The Derivative - WTF is LDI, and What’s working in Vol Trading with Zed Francis of Convexitas

Episode Date: October 13, 2022

Cover the kid’s ears… because we’re going back to our WTF format to ask what the actual Fingazi is going over in the UK with the bank of England raising rates, then buying a bunch of Gilts to save their pensions. The headlines say it’s some new-fangled LDI concept which led these pensions into trouble. But our guest this week, Zed Francis of Convexitas, says not so fast… the LDI actually is fine – and it was the reach for yield and adding some longer duration via derivatives which likely caused most of the problems. Zed used to work at Legal & General – which sounds like a UK pub to us, but had a solutions group which created some of these LDI frameworks, so Zed’s in contact with some of the guys on the front lines during this shake-out. US pensions also use an LDI framework…is it coming for them too? What are the main differences between US and UK? Is duration the same as volatility in these cases? Are these pensions sort of short gamma? And of course, while we had him, why is some stuff (gamma) working in the Vol space when a lot of popular VIX/Vega based models aren’t.  SEND IT! Chapters: 00:00-02:37 = Intro 02:38-17:20 = Pension Differences US vs UK 17:21-34:15 = Where does the risk show up, Duration & waterfall events 34:16-43:57 = Leverage: Keeping the drawer closed 43:58-55:42 = Where do Derivatives come in & how to plug the hole 55:43-01:02:02 = Struggles in Vol Strategies 01:02:03-01:11:09 = How Vol has changed Follow along with Convexitas on Twitter @convexitas and for more information visit their website at convexitas.com Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy Thursday, everyone. Yep, just a plain old October Thursday, which means we're getting on towards the end of the year. Wouldn't surprise me to see some Christmas stuff popping up in stores soon.

And that means it's almost time for our annual Thanksgiving to Christmas pod break, where we refresh the batteries and work on securing the next 11 months of great guests. Speaking of which, we got some good ones to close out the season coming up. We have Michael Harris of Quest Partners next week to talk CTAs and Managed Futures.

Then fellow Chicagoan Caitlin Cook to debate crypto. Plus macro elf, if we can ever nail him down. And a return of our first ever guest, Wayne Himmelson. On to today's show where we're bringing back the WTF episode format to hear what in the actual F is going on across the pond with UK pensions, the gilt market, and something called LDI, or liability-driven investments. Who better to shed some light on LDI than Zed Francis of Convexitas, who before he was involved in Equity Ball worked in a solutions group for a UK manager doing just these types of structures. We get into how the UK differs from US pensions, whether this is an LDI problem

or risk management problem, and why you probably shouldn't blame derivatives too much. We also could miss the chance to pick Zed's brain on what's going on in equity vol land, where the gamma trades he's known for have been picking up the slack where Vega trades others are known for have struggled. Send it. This episode is brought to you by RCM's outsourced trading desk, which guys like Zed use to get quoted up on size and index options and work orders 24 six as an outsourced trade operation. Check it out under the services slash trading firm slash 24 hour desk on the main navigation at rcmalt.com. And now back to the show. All right, everyone. We're here with my buddy Zed Francis on a rainy Chicago day.

We could have done this in person, I guess. we keep saying that every time we're on, but maybe next year I'm thinking maybe we'll do some sort of like once a month on my porch deck or something outside, outside pods. I slacked my business partner, Devin, about 10 minutes ago to say, all right, leave me alone. I'm ready to go talk to Jeff. And he was like, oh, you guys are doing this in person? I'm like, nah. But wanted to get you on. You guys had a super interesting post over at convexitas.com, which kudos for getting that URL, by the way. That's a good one. Right, everyone else is convexitas.us or whatever. Hard to get the dot com these days. But I digress. So good post over there on all that's going on in the LDI liability driven investment.

