course, I could get type rated. I could be legal in it. But right now, if I went with a professional and they uh you know showed me the basics I could probably do it I mean of course I could land it because it's the same thing put the gear down and land I would do it one of the movies right we're like is there a pilot on board yeah I can do it um how about how many of these

ultra marathons have you done well i think i've done about 55 or 60 uh and counting i've done 1100 milers and uh i think probably seven or eight hundred kilometers and maybe 15 or 20 50 milers yeah that's crazy so what's what's one of the favorite locales on one of those well so that changes that changes depending on, you know, when you ask me, if you ask me right after the race, none of them are favorite, but, uh, but the one I've done the most is called the Western States endurance run. I've done that six times. It's from Lake Tahoe down to Sacramento, essentially to Auburn. And, uh, that's, I've done it six times, finished at five, dropped out once, got in a sub 24, uh, silver buckle buckle once that's one of my favorites uh around the mont blanc uh

you cross three countries uh france italy and switzerland you basically climb 3 000 feet uh mountains 10 times wow 30 000 feet of climbing that's my other favorite yes are you a tour de France fan? I feel like this you've got an endurance athlete streak like so how long does it take to run 100 miles? It depends on the terrain and depends on how well you train but my personal range is the lowest is a little over 23 hours and the highest is 42 hours. And you're literally running for 23 hours straight? Oh, yeah. Running, there are times like in the Mont Blanc one, saying running is kind of a stretch because 30% of the terrain is unrunnable. So you're basically just trying to make it across rocks.

But you are running, I'd say, at least a third. Yeah. Wow. Right. You're not, there's no like the Iditarod sled race. They like stop at night and rest the dogs. No. I mean, you can.

But you'll lose, yeah. It counts against your time. So in France, when we were doing this, the Europeans have a very different way of racing. They literally, when they get tired, they just lay down in the middle of the trail and go to sleep. And for somebody who runs races in America, that's really off-putting because I stumbled across a couple of sleeping

runners on the trail. But I didn't yeah almost 40 something hours get off the trail um how about favorite book that you've written oh my gosh there are oh I there's so so many though um I don't even I can that read so much, but I use a lot of instruction manuals, I don't know, believe it or not, on how to do things. So I got a lot of favorite instruction manuals. So the one that I just read, I guess, well, some of them are pilot ones. And one that I just finished reading was a beautiful manual on how to rhyme, on rhyming, on how a rhyming dictionary, how do you actually rhyme words? So anyways.

And what about your books? You have four books. Yeah. Which one of yours is your favorite? I think. Your favorite kid. You know, it's tough. favorite? I think your favorite kid. I know probably the exotic and hybrid options one, which I wrote when I was about 32 years old. And I wrote that three years ago, almost 22 years ago. Yeah. And I wrote that. And that book, I think it's still my favorite because I didn't know any better. So I put every method that I knew, every mathematical strategy and method, calculation method that I knew in the appendix.

Wow. So I still go back and I look at it, which tells me that, you know, I haven't grown very much. So I still look at my own work to figure out how to solve some mathematical problems. I guess that's the one. That's good. These days people would put it in a Twitter thread and then go back there. Awesome. And then last one, favorite Star Wars character. Oh, that's another. I, you know, I was, I don't, I didn't, I'm a physicist,

but I didn't watch much Star Wars, but having recently watched it with my little children, I think the cutest one is R2-D2 I mean so I guess that has to be my favorite he's a star he can do it all well great Vinay this has been fun hope to see you on the slopes one day or when we're out in LA when everything opens back up thank you very much for your time all right we'll talk to you soon. Best of luck. Take care. Bye-bye. Take care. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com.

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