The Derivative - The VOLvengers: Wayne Himelsein (Iron Man) & Mike Green (Captain America)

Episode Date: February 25, 2021

We’re bringing out the cake & ice cream for this pod because it’s The Derivative’s 1 year anniversary! If you’ve been with us since the beginning – you may fondly remember our inaugural episode The Human Behind The Hedge Fund with Wayne Himelsein. So, in today’s episode, we brought back Wayne, President and Chief Investment Officer at Logica Capital Advisers, and as a special anniversary bonus – his business partner Michael Green, Chief Strategist at Logica.  We’re talking with Mike and Wayne about running a hedge fund and helping clients through the trials and tribulations of 2020, the “two star” problem, Twitter fitting into the business model, straddling volatile calls, inception of the Iron Man (Wayne) and Captain America (Mike)partnership, dynamic of the macro overlay logic, value vs momentum, staying power of the Wall Street Bets model, COVID due diligence, and failure not being part of the Logica vocabulary. Chapters: 00:00-02:25 = Intro 02:26-22:44 = One Year Anniversary! 22:45-39:35 = Value vs Momentum – when the system needs to breathe / Noise Traders 39:36-50:45 = The Tony Stark/ Captain America Dynamic  50:46-58:58 = The Two-Star Problem 58:59-01:09:05 = Hard-Hitting Tweets 01:09:06-01:21:04 = Favorites Follow along with Mike (@profplum99)and Wayne (@WayneHimelsein) on Twitter and check out the Logica Capital Advisers website. Check out our past episode with Wayne here; and our past episode with Mike 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. So the uniqueness of optionality is that you're really betting in two different variables. You're betting in direction and in volatility. And so there's some people, many people in the vol world that specifically use volatility to bet on volatility.

So they're going directionally neutral and making their informed decision about which way they think volatility is gonna go or whether volatility itself is expensive or cheap. So we don't do that. Unlike most in the vol art space, what we're doing is more utilizing both of those variables so we're making directional bets but concurrently with volatility bets right so when

you're doing both you haven't neutralized direction right and just making a vol bet you're saying i want to make a directional bet and so in that case of the game stops or the teslas or whatever the craziness involved, you have to be sure that your direction is good enough, your directional magnitude is enough to overcome the vol that's going to go in the other way. And so to speak about it simply, if direction is right by 10 points, but vol loses by 10.1 points, then you're down 0.1, right? It's that simple. Happy anniversary. One year that is. One year anniversary to The Derivative.

We launched this pod just over one year ago and have had some great guests. Lots of fun conversation. I most of the time felt not totally adequate talking to the guests, but it's been a lot of success. So thank you back the OG original guest to celebrate. We're joined by the human behind the hedge fund, Wayne Himmelsheim and his partner in crime or crime might not be the best word, his partner in non-crime, chart crime maybe, and also derivative alum Mike Green of Logica. So thanks for joining us guys. Thank you for having us. Yeah, thanks for having us, Jeff. No worries. And since you're both veterans of the pod here, we've already done both your backgrounds and bios. So we'll put links to those in the show notes and spare the listeners going through that again, although it's quite interesting in both of your cases. So I recommend going to listen to it if you haven't already. So let's get right to it. So as well as a one year anniversary for our pod, it's kind of was 2020 was the one year anniversary of you guys going live with

Investor Capital, correct? Yeah, yeah, it was. We were running. I mean, we had some Investor Capital before, but we didn't have it in a commingled vehicle. So or at least not as a standalone doing the absolute return version. We were running a little bit more on the tail risk side as overlays to other strategies. So launching the standalone absolute return version for our first year, it's our anniversary. It was, yeah, it's exciting. And it did everything that we hoped it would do. And of course, we're happy and just excited to go on for more.

I know we should have brought a little like anniversary hats or something. We threw that at five years. I think we were all just very excited to have 2020 over for our society. And now we're, you know, well into 2021 and scratching, everyone's scratching their heads equally. So yeah, it's going to be a little less to celebrate, I guess. As weird, different, but as weird. So what are some of your biggest takeaways in terms of running a fund of

stewarding investor capitals through these crazy times? Who wants to start first? Well, I'll let Wayne launch on that one and then I'll chime in afterwards. Yes. I mean, honestly, there's not that much specific. And I mean, I've managed investor capital for many years. I've been in the business for 20 years and done different things, had outside capital in different phases. And so it's, you know, that experience is not new to me. What's, I think, more exciting this time and ever since I've been doing the volatility trading, I mean, it's been since 2012 that logic has been focused on volatility

and building up the systems and technology and models to do what we do today, as many years of innovation. Since that time has started, the thing that's gotten me most excited is, I'll call it just being on the other side of the market, right? Is that where the shared pain of the streets, generally speaking, is when markets go down, right? Everybody's suffering and everyone's talking about how much did you lose or et cetera, et cetera, in tragedy or in market turmoil. So being on the other side of that is just such a nice positive. It's almost like a, I know it's the good side of Wall Street. I don't want to put it that way. But in the sense that it's a help, it's like humane, you know, everybody's suffering, and we're the ones that are up

during the time that the suffering is elsewhere happening. So to be on that other side is something that I love and appreciate more than anything I've ever done. It's not just running money. It's not just working with investors, but it's being there and being the win in the times of disaster. So I think from that perspective, it's a new thing. It's an exciting thing. And it's something that I can't wait to keep on evolving in and being, you know, hopefully not just amazing during the worst of times for the market, but hopefully doing even better during the rest of the time in the market, which would be of course the best of all worlds.

Sorry, Mike, I'll jump in real quick. I've like back in a way, we were had our own managed futures fund, classic trend following, did really well back in the 08 crash. And we'd be at parties, right? This was when you were allowed to go to parties. We'd be at parties and people were like, can you believe what's going on in the market? And and we'd be at parties, right? This was when you were allowed to go to parties. We'd be at parties and people were like, can you believe what's going on in the market? And I'd be like, yeah, I hope they go to zero. And they're like, what, what are you talking?

So there was a little bit of like, you were the oddball. So I get what you're saying. It's fun to be on that other side, but you're also a little bit of an oddball, like looking at you weird of like, what is that guy's problem? He's betting against all of us. Right, exactly. Not exactly, but sort of. Not exactly. But it's kind of that there's that it reminds me of that, there's a, I guess, a German psychological

concept schadenfreude, which is, you know, having excitement and others woes, you know, it's not that, right? It's not like I get happy when people are suffering at all. I mean, it's quite the opposite. But it's just like, it's you're the one that's happy at that event where everybody's moaning you know and you know so it's it's just it's weird to be on the other side it's it's but i love it i love providing that service alongside doing what we do in the markets um mike what it does yeah so i would actually frame the same view maybe just a little bit differently. I think the most exciting thing for me is because of the way that we're positioned, right, where we are effectively in a straddle. So when the market goes down, we're benefiting.

When the market goes up, you know, we should be capturing a portion of those returns. It gives you an ability to actually be relaxed in those situations, right? So one of the things that we did last year that I think, you know, if you're really honest about it and look back on it, it's an incredible luxury. We put out a piece on March 26 called Policy in a World of Pandemics, right? The ability to write a piece like that and have the luxury as a team to be able to edit it and think through the processes and have discussions around it as chaos is occurring around us can only occur in this type of structure, right? So we were able to have the ability to, in a somewhat calm and collected fashion, compose our thoughts about what we thought was occurring.