And turns out before you were a equity index option guru, you knew a little bit about this stuff. So I wanted to get you on, talk through this. It was a big topic the other week. I saw GILTS went back up to those same highs, I think, last night, yesterday. So it seems like the story's not completely over. So let's start there. The story has changed, Jeff. Last week is very different than this week. Okay, we'll get into that. So let's start with basically why you know anything about this. What's your background on how you got into LDI? To me, the main thing about this is it's funny because LDI is something that I'd say not a lot of people are experts in. And for good reason, it's kind of boring. Like the whole goal of it is to not

have to worry about anything. And so because of that, even in the, you know, pension consulting community, they're kind of like the lockdown assets. They like, okay, we've allocated those over there. Once a quarter, I just kind of ring you up and be like, is it doing what I thought it was doing? And, you know, 99 99, 100 times is, yeah, it is. And everybody goes back to focusing on equities and PE and VC and so on and so forth. So it's funny that the, we'll call it lockdown, boring piece of the book finally showed up in headlines.

And obviously you only show up in headlines if things are kind of hairy. It's not because everything's going really well. But yeah, no, it's a fun one that I oddly have some direct experience in. So from 2013 to 2016, I was at the UK Asset Manager, Legal and General, in the US arm. But the group I joined was called the Solutions Group. And their core offering was LDI to U.S., mostly corporate pensions, some insurance, some publics. But LDI really is a corporate pension game.

And why that was interesting to me at the time was a large corporate pension that implements LDI strategies. They do so via separately managed accounts and their holdings are a mixture of credit and treasuries. And as you say, as a derivatives guy, if I have a segregated account of a bunch of treasuries, that's collateral. That's a huge opportunity to build out a derivative overlay business. You already have the relationship, you already have the assets, you already have the collateral, you already have the assets you already have the collateral you already have the correct operational structure like this is great like this is a easy tack on cross sale business and so that's why i did that uh shift in in my career for those three years um but yeah from those you

know great name by the way legal in general right very very very uk yeah like you can tell it's insurance like right you like you you work at legal in general and then you go down after the day and have a pint at owen and engine or something like right exactly exactly but anyway from from that three-year experience like know the ins and outs of lbi uh pretty darn well both the u.s side and the you know across the pond UK side from having a UK parent. So correct me on my naive understanding here. So when I read the headlines, it's like, oh, right, they, they're trying to match their liabilities to their asset returns. Right. So I use the example, they have a billion dollars in annual liabilities. So in gilts, English bonds are paying a yield of 1%. So if I want to get a billion dollars out of that a year,

I need to buy a hundred billion in gilts, right? That would throw off a billion in yield. And you can correct me after a second. So I was like, okay, but the problem is they don't have a hundred billion dollars. So they borrowed or they levered up their portfolio via futures or whatever to say, okay, give me $100 billion exposure to get the billion outflow. And then just got railroaded by the duration mismatch.

Yeah, so it doesn't really have anything to do with, we'll call it yield or just cash distributions from all these things, right? There's no free lunch. Like you use derivatives to, you know, buy a bunch of duration on swap. There's no income coming from that. It's a risk parameter, right? So it's balancing the risk exposure of the assets and liabilities to match. Yes, the ultimate goal of LDI is to have your pot of assets be able to pay for all the distributions that you have in the future. And that's, you know, if you're a pension, you know, basically what your distributions are going to be. If your actuary tell you like this is how much we expect everybody to live and this is the waterfall. And hey, this is about what you're going to have to pay out every month going into perpetuity. If you're an annuity, same thing. We have a pot

of money today, and we understand that we have to pay things out in the future, and we're building an asset portfolio to best have the likelihood of paying out those liabilities, i.e. distribution, same difference. And general insurance contracts are quite similar. You have a pot of money today, and you're using that pot of money to be able to pay off expected distributions, i.e. liabilities into the future. So, you know, very simply, that's the goal is you got a pot of assets and you hope those pot of assets are going to be able to pay off all those distributions into the future. The distributions into the future are pretty darn well known. Like they're not shifting around a ton every once in a while. You know, the actuaries say, oh, shoot, you know, people are living longer and your liabilities might go up.

But, you know, in general, it's pretty darn well known. So what's different. I'm going to share my screen while you're talking about this. Oh, right. So that right you're pulling up is, you know, the post they wrote, which is just a very vanilla sample of what out outflows look like, your liabilities, your known distributions for a U.S. plan. And that's the key. That's a U.S. plan. And then the asset mix that you're going to have that kind of best matches those cash flows, which, again, is a blend of credit and treasuries.

So really, you said like it sounds pretty darn vanilla, pretty darn low risk. But my immediate question is, isn't this just what everyone's doing? Aren't you trying to get an asset mix that pays your liabilities? Like where's the aha moment? There's no super aha moment to be frank.

Most investors think an absolute return. Like, hey, i just want to like turn my pot out of money in terms of the biggest pot of money possible and if you're an insurer whether you're running traditional insurance product annuity product or again a pension that having returns greater than the amount of money you have to pay out has very little benefit to you ultimately right you know the risk you don't get to pay out has very little benefit to you ultimately, right? You know, the risk doesn't really- You don't get to charge a performance fee.

You don't get to keep it. Right. And if you're a pension, like, the money's kind of trapped. Like, it's really hard these days. You know, back in the 90s, it was different. But like, really hard these days, regulatorily, to get the money out. So if you're a CFO at a pension, you don't really care about the outperformance. You just want to make sure you don't have to put more money in. Like, you're just like, do I have enough

money to go ahead and pay for all my liabilities and into the future? And then again, that's why, you know, LBI is a subsect of an, like, you know, financial services industry that you don't come across with. You don't, very few people you talk to run pensions. And those are the kind of folks that would actually care about this. So, all right, this all sounds, again, vanilla, boring, like how the heck could something possibly go wrong? I want to start off by saying the US and UK pensions are very different. So, you know, everybody is saying like, oh shoot, what happened in the UK is it's going to come to the US. It's pretty darn unlikely and it's completely structural.

So first off, the US starting, you know, a good 40, 50 years ago, started shifting retirement at corporate entities from DB, defined benefit, i.e. pensions, to DC defined contribution, meaning 401ks, right? So that's shifting the liability from the corporation to the individual, right? Now the individual is responsible for their own retirement. Sure, they're, you know, adding additional money to the 401k matching contributions, but it removes the liability from the corporation.

It shifts it all to the individual. In the UK, it's not the case. And basically legally, you can't do it. They're still all defined benefit plans, i.e. pensions. So one, the market in the UK is substantially bigger than it is in the US. Just because in the US we've had 40, 50 years of runoff. So it's smaller. Corporate pensions in the US are only like $2 trillion, which seems like a big number.

But in the US with 200 plus trillion of assets when you include housing and all that kind of thing, it's not very big. So it's hard for it to create a massive influence on the marketplace, where in the U.K., that's not the case. It is a substantial portion of the overall market, a substantial portion of this specific market, which we'll get into as we keep wandering down the path. The second bit of that is if the US pension universe has slowly been shifting from DB plans to DC plans, it means it's all legacy liabilities. Corporations are paying pension distributions to 50, 60-year-olds. They're not accumulating new ones from like the 20, 30 year old that's just starting to work. Where in the UK, that's the opposite. They're still collecting new liabilities

from the person that just graduated from university is entering the workforce. So this means the duration of the liabilities in the UK is substantially longer than the duration of the US. Because again, we're just legacy distributions for the most part, where that's an ongoing plan. And so what that's called in the pension world is closed plan, i.e. there's no new participants

entering the pension plan versus an open plan, meaning there's new people showing up every day. And so of course, if you have a bunch of 20 year olds, it means your long dated liabilities are still pretty hefty. Where here it's just, oh, like the actuarial, you know, chance that a bunch of people live to 110, right? It's small. So you have the mismatch of, okay,

it's a really, really big part of the overall investing universe in the UK and just the liabilities are like 50% longer in comparison to the U S simply because the plans are open versus closed. And then the final piece of that is, well, okay, one more big difference. One more big difference between the US and UK is the discount rate. So we all think of, we'll call it equity world DCF model, like that's just discounting all those future cash flows to get to a present value today. That's all that's going on in LDI as well. It is discounting all of those future liabilities, those cash flows,