And that's not something that a lot of people had the luxury of doing. Most people were very busy putting out fires. They weren't in a position to observe the market. And for me, that was like a white paper. Are you fucking crazy? Like, have you seen the market? We're not writing a white paper right now. No, that's exactly right. We got very, we were very fortunate to be in a position to be able to put something like that out last year on March 26th. So those are all kind of successes, any big, not big failures, but any failures or things you wish you'd done differently in the year gone by, years since launch? Yeah, I mean, the word failure doesn't kind of fit in my vocabulary in that everything's a lesson to learn, right? I mean, we all make mistakes. We're all human. So that we don't really fail unless we just throw up our

hands and say we're done, right? And so we didn't do that ever, nor do I plan to, right? So with everything that happens that we don't like, or that wasn't ideal, it's for us to say what, you know, what happened here and why and how can we make it better? So in that sense, I won't say they were a failure. I'll say that they were things that weren't ideal. And what was an ideal is when the summer rally to Mike's point, we're in a straddle, right? So we should affect conceptually participate in the ups to a fair degree as much as we do in the downs. But the difference of the post-market meltdown, the recovery environment from June to November, was one where there was market upside,

but concurrently this really heavy decline or deterioration in vol, right? So vol, the thing we're long is in a bear market, right? And so we're long vol, but on the call side. So we're trying to, you know, participate with the market, but? And so we're long vol, but on the call side. So we're trying to participate with the market, but getting crushed by vol itself, just this major headwind against us. So the lesson, in totality, we're okay, but we would have wanted to participate more on the upside. And we're positioned, interestingly,

in enough calls to do so if vol had started from a lower point, right? So this lesson of how do you participate better in the upside when vol crush is such a big headwind without getting more long, right? That's the fundamental problem you have in long vol. And so the straddle is ideal if vol is starting low in the historical 16-ish area, markets can go up and down and you participate in both directions being in the straddle. That's great. But this environment of a declining vol and market up capture is one that is incredibly challenging to the long vol world. And so that's something where by no means I would call it, you know, that it wasn't perfect,

but more so there were so much lessons we garnered from what happened and things we now have as tools to work with those environments going forward. Of course, there's not that many environments where you're fighting a market recovering. It always has to be post some crisis. So hopefully we won't have or, you know, I guess for the world, there won't be another one of those anytime soon. But in the next one, I believe we'll do better in the rebound, if you will, because of the tools we built during this version. Yeah, I would just augment that. I think Wayne said that very, very well. I view the summer and through December basically as an extraordinary number of learning experiences, where we saw things happen that candidly hadn't really happened in the time period that we have either been active or modeling. There's really only comparisons back into the late 90s. In early 2000, we spent a lot of time in the past couple of monthly letters talking about those dynamics. And I think it's given us the opportunity, similar to the quote unquote relaxed analysis in March, and it was anything but relaxed. I just want to emphasize that. But when you're in that situation and to think about the way to structure

analysis or testing of our systems that we now are much more robust to. And so I've been extraordinarily pleased with the way that we've been able to push forward both our R&D and our product development in that environment. And so I had this for later on in my notes, but we're talking about it now. So let's dig into it. Yeah, and my note was, you know, Mike came in, you've got an active call book, you're owning the straddle.

A naive look would be, as you said, like, hey, these guys probably did well on the call side, did really well. So can you just dig into a little more of what you mean by why it was such a tough environment? and which i've kind of pretend naively asked you before wayne of like why weren't you long tesla calls why weren't you long gamestop calls um knowing the answers are probably because they were insanely or they still are insanely volatile but can you speak a little bit to that of that how the straddle exactly looks when you're buying those calls?

Yeah, I mean, so first, why we're not necessarily wrong, long, GameStop calls or Tesla calls is that we don't trade the, you know, interesting information or the media names, you know, we trade off of a model that identifies names that have certain behaviors, and those names didn't come up. So we wouldn't buy them, you know, that's, that's the, the positive is, I mean, that we're not going to drift from our systematic approach. I like that. It served me well over many decades. So I stick to it. But in theory, a hundred vol stock wouldn't go into your list, for example. Yeah. I mean, so it's going to look at other behaviors that didn't make it. But to speak about that specifically is where, you know, there's potential upside that vol or that IV out of the money is incredibly expensive. So to say that that's, you know, in fact, there's probably people that bought

call optionality on GameStop once the rally started, that while it continued to climb, not even didn't go anywhere, but perhaps was even down, you know, at some point, because vol is coming in against the positive delta of the call, right? I've been saying that for a while now, that these market makers are pushing all their prices up. People are buying these calls. They're going to lose money, even though they got the direction right. It's going to end the game, right?

Exactly. Or say conversely, for people who, when GameSock made some of those incredible highs, and people thought, oh, this great time to buy some puts, you know, which is great theoretical trade, you have limited downside. And at that point, the stock was so overdone, it had to come down. But you're paying so much in IV that the stock collapses 30% and there's no money made on that put option because IV contracts so much. So the uniqueness of optionality is that you're really betting in two different variables. You're betting in direction and in volatility. And so there's some people, many people in the

vol world that specifically use volatility to bet on volatility. So they're going directionally neutral and making their informed decision about which way they think volatility is bet on volatility. So they're going directionally neutral and making their informed decision about which way they think volatility is going to go or whether volatility itself is expensive or cheap. So we don't do that. Unlike most in the Volard space, what we're doing is more utilizing both of those variables. So we're making directional bets, but concurrently with volatility bets, right? So when you're doing both, you haven't neutralized direction, right? And just making a vol bet, you're saying, I want to make a directional bet. And so in that case of the GameStops or the Teslas or whatever the craziness involved, you have to be sure that your direction

is good enough, your directional magnitude is enough to overcome the vol that's going to go in the other way. And so to speak about it simply, if direction is right by 10 points, but vol loses by 10.1 points, then you're down 0.1, right? It's that simple. And it's so hard to think about because it's complex math. It's a partial differential equation. It's like, so how do you, you know, you can't you literally those two relate so weirdly right and so you get into vol surfaces and how to model it and but that's the stuff we do so we're not um i don't know where the original question i think i've drifted a bit but because we don't look at those we're looking at this grand concept of how do we get the direction right in the face of vol decline and so the bets we were making we

we did get direction right in late summer but vol crushed too much it was 10.1 negative versus 10 positive in direction and so even though we said yay we got the direction right it didn't even help us because vol was coming down so much and i what we weren't willing to do is go more long, take a further directional stake to overcome that vol. Because then if you're wrong and there's an event in the market, you're not going to make up on the downside or you're not going to have good down capture. So that trade-off is always the thing we're trying to balance. And even as a point of clarification, and Mike, you can speak to this, you always do have the puts on it. It always is a straddle.

So we're saying here long, but it's long the straddle, not, not outright long. Well, no. Oh, sorry. Let me just clarify that and then jump to Mark, jump to Mike is the straddle. What we trade is a, is a dynamically tilting straddle. So we can be, it's a straddle. There are always puts on the books, but we could be net long or short on that straddle. So we can be, it's a straddle. There are always puts on the books, but we could be net long or short on that straddle. So if we had, for example, just speak very simply,

100 calls and 90 puts, same delta, we're going to be 10% long, quote, right? But we have puts and calls. So if the market collapses down 20% tomorrow, we're still going to make tremendous convexity on the downside and it's going to overcome right away. So you're long both tails, but you tilt it in the middle to be able to make directional bets along the way sorry go ahead mike no no the only thing i was going to add to that is i mean to

answer the question directly in terms of why we weren't in things like tesla or gamestop i mean first within the single stock options that we purchased we we selected in the S&P 500. So the only time that Tesla would have even become available to us. That was December. Actually, as of December, right? The second component is when we're thinking about those call options on the single stocks, while we are selecting for momentum-like characteristics, which both GameStop and Tesla would have qualified for towards the end of the year. The other thing that we're trying to do is we're trying to address the issues of volatility crush that Wayne was saying. And so we have a natural bias within our selection process to find securities that have relatively cheaper volatility or implied volatility on them themselves.

Right. So one of the things we actually wrote about this in a white paper in August talking about SKU, you know, one of the things that has manifested itself this year is that you have seen the pricing of options on stocks like GameStop and Tesla to a certain extent, and for that matter, Apple, right, have exploded to levels that we just haven't seen in a very, very long period of time, right? So the implied volatility on GameStop at one point was north of 500%. It's incredibly difficult to make any money. And to Wayne's point, if you had bought a 200 strike put on GameStop when it was trading at 400, yes, you would have made money, but you would have only made somewhere around 60% to 70%

relative to the loss of losing 100%, right? That's just not a very good trade. And so that's part of what we're trying to address by selecting at lower implied volatilities. And the second thing that- Just quickly, an easy way to think of that is you're identifying the trades with the most convexity, right? So you don't have to get the direction and the vol as right, you could get either or right. Yeah, I mean, given a choice, I guess, since we're biasing long on our single stocks, right? The real question is, do we get the volatility picture right? And that is extremely tricky because vol tends to compress as prices go higher. It's unusual to see the sort of vol expansion and higher prices that we saw through

part of 2020. And again, that goes back to some of the challenges and higher prices that we saw through part of 2020. And again, that goes back to some of the challenges and learnings that we had over the course of the summer. We just hadn't seen what's referred to as a vol up, market up type environment, again, since the late 1990s. Yeah. And sorry, I cut you off your second point, or did I mess you up? You forgot. No, the second point that I was going to hit on was the one we couldn't ultimately include it. And then the second one is the dynamic of we're automatically selecting for lower implied volatility, right? So we're trying to, you know, people have heard both of us talk about the dynamics of value investing and the challenges associated with value investing.

But at the end of the day, the price you pay for something, the contract that you enter into in terms of that implied volatility is going to affect your expected return. Yeah, to jump into or follow up on what Mike just said, the way I just thought about in my head as an easy way to explain it is a hurdle rate, right? So if vol is our hurdle rate, and if we found a position that we thought had upside potential of, say, 10%, but the hurdle rate on the price of IV or implied vol, that hurdle rate was 9%, that's not as good as a trade that has an upside of only 8% versus 10, but the hurdle is only 4. Right? So it's the combo of the two that we're trying to reach. What is the most upside convexity given the lowest hurdle rate?

Right. So a naive way might be to just look at the hurdle rate, but then you end up with all these low vol things that might not move at all. Exactly. So that's a selection bias that way. Exactly. So then you want to look at both and find the merging of the worlds. I like it. Then I want to come back to you mentioned the value versus momentum. So

that's kind of implied in your book as well, that you're tilting towards these momentum names. In November, we talked about there's that huge dislocation from value to momentum. So to me, that's kind of like a hidden risk factor in there. We're not so hidden, you openly talk about it, but it's kind of a risk factor that you're at risk of this big dislocation. At the same time, you're only buying the option. So there's not a, you know, a short option risk. But can you speak to that a little bit about that dynamic and how you kind of measure that risk and view that risk? Sure. I mean, first, I want to start with what you ended with is all the risk we take is non-recourse. Right. So we're always only buying premiums. So to the extent we're completely and totally and utterly wrong, we lose a little bit and we're done.

Right. So that's the beauty is in November. Sorry. So, yeah, you only can lose the amount of the options you bought. And the amount we put into any option or any sector exposure is always going to be some fixed percentage of our portfolio. And the amount we're going to be totally on the long side is going to be fixed versus the other half of our portfolio, which is short all the time, right?, with put options. So it's by definition, the whole thing is constructed to be, you know, balanced that no single risk can hurt us that badly, you know, in a larger context. That's the beauty of a straddle, of course. But so putting that aside is, yes, the exposure, the overexposure to momentum, which is an exposure that we chose, and we expressed why we chose it, does also pose a risk, right? If you get that wrong, which is an exposure that we chose and we expressed why we chose it,

does also pose a risk, right? If you get that wrong, that's an area. And yes, we openly talk about that risk. And it hit us in November when it actually, we thought the ironic part of November was we thought the problem was going to be the election, right? And what was going to happen and all the uncertainty around that. And then the election was fine. But then two days later, it was the vaccine announcement. And of course, momentum crushed and all the oversold, quote, value or anti-momentum rallied aggressively for one of the greatest factor rotation days on record. to not we knew we had this exposure, but to how much this exposure can cost us. And is it worth it? Right. So if anything, it opened up a door of questions. And then Mike and I actually got into an interesting discussion around a way to measure what we call factor instability, which is that if is there going to be a market where there's more rotation amongst factors, you know, perhaps there's so much more risk parity

in the market that it's creating factor instability. So if this is a new emerging phenomena, then we got to figure out a way to a signal to identify it and perhaps have some more balance in our book between, you could call it growth value, or we like to call it momentum and anti-momentum. So we have, in fact, evolved a segment of our portfolio that does have some balancing between it. We've reduced some of our momentum book and included an anti-momentum, or call it the Growth Value Balancing Act, as a new feature that we utilize. And we're further developing a way to measure and weight based on the factor instability over time.

Yeah, this is one of the things we wrote about in our January letter that helped us in the relatively difficult January period, I think for many long vol funds, was recognizing this factor instability and diversifying our sources of return that had, as we talk about, the unintended benefit actually of stabilizing and lowering the overall volatility of the product, particularly in this type of environment, which allows us to actually have a better overall profile. So it turned out to be one of those win-wins that, again, we've been fortunate to have a number of opportunities in the past year to observe phenomenon that hadn't emerged. If you look at our January letter, which I know you were perusing before, right at the front, we highlight

this dynamic of factor instability, which has exploded to levels above 2007, 2008, and in line with the factor volatility that was experienced in the 99 to 2000 time period. The ability to take advantage of that, I think, is something that we, I'm not going to say stumbled upon, but certainly in working together, we came up with a solution that actually ended up making the product significantly better, in my opinion. What do you think is happening there? Is it simplistic, long, short equity funds and factor-driven models kind of becoming more risky or blowing up? Are people abandoning those strategies and it's causing more factor volatility?

So my interpretation of the events that are going on right now is that you still have significant unwinding of long short portfolios. I mean, obviously, Melvin Capital would be the extreme version of that in this past month. But we continue to see consistent redemptions coming out of the active manager universe. The long-short universe has struggled in a lot of situations. There are obviously some who did quite well coming out of the March time period. But in general, we've seen a lot of those position unwinds. And then the factor that I would actually suggest has had the largest impact has been the rise of what I refer to as the noise traders, right?

The retail traders who in one form or another think they've solved something, right? And so trade with a level of conviction and aggressiveness, particularly in the low delta call environment that is creating many of these conditions. We describe this in our monthly letter as Monday momentum works, and then Tuesday value works, and then Wednesday small works, and then Thursday large works, right? And so you're getting this rotation amongst factors that is indicative of stress in portfolios. Whether that's the ultimate cause, I think it's going to be very difficult to know until we're a few years past this point. But you're thinking that some of that retail momentum and then probably not all the momentum,

but people seeing the retail momentum and creating more of a cascade on top of it. Yeah, the cascade effect is very clearly a component here. I like to think a lot. I mean, I agree with everything Mike said. And then we'll throw on as an addition a point I mentioned before was the increase in risk parity trading. And, you know, it's in general like you could say as the broader market has had a lot of vol dampening over the years. Right. So short option, short call rights has been driving vol down, enabling more vol pops when there's unwinds. So if you bring that down to the micro version, anytime you're dampening vol, you're pushing down a spring and the spring effectively wants to pop, right?

So in risk parity, by definition, they're trading, they're dampening the vol across the factors. And so you're compressing what would otherwise be natural factor of all by all the action of risk parity trading. And then every once in a while, there's a pop. It's almost like the system needs to breathe. So it's reducing what would be natural modulation or variance over time into compressed moments because of the unnatural compression of risk parity. I don't know if that makes sense. It does. I think of that in the normal bell curve and the curves, even,

even a normal bell curves too wide for most people. So they squeeze it in creates a taller head, right? Right. They want to be in that tall head, but what does that do? Pops out the, the tails when you squeeze it. Yeah. It's leftocardic is the formal word. Yeah. You can use the math terms. I like my hand motion. I love hand motions too.

My hand motion squeezing. But yeah, and so I mean, one of the things that we've seen, and you're familiar, obviously, with some of the research that we've done in this area, Jeff, but you know, we are seeing this phenomenon of increased positive drift, right? The markets are effectively accelerating upwards. Now, I would highlight the returns, particularly in the context of kind of what historical valuations would suggest the expected returns should be, right? We're seeing an environment in which over and over again, the GMOs, et cetera, of the world say, you know, returns should be

terrible. And then, of course, we get the best returns we've had in decades, right? That sort of phenomenon is matched on the other side by the extraordinary negative skew that is appearing in markets, right? So one of the areas that Wayne and I have been sharing some research on internally is this issue of, if you have this positive drift feature, that makes calls look really, really good. And to Wayne's point earlier, shouldn't you just be more long? The offset to straddle somewhat centered so that you're capable of delivering that downside protection at a moment's notice, right? Without, you know, kind of the big warning of, oh, a recession is coming or the yield curve is inverted or, you know, blah, blah, blah. We're seeing that show up in the data. And I would suggest that one of the challenges that a lot of people have is they tend not to think about how does the return distribution change over time. They tend to think of the market as a somewhat

fixed vehicle. Our evidence suggests that there's some serious changes that are underway. And do you think that's going to, I've been asking this, I'm kind of sick of the Wall Street bet story myself, but like, do you think it's going to be, does it have power? Is it going to be a staying force? Like it's kind of feeding on itself right now it already it seems but what are your thoughts overall on this what'd you call it the uh you had a good word for it i've forgotten already i've forgotten already the noise traders noise traders yeah i was trying to say retail but it was better than that the noise traders. Are the noise traders here to stay or will the hedge funds, the evil hedge funds have the last laugh? I think so. You know, Wayne spends a little bit less time on on this type of research than I do.

The term noise traders is drawing from an academic paper that was just published in December by. His name will come up to me in a second, Jang et al, University of Michigan professor. And the term noise trader is fairly broadly accepted as people that trade off of information with the perception that the information that they're receiving in kind of an efficient market framework gives them actionable activity to do, right?

To actually execute a trade. I would suggest that the frequency of the noise traders and the growth of the noise traders is a feature of a market where people are active with either stimulus checks or a lack of ability to spend in other areas, whether that's gambling activity or otherwise. We've clearly seen an increase in small accounts opening. We've clearly seen an increase in small accounts opening. We've clearly seen an increase in option activity, in particular around the retail segment. But the concerning thing from my standpoint is that the data suggests that these individuals are on net losing quite a

bit. In the options world, the data suggests that 98% of the trading activity coming out of vehicles like Robinhood is losing money. And so I would suggest that this effectively will burn itself out, right? There is tinder in the forest and, you know, lots of material that can catch on fire right now, but we're burning through it. And, you know, I would suggest games. That's kind of the demand side of the equation. From the supply side of the equation, right, you have, you know, could it be argued that Citadel and all those groups, the banks are much less willing to take in warehouse risk, right? So they're all immediately delta hedging. And that's kind of, you know, the cascade effect is greater than it was 5, 10, 15 years ago because the supply side of the equation is much more into Delta hedging.

I think that's a general feature of the market that is occurring, right? We're seeing increased consolidation and therefore, you know, the quanta when it hits, right? Citadel is a much larger player relative to other players. So if they decide that they are not going to provide liquidity, then the market needs to step aggressively towards a new level of much higher implied volatility, or if they choose not to participate, right? Those areas of concentration have changed the market structure. And I think you're hitting on a really important point, which is just the general structure of the market, whether it's

through the rise of passive investing, the consolidation of market makers, the change in the character of market makers has created conditions of fragility in both directions. I use the term inelastic, right? The market rises more on less money being put in and will fall more on less money being taken out than it has historically exhibited. Yeah. And we had Jim Carson and Chris Cidio on the pod a couple of weeks ago, and they were talking about what happens when all that noise flow finds puts, right? And starts buying all these puts and the gamma delta hedging on the way down could be, right, as you're saying, could create a faster and more drastic move. It's possible. I'm a little skeptical that that's going to be as easy for people to embrace, right? As much nihilism as there

appears to be behind things like our Wall Street bets, there's only so much you can make on stocks going down, right? You can certainly make a levered exposure on puts, but it's a better story to say Fed printer goes burr, market goes up, stocks only rise, therefore I should buy low delta call options and, you know, quote unquote, screw the hedge funds that are the evil shorters of the universe, right? I think that's a more compelling story than, hey, let's bet against XYZ company. Or let's bet against the entire US economy and market, right? It's less sexy. And you guys should be putting up signs like, hey, we buy calls too. We're not the evil hedge fund.

Well, actually more to that point. I mean, this is exactly why Wayne and I chose not to have any form of shorting or short options or anything else, right? When you short, you have a tremendous exposure both to the downside in the form of the credit factor, right? You can have your shorts pulled at any point in your ability to maintain your levered position, which a short is, you can have that taken away from you in a bear market, but you can also find yourself exposed to increasingly convex instruments to the top side. And so Wayne used the very intentional phrase before non-recourse leverage, right? That's what we do. That's why we do what we do is to gain exposure to that. And it is honestly quite unique relative to most of our peers. We don't sell any form of options to defray the cost of being long options. That was a very intentional choice given the way we see the market developing.

Yeah. And there was some confusion just around the kind of high net worth space of like, Hey, these funds, Melvin capital tries to make money on things going down. Like does this other long volatility profile have the same profile? I'm like, no, not at all. They're borrowing money and selling an individual name that could rally. Right. They have an infinite risk almost on that versus a long volatility as a defined risk.

Yeah. It's almost like shorting on an equity basis or is short vol, but long puts is long vol. Yeah. And that's that differentiated better than that. You're you're doing the same thing, but one short vol and one's long vol. It's I mean, one of the things that I would just highlight is that while we call our firm the absolute, you know, our our flagship fund is the Logica Absolute Return Fund. Absolute return is an asset class where you're typically thinking of being long and short, has the most negative skew distribution of any asset class, right? Precisely because you're

constantly trying to run a balance exposure where you are short roughly the same amount of delta or exposure that you are long. And that gives you this negative exposure to the credit dynamic. It gives you potentially the negative exposure to something like a GameStop screaming upwards. Our portfolio is constructed so that it exhibits positive skew, right? So we look nothing like anybody else in our space, other than the two words that follow Logica and our name. Which is capital management.

No, absolute return. return absolutely return i was going to tell you guys after this january paper we got to come up with a numbering system or something you had a few new like i ar and there were a few new three-letter acronyms i'm like all right we we jumped the shark on the three-letter acronyms lar four letters how about that yeah four maybe three and a number. Three and a number. There you go. So changing subjects a little bit, I wanted to ask you both just basically how it's been working together. You kind of view yourselves as more Sherlock and Holmes,

having civilized discourse, or Tony Stark and Captain America and it comes to fisticuffs every now and then what's what's the dynamic like can we get 50 50 of those two analogies I actually think that's a really good way to think about it because there are elements where Wayne and I strongly disagree about stuff right and there are other areas though where i think what we're ultimately bringing and i don't think the tony stark captain america thing is a terrible way to think about it because at the end of the day we both deeply respect what each of us brings to the table right um and so i want to be tony stark yeah there there is sometimes debate about that but um uh but at the end of the day, I do think like the

really critical thing is, is that you approach it like you would any relationship, right? We bring different skill sets to the table and we have different points of view on some of this stuff. But if you approach it from a standpoint of respect, you're going to end up making progress. And, and that's how I think of 2020 more than anything else. Yeah. What's interesting is that I've noticed this is that when two people agree on stuff, there's nothing more to talk about. Right. So, you know, if Mike and I had to debate, you know, should we get shorts involved? Well, no, we both are adamantly vehemently against that. So that discussion is gone. Therefore, it can't take up any more time. So naturally, we end up talking

more about the stuff that we disagree, right? Because there's so many things that are already agreed, and therefore, let's move on. And so it would, if one looked at the sometimes the discussions, it would appear like there's more disagreement. But that's just because the pile of agreement, 90% of the pie is already foretold, you know, or gone story. So the focus on that small, the small piece of where we disagree is hard, because, you know, we, we come from different places, there is so much agreement, so we think we'd be aligned. But then there's oftentimes something very different we see about some nuance, right? But the beauty is chopping through that. And to Mike's point, because there's respect for each other from an intellectual standpoint,

then one of us is not saying something ridiculous. That can't be the case. So therefore, what's going on? And let's understand this. Right. And so that gets interesting conversation. Right. It's like that old Internet Twitter meme, the blue or the brown dress. Like you both think the dress is blue. Now let's get into the shade of blue. Exactly. You're arguing. That's nicely said. The shade of blue.

Yeah. Yeah. We're in the shades. Heavy into the shades. And tell the story. I made the blue a little bit more. Which one did you see, by the way? I can't even remember that thing.

That was crazy to me, that dress. I don't know how they did that. I didn't even see a dress no i'm joking um um and tell the story of how you met it was on tinder or twitter or something with a t and an er don't tell our wives no um no we met we met on twitter it was really one of those things where wayne uh tweeted something and I immediately said, this is somebody who knows what he's talking about. And since he's down in Los Angeles, I suggested we get together for a cup of coffee. We did the obligatory,

let's meet for a cup of coffee. This is pre-COVID. This is pre-COVID, right, exactly. So we sat down for what we thought could be a 15 to 20 minute conversation. And two hours later, we were figuring out various ways that we could work together, collaborate external advisor to Peter's organization. And as I dug into Wayne's product, like it became extraordinarily clear to me that he was doing something that nobody else was doing in the quantitative space. But it actually very closely mimicked what I was doing in the discretionary space. And the advantage of a quant framework against the discretionary

is if you're going to do something in a systematic fashion, pre-programming it, effectively giving it the ability to make decisions without you constantly having to recalculate what is my exposure, where do I want to change this, how do I want to do this, etc., it frees you up to think. And at the end of the day, thinking is what we're really trying to do better than other people. So it's, you know, it worked out extraordinarily well. I was able to point out to Wayne that he was missing some of the impact of the passive dynamic that was creating, at least in my analysis, this upward drift. And that led to a conclusion that there should be more up capture.

Wayne, to his credit, embraced that. And we found that we had a product that we were able to run with, with almost no time to launch. Which is rare in and of itself, right? Like most managers, you meet someone for a cup of coffee and they're like, hey, I think you're missing this piece. They're like, who are you? We're just having coffee. It also reminds me quickly of a story my wife and i when we were dating way long ago we we would go get coffee she'd be like hey do you want to go get a coffee we'd go neither of us drink coffee so we were we were going to starbucks and getting tea to this day we don't drink coffee we drink tea but for two years in there she probably asked me to coffee you know 86 times with fully knowing that i don't drink coffee but anyway um and wayne i think you

just presented as your wife kept asking you to coffee the record might show it was yeah 50 50 or like 10 90 yeah we'll see uh-huh and so wayne what was that like where this guy's telling you uh what to do with your model i mean it, it was, as you can imagine, it's like, I've been working on something for many, many years, and I'm focused on, you know, its benefits and its features. And then somebody telling me that I think, you know, initially, I might have thought, well, I'm not sure, let me think about that. But in general, I consider myself to be a very open minded and very objective and try and not get trapped in my own ego or what what it is that I built. Quote, all I'm trying to get to is the best future outcome or the best, I guess, in a Darwinian sense, the most the fittest product.

Right. And so a lot of what Mike, a lot of the points Mike made were really compelling. So I couldn't just toss it out. And I had to go back and look. And I understood what he's saying made a lot of sense. And what was interesting is that in the prior years, I had run capital where my volatility trading was more of a risk overlay, right? So I was long vol, but more as a tail risk component than as a standalone absolute return. And so I hadn't what I realized when Mike was saying what he was saying is that I hadn't been focusing in that world. Right. So because I had this basket of other advisors that I was hedging out because I was I'll call it living in the risk overlay world.

I didn't have a chance to step out and say, and look from the, from an outside perspective. So to have someone come and tell me all these points, which are in and of themselves very valid and, and, and of course, rational and, and made so much sense, but concurrently to realize that, Hey, I have a reason for not being, for my eyes not being open to that previously. So it all congealed to say, oh my God, I see it. Right. And so that was an amazing moment for me to know that there was not just validity, but why I had been constrained myself in seeing that in the past. So, and the evolution from a tail risk product to an absolute return was so simple. It's all the same models, all the same

trading, all the same thesis, simply just increase the weighting of the of the up capture of the call book. Right. And so the project was quite simple in saying how much more up capture, how much more do we want to wait the long side versus the short side? And so a little bit of modeling around that allowed us to launch a product within a month or two of that discussion because everything was already in its place. And I would have loved to been a fly on the wall for that first. So were you guys actually drinking coffee? Yes. Was there a waitress or you went up and ordered at the counter? No, that was a counter place.

I'm envisioning the waitress like coming over and hearing you guys talk this stuff and being like, what? What is going on here? You're supposed to be talking about scripts or something. Yeah, it's particularly unusual because it was this, I remember the place, it's this kind of outside seating in the middle of Brentwood, which is a very, we were the only ones talking finance in the end.

The rest of them had been done with that for years and years, right? Yeah, exactly. Someone has to talk about that. I also remember that it definitely was coffee because it started to go through me in about 75 minutes into the two-hour conversation. I'm like, I got to get up and go to the bathroom. So definitely coffee.

And then there was something interesting you said in there, Wayne, of trying to make it the fittest model, which is interesting to me, right? You're trying to make something least likely to fail, right? Not the best performing model. Of course. Not fittest as in curve fit. is interesting to me right you're trying to make the something least likely to fail right not the best performing of course not not fittest as in curve fit you're not fittest as in fit to survive right which is great because a lot of quants will try to be making the best model whatever that means of the best absolutely you know what's funny about that statement is it's it's the beautiful it's a perfect irony is that you want the fittest to not be fit yeah yeah and but those two fits are very different ideas you wanted the fittest to survive and to do that it can't be fit to the data right so to not fit the data begets the fittest

model which is ironic which is it's it this is actually a point where Wayne and I bonded as well, right? So most people think of evolution as survival of the fittest in the context of that's progress. The reality is, is that fitness is fitness within an environment. I've talked at length about this. Wayne has talked at length about this. And fitness in that context is actually fragility, right? You are exploiting an environment that you've determined looking at the past with virtually no certainty that the future is going to resemble the past, right? We talk about that explicitly. And I'll just say as a funny observation, the first time I went to Wayne's house, I walked in and his house is filled with fossils as is mine, right? We both have this fascination with dinosaurs

and the preservation of history and the indication of evolution in that context. But to think about that properly within a quantitative or a market framework is to understand the inherent fragility in those models. I think bringing it back to Wall Street bets, I saw one of those guys who'd made a bunch of money. He's like, I just bought a triceratops skull like some of them were dinosaur bones with their ill

gotten gains or no they're perfectly legal gotten gains but maybe ill-advised games i wanted to ask you guys so i get some calls doing due diligence on Logica and happy to tell them what I know about you guys, but some of them have asked about what they call the two-star problem of that you're both strong kind of alpha dogs out there in the money management world. How does that coexist? So I think we've covered a lot of that, but just what would you say directly to the two-star problem? sounds like a science fiction novel right i'd say i'm iron man i get to be captain america how can you lose you get to wear the uh tights yeah all right i'm gonna stick with the shield but um

no i mean look just from my perspective there is absolutely a challenge that both of us have where we have existed within frameworks where we usually think we're right. Right. And anyone who's been married knows that, you know, we're not right. Our wives are right. Right. And so there's an element of that same respect component that you have to ultimately bring to it and say, look, if Wayne is arguing something strongly against me or vice versa, if Mike is arguing something strongly against Wayne, you have to stop and say, why are they saying this? Right. And offer them the opportunity to respect their point of view. Sometimes it'll be wrong. Right. I know that I'm wrong a sizable fraction of the time, and I know Wayne knows that as well. But at the end of the day, if I'm bringing forward an issue, or if Wayne is bringing forward an issue, there's a reason he's doing that, right? And as long as you keep that in context, you're going to be fine. Yeah, I very much like what Mike said. And i guess the only thing i would add is that in the two star

problem is only a problem if the two stars each need to be brighter i guess and so in this sense i think that um it's two stars where we can both allow for our starship in a way that's that's didn't sound like it not not the starship enterprise Don't get excited, Jeff. Both allow for our starness to be itself. Like I want Mike to shine where he's great. He wants me to shine where I'm great. And we each know that each of our shining is going to be complimentary and additive, accretive to what we're doing.

So why would we want to stop it? You know, we both want to foster it right and so i think as long as we look at it in that way and we see it that it's that we're aligned with each other and it's beneficial and if we fight it's because we want to build the fittest portfolio right fittest in the evolutionary sense most anti-fragile etc cetera. So if that is to use Mike's word, the context or the backdrop to everything that we're ever debating each other, then it can only work out in a good place. And so I think that that helps two stars work. And I'm looking forward to more of it. Yeah. And to me, it's a bit of a legacy question, right? Of like, you're in some

sort of tiger cubs or something and two of them, right, one wants to be short some name stock and get all and the other one wants to be long. So they're having this public discourse about like, hey, this is why that's a bad idea. This is why it's a good idea. But your setup doesn't lend itself to that. Well, the other thing to keep in mind is we're, you know, we're a systematic shop, right? We're quants at the core. So where Mike and I can have a lot of debates, there's a difference between debate and ideas and innovation and then what eventually makes it into the portfolio, right? Because after all this discussion and potential innovation, it then goes to the rigor of quant

and analysis and all the stuff which could be months of work and R&D that ends up saying, you know what, what we both were debating, it wasn't even that as the issue. portfolio had to have been the outcome or the results of a so-called debate and having made it through the rigorous quant, which then proves that it's something good. And so then it is adopted or adapted in that way. Right. That's a good point. So Mike's not going to convince you, we need to be 90% tilted towards calls. Yeah. Let's do it right before the close. Hit the button. Hit the button. Go. You know, again, I think that's one of the areas that is almost a relief for me. Right. And it is there are components of learning to work together in that way. As a discretionary manager, you're constantly being forced to evaluate how do I want to change the portfolio given the immediate information that's available today. Right. And so one of the legitimate, you know, issues that I think Wayne struggled with in 2020

was the frequency of my market observations. Right. You know, this is what I'm seeing. Right. As part of that respect, I think one of the challenges for Wayne is how do I recognize that I hear Mike on that, right? But it's not necessarily going to change our portfolio or our construction or anything else. And in a lot of ways, that's actually quite, you know, it's quite important and it's also quite liberating because as a discretionary manager, you make a lot of mistakes, right? You do a lot of things that you're saying, okay, I need to address this immediate issue

right now. And you can very easily unseat a portfolio that is very well positioned taking in the latest piece of information. So that's actually been incredibly valuable for me to work together with Wayne and the rest of the team thinking about, okay, what are the important steps that we need to make as we think about this. And we've had an incredible amount of innovation. I mean, Wayne highlighted the diversification into the value factor that we introduced in December that has contributed. We also introduced a diversification

to an anti-momentum factor that was critical to the ability to hold ourselves following the bottoms in March. We've introduced components now that we're beginning to look into in our macro overlays that are areas of insight that I can bring to the table. But all of those, you want to take time to do it, right? You don't change it in the same way that you would necessarily in a discretionary space. I think at the end of the day, that's a positive. We're building something exactly as Wayne referred to it. That is, you know,

just to steal a quote unquote competitors phrase, you know, it is anti-fragile to the, to the environment going forward. The, uh, you reminded me of my favorite, one of my favorite West wing scenes, um, might be a little too blue for, for you, Mike, but, um, yeah, they're flying and he's talking about a pilot and he's like, the pilot is in a cloud he's relying on his instruments he doesn't he makes an adjustment here he makes an adjustment there and he's like you'd be completely shocked with the number of pilots that come out of a cloud

flying completely upside down right so that's if you're like we gotta make this change we gotta make this change yeah adjusting the knobs you kind of lose your your true normal um i like that one that's a good one job i'll send you the uh the actual i kind of botched the quote but i'll send you the actual quote and then we've already settled on the uh tony stark and captain america but i had a whole list of duos here bonnie and clyde kirk and spock harry and lloyd from dumb and dumber butch and sundance, Butch and Sundance, Thelma and Louise. We got any other duos we identify with? We stick with ones that survive. Thelma and Louise is not good for a long ball, right?

Either is Bonnie and Clyde. I mean, you know. Let's stay in the Marvel universe. Yeah, Dumb and Dumber wouldn't be good for marketing either. Although you have called me out, or I'm not sure if it was you or or somebody else uh reminded people of the story in an interview the dumbest man alive um which is you know i've told repeatedly i think that was actually the title of my rcm segment but yeah yeah who was that that said that uh alberto vilararindo Technology Fund. Before you spent 10 years in jail. All right. That's a good badge of honor.

So moving on, I wanted to talk a little bit about tweets, Twitter. Wayne, you've been talking a lot lately or just I've noticed lately of kind of I'll summarize this of kind of questioning the use of pure quant and saying it's a mixture kind of math and art or science and philosophy. You know. Where are you going with that? What's your point on all that? Yeah, it's it's I have been saying more on that front as of recent year. Right. Where are you going with that? What's your point on all that? had to perfectly calculate and there had to be the signal had to be perfect. And if I take that on a slow and steady growth over time about recognizing uncertainty and, of course, learning about our favorite concept and non-ergodicity, right, and everything that happens in the market, that it can't be so rigid. And then, you know, I could say that, in fact, what Mike was talking about before about his joining and us working together over the last year and how he worked as a discretionary manager and being so active on decision making.

So I think maybe that's influenced me more in recent times to really consider what is a quant, right? And what is better about it? And so what I've always loved about quant is the systematic way of dealing with difficult decisions, what I'll call emotions, right? And so we're going to mitigate our emotional reactions by having a system we're following. I love that part. That's why I the way it is so elegant at times. Concurrently, I understand that markets are ever changing and that there's reasons to be active at certain moments because there are smaller sample sizes that don't fit into the models. You know, when Ivy hit 100 at the bottom of March, you know, there were only five times in history that we could model that that happened. So there's no use of listening to the data, right? The tails are too fat to adhere to in modeling. There's uncertainty there within the tail.

Therefore, the ultimate place to get to, I guess, is this melding of art and mathematics. And so in thinking more about it, I've been tweeting more about it, and I've been infusing in some way this thinking into how I do what I do every day. And I don't say that I'm at a perfect place. I feel like I'm at a much better place than I was 10 years ago and five years ago and two years ago,

but it's still an evolution. Therefore, I'm talking about it because I want to try to hone in on the ultimate if that's even possible. Yeah, and that's a great point on the long vol space, especially because there's so few samples in order to build your model. If you built a vol regression model, right, you would have sold VIX at 30, right? Back in March and got your half-inch ripped off.

So that's an interesting point. And then Mike, on your sort of... I know where this is going your sort of Twitter of late has been a lot of you've waded into the crypto world so yeah I mean so I've talked about this

on a couple of podcasts and you know yeah I don't want to get into the whole argument I was kind of just wanted to say like what do you know what's your point of doing that so there's two components.

I mentioned before the dynamic of the macro overlay at Logica. We have two separate components. We have exposure in the straddle form, which is volatility sensitive. Then we have an overlay that is composed of less vol sensitive instruments that we're trading and a delta one exposure. One of those exposures is gold. Another one is dollar. Another one is dollar, another one's rates. During a trip I made, one of the few trips during the coronavirus experience, I had the opportunity to sit down with a number of family offices in Texas and found every single one of them was

using the exact same language to explain their diversification into Bitcoin, where they were selling gold and buying Bitcoin because it was, quote unquote, the superior instrument. I came back, talked to Wayne about it, and I said, look, this is something we need to dig into because if people are replacing the gold exposure, which the easiest way to think about it is it's like a commodity exposure in our portfolio. It has negative dollar characteristics. It has positive inflation characteristics. It's something that we pay attention to. And in general, that portfolio is designed to provide a balance to the overall exposures. And a little bit of flight to safety or no? There's a flight to safety component of it. But if you honestly look at the behavior of

gold, it behaves more like a commodity, right? So in most risk off events, it has a credit component to it. So it is initially liquidated and then recovers very strongly when the Fed addresses the credit factor, right? So it needs to be held and sold, and then it can recover extremely well, which is helpful to a portfolio that has a high vol exposure, which tends to retreat in those environments. But understanding that potential for Bitcoin to replace gold kind of sat at the center of it. And as I dug into it, I found some stuff that I thought was important to share. Unfortunately, when you share a contra crypto take, or more accurately, a contra Bitcoin take, because I think both Wayne and I

are bullish on the idea of innovation and digital assets and the potential for crypto. I mean, I can't imagine a scenario where Wayne would say, I don't think math is going to play a more important role going forward. You know, our findings on Bitcoin were controversial and negative enough that it basically, as I put them out, my Twitter feed erupted into crypto vitriol. And so part of, unfortunately, what you're seeing is also me try to bait people into saying stuff so that I can identify people I need to mute or block so that I can actually recover my Twitter feed. It's frustrating because it's, you know, I basically have come out and suddenly I'm, you know, one of my favorite movies is Monty Python's

The Life of Brian, right? And I would broadly describe the crypto universe as similar to, you know, the People's United Front of Judea who hate nobody more than the Romans except for the United People's Front of Judea, right? And so like, it is just constant vitriol and anger around, who hate nobody more than the romans except for the united people's front of judea right and so like it is just constant vitriol and anger around um you know which way like well he doesn't like bitcoin because he's a failed hedge fund manager who can't make money i'm simultaneously a socialist

a um elite member of the 0.1 percent who's benefited from the existing system and therefore continuing to shill it. I'm a have fun staying poor individual. I am a statist. I'm a totalitarian. I'm a capitalist pig. Like it, I, you know, basically I'm everything that, that my wife has ever said negatively about me in a moment of anger gets compressed into my Twitter feed for the past three weeks. So we're, we're working our way through it. And hopefully I'll be able to come out the other side and not have to spend nearly as much time cleaning up my Twitter feed. And Wayne, are you ever like stop digging the hole or you're just let him let him go? Honestly, I'm busy with so much other stuff. I don't really I I, yeah, it's, I don't focus on it. I mean, I think,

yeah, no, Mike's his own person. I want him to do what he wants to do. And to the extent he does stuff that, or that he's inspiring innovation or stuff for me to think about, I'm happy to think about it. I mean, going back to the original question is, you know, the gold and the rates and the pieces of our portfolio that are there for, you know, you mentioned the word flight to quality. That was my original purpose in adding those assets were flight to quality related and how they had using certain mathematical tools, how they show a strong negative relationship to falling equity markets, right? And the worst equity markets fall, the more those things tend to have life in them as flight to quality or safe haven assets. And the worse equity markets fall, the more those things tend to have life in them as flight quality or safe haven assets.

And so, you know, to me, the whole question, whatever is going to go on positive or negative about Bitcoin, I really boils down to that one simple question is, does it have the strength to be counter equity market falling? Right. If so, I'm interested. If not, whatever, it's just noise. So to the extent it replaces a piece of the portfolio, it has a potential to until it demonstrates the ability to have that feature. It's, it's therefore just talking and debate rather than being utility, a utility to the portfolio. But it's curious to me, you think you being you guys have these optionality minds of like, just seeing it's curious to me, you'd think you being, you guys have these optionality minds of like, just seeing it as pure optionality, like who cares what, what's behind it. There's huge optionality there. I could argue maybe not so much anymore with it so expensive, but, and,

or which I talk with a lot of trend following managers about of like, why isn't this in your portfolio? Right? Like you don't have to believe in it, but there's a, there's a, that's a very good point on it. Like put it in the portfolio and trend follow it long and short. Right. Like you don't have to believe in it, but there's a there's a that's a very good point on it. Like put it in the portfolio and trend follow it long and short. Right. Absolutely. But then I'd say to the extent that in our portfolio, it has to meet that certain feature of flight to quality to replace the gold position. Right. So to the extent it does, then it's looking for not just optionality, but for a certain type of behavior, right? Then as far as the optionality goes, yes, it may be optionality, but we go back to our original conversation today is what's the price of that optionality? What's the IV you're paying for that directional bet?

And if it's that, you know, if options on Bitcoin are that expensive, then you're not going to get the payoff because your hurdle rate is through the moon, right? So all of this stuff would come into play, but you're right. As price-volume behavior studies, it doesn't matter what the thing is. It's just taking advantage of a trend. And so we do think that way. But in this case, it's got a more specific utility for us that may or may not be the case. It currently is not.

Yeah. And, well, I was going to say crude oil is not going to go to zero but it went negative but um yeah right it's it's got a little risk that it could literally just be zero tomorrow sure exactly rapid fire questions biggest twitter pet peeve from people you follow or your followers i think mike just covered some of his but i'll do any for you wayne i i honestly i love twitter um my only pet peeve would be the i'll call it the echo chamber is that the just by virtue of we follow who we like therefore there's a lot of repetition of ideas and people tending to focus on, you know, what they think and whoever said or confirmed what

they think rather than looking outside for other views. And I wish it was a little bit more democratized in that way for, you know, being more open to other views. And I see some debates at different times where I wish the people would be more open to other views. And I see some debates at different times where I wish the people would be more open to hearing each other. Not that I'd not, you know, that's just very large scale thing. But it's just, I want to use I like to read sometimes people who have nothing to have very contrary opinions to mine, and read their timelines and think about things they say. So if there's, you know, I guess I feel like too many people get trapped in just sticking with who they want to follow for how much it confirms what they already think.

Yeah. Which is a worldwide problem, right? That's the whole Facebook and you're in your bubble. It's so hard though. I've read some of this stuff on my Twitter feed and I'm like, I don't want to follow that guy. Listen to what he's saying. Right.

So it's hard to find the smart intelligent not crazy dissenters from what you believe exactly that's a really good differentiation it's not just any dissenter but it is center with with the rigorous intellect that you could think about you know that would talk about why and you could pursue those other ideas more uh more robustly um are you guys moving on anything like clubhouse or any of those? I don't even know what that is. So apparently I'm not moving on it. I was invited on by a friend. So I have logged on and I immediately logged off saying, oh my God, I can imagine nothing worse than people speaking in isolation and everyone following along. Right. It's I think it's a remarkable business model.

If you think about it, people have played it very well. Dan McMurtry, who's a friend of mine and was one of the early super Magatu on Twitter. Very well known young guy. I think he's nailed it. Right. Which is Clubhouse is basically the velvet rope room in the club, right? I think Clubhouse was unintentionally or perhaps intentionally designed to allude to this. But it's the equivalent of somebody saying, hey, I was at the club with P. Diddy last night. No, no, you weren't. You were in the same building but he was in the vip room right you know with a bottle

with a bottle service and sitting behind a velvet rope that you're not allowed behind but the story gets told i was in the room right and i so i actually find clubhouse the little bit that i've seen of it i i was remarkably disappointed all right we won't look for you on there and especially you wayne you don't know i haven't used it yet either so i'm not one to talk um and then what we're saying here with covid remote work if you guys had to go work together somewhere remote which which would it be santa monica or san fran or somewhere else monica or cayman's any boats i I've personally fallen in love with stay at home. I mean, it's strange to say, but I love, I've got this awesome little office space here.

It's in my basement of my house. I feel like it's my bat cave. One day we're going to have a special episode where you reveal what is in that 1970s Russian file cabinet behind you. Yeah, that will not be revealed in a public forum. No, I'm just kidding. Yeah, so I just I love the space and I love the fact that I can go up in the middle of the day and see my family and all that. I've gotten really, really used to it.

And I've been actually questioning whether it makes sense to go back to an office. Honestly, I know this is happening everywhere and people are talking about it. So I'm a big fan of the continued remote and maybe having an office every few days just to connect. And, you know, once or twice a week. I don't know. So we're thinking that through. But I don't think Mike's leaving San Fran. I don't think I'm leaving Santa Monica. So I'm not sure that that's going to be a week. I don't know. So we're thinking that through. But I don't think Mike's leaving Santa Fran. I don't think I'm leaving Santa Monica. So I'm not sure that that's going to be a possibility. But luckily, we've gotten very used to and accustomed to the remote work. And now it's so natural that it doesn't feel like, you know, initially, actually, when Mike joined, it'd be,

oh, is this going to be a problem that you're up north and we're here? But now we see that not only is the problem, it's actually, we can all be more productive and more efficient in doing it this way. And what, sorry, go ahead, Mike. Yeah, no, I was just gonna say, so first of all, I don't know if I'm going to leave California or not. I've expressed some reservations about California at this point. But I tend to agree with Wayne. I mean, look, we were incredibly fortunate to have the pandemic hit and create the work from home environment. Because if we were trying to build Logica under normal circumstances, we would have spent an incredible amount on airplanes. We would have had to have traveled under difficult circumstances to places like Europe, places like

Australia, et cetera. And as it exists today, we really lucked out that we were able to, Wayne and I can wake up in the morning, have a meeting in Europe, followed by a meeting in Chicago, followed by a meeting in New York, followed by a meeting in California, followed by a meeting in Singapore, all without leaving our house.'s it's proven to be remarkable. Now, at the same time, I think it creates challenges for most firms. If Wayne and I were not older, if we were not more well known within the industry, if there wasn't a known quantity around us as entities, I think it would be more difficult. provided extraordinary cover for us to build the firm without having to spend as much money or waste as much time in transit as we otherwise would have. I was going to, I'll just ask you guys both because you deal with allocators all day. Like, do you think that will stick? I was

pleasantly surprised that allocators were so willing to go on Zoom and do videos and not travel. So I'm curious if that will stick, right? It used to be you had to do an onsite visit, you had to do this. So I'm wondering if that's going to leave the due diligence process for a lot of these firms. Any thoughts? I think as always, some will get, you know, some will adopt and say, hey, the same as what we're saying is this is, you know, this is very achievable and we can get more done this way. And so they see the light, and we'll be able to, and we'll continue doing more of that going forward. Others can't wait for it to get back to normal. I have generally heard both views. And, you know, so I think there's still, you know, even during the

pandemic, there's one institution that continues to ask us when they can do the office visit. And I continue to push it back. I'm like, no, I'm not ready for those meetings right now. But they want to do it during the pandemic. It's so important for them to do office visits. And so I think it's the whole spectrum. But if I had to guess, more people will be open, and that's what it feels like, to doing more remote ODD and getting at least a lot of the heavy lifting done. And maybe just a one, a quick office visit at the end, just to confirm that it's a, you know, there's a bunch of living people at a location. Yeah. And you also have the addresses, both of you, right? Santa Monica is like, ah, let's, let's do that office visit. Right. Exactly. You're in somewhere in New Jersey or something. They might say, yeah,

well, yeah, let's skip it. Right. Exactly. Right. Yeah. The NFA is famous for doing their Florida audits in January and February. Surprise, surprise. The only thing that I would I just want to add to that. I mean, so very quickly, like I agree with Wayne in general on this, but I think the real challenge is not people like Wayne and I who have done this for a very long time. The thing that worries me most about the move to work from home is that it's harder on the younger people coming into the industry because they don't have the opportunity to sit in casual conversation with people who have been doing it for a long time. And so if I'm going to push back on Wayne in terms of whether we'll have an office or not, I do think that there is a component at which we need to be thoughtful about how do we bring younger people into the organization? How do we give them the opportunity to model

our behaviors and our insights and to develop those in casual conversation? But that's the group I'm most worried about. I'm not paradoxically for guys like us, this is heaven. And I also think it's the worst possible condition for young people. Yeah. A few in our office and other offices, I know if they're just like working from home in their little apartment in Chicago or Manhattan, that's like, they're miserable. And they really miss that interaction. That's a broader theme of like, where do all the next layer, you know, a Chicago guy, like the old trading floor. And that's where most everyone I know came out of the trading floor and learning the ropes, the old school way. You know, that's all computers now, or even remote, as you're saying, like, where does that next layer of talent come from?

But that's for another podcast. wall street bets right yeah right straight out of wall street bets the um i was reading that article on chris city that he would stand outside wall street and hand out his trade record like i would love to have heard some of the comments from the guys of like get this out of my face um cool and i'll finish with uh we've already asked you your favorite star wars characters so i'll stick with the um marvel theme favorite marvel character besides iron man and captain america since we've covered them oh well i was gonna say iron man i'll give you iron man wayne you got a favorite um i mean it was also iron man but i'll think of another favorite i could go harry potter

character instead if you prefer no i love the marvel universe um trying to think um yeah i don't know this second i can't i i love them all i i'll say hulk uh i just i have a thing for hulk and uh one for one reason is my little four-year-old boy has been wearing a Hulk outfit recently, running around the house, smashing stuff. Nice. Yeah. That's, it's given this Hulk a new meaning to me. It's this little Hulk. And outside of that, I just, that power, it just kind of is so dominating.

It just, there's something about that, that I like. Andy's like a nuclear physicist, right? Exactly. Exactly. Got a brain up there too. All right, guys, it's been fun. Thanks so much for your time. I'm sorry, I just had to ask Wayne, does he have the Hulk hands?

Yeah, the outfit didn't come with the hands, but it did come with the head head piece so it's yeah i'm gonna send you i'm gonna send you a pair of the hands he'll love those yeah those are good whack them together they go hulk smash it's it's good that's great yeah uh all right guys it's been fun thanks so much we'll uh talk to you soon and keep up the good work. Thank you, Jeff. Thank you. Take care, Jeff. Thanks a lot. Take care.

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