those distributions to a value today. Same math, you know, very, you know, boring for the most part. The only difference is what the heck are you using to discount those cash flows? So, you know, equity world might say, hey, you know, I got to earn treasuries plus 4% for me to buy that equity. So, you know, today, whatever, I'm just going to use an 8% discount rate for my equity cash flows. For US and UK pensions, it is defined, it is regulatorily defined on the corporate pension side, public pensions way different in the US, but on the corporate pension side, it is defined. And in the U.S., those liabilities are discounted by extremely high-grade credit, i.e., A or

better, you know, single A, double A, triple A credit. Whatever the yield is across the curve on that credit, that's how you're discounting those liabilities to today value. And thus, that's how you're discounting those liabilities to today value. And thus it affects how you're going to invest. If you're discounting credit, you're going to buy some credit. The theory being you can, right, if they invested just in that index or that asset class, they would get that return and they'd be able to- Right. I'm discounting it based on this asset. And if I buy that asset, it's going to give me that return. We're all done. Right. In the UK, there's not really like depth credit market. And what they utilize is their discount rate is a mixture of gilts and linkers. So gilts are just treasuries

and linkers are essentially tips. So their discount rate involves- Linkers, that's a new one. Yeah, treasuries plus inflation. Like that is the mix of how they discount their liabilities over there. So rather than owning a lot of credit, they own gilts and linkers, i.e. treasuries and essentially tips.

So those are kind of like your major differences. UK, much bigger, you know, part of the overall market. Their liability is a lot longer because their plans are open, i.e. new folks are getting a pension versus that's not the case in the US. And then finally, the discount mechanism in the UK is essentially treasuries and tips, i.e. inflation vehicle called gilts and linkers for the US, it's credit. So those are major differences

between those two universes. Right away, I see the issue there, right? The gilt volume and liquidity is way smaller than US treasuries, even though the UK pension system that relies on that is much larger. So there's a mismatch there. Right. So we'll start water falling into like, where does the risk show up from this situation? And so, all right, if your plan in the UK is still open, that means you have known future liabilities, but also unknown future

liabilities. I every time you hire a new employee, oh, we got more, right? Like we're continuously potentially adding. And if you're a CFO of corporate, and your plan is 100% funded, you have enough assets to go ahead and support all those future liabilities, which is incredibly common in the UK, actually. And the reason for it is actually LDI. It was a successful thing that they were doing LDI prior to 2008. And so they didn't have the US problem being, you know, 110% funded, and then 60% funded after a great financial crisis. UK actually was 100% funded pretty much all that time. So you're 100% funded, but you know your liabilities are going to go up if you continue to hire people, which as a

corporation, you would expect that to actually happen. So if you're a CFO of one of those plans, you don't totally lock it down. You lock down like a big percentage of it in LDI to try to just pair things off. But you also want to take a little bit of risk and you know ldi to try to just pair things off but you also want to take a little bit of risk and you want to out earn those liabilities a little bit because that way your pot of money can also achieve enough returns to pay for the new people versus taking money out of earnings to start you know put funding attention to pay for those new people so why wouldn't i just put new ldi instruments on as the new people get hired because they need more money you have to fund it you have to go actually take money out of earnings that damn money and actually pay for this person so

you want a little bit of like you know whatever having your cake and eating it too i want to de-risk it but i also want to take a little risk to, you know, the 5% of new people I hire every year that the pot of money already have can go ahead and support those folks. And so over the last, you know, 13-ish years, when the treasury and or gilts market and the tips and or linkers market was very, very stable, it was kind of an appetizer to go ahead and start taking a little bit more risk. And the little bit more risk is, hey, rather than buying gilts, let's buy like some oddball stuff that are basically government protected. So like in the US, it's like, you know, they're Brady Bonds, Refcos, things that are technically backed by the US, it's like, you know, they're Brady Bonds, Refcos, things that are technically backed by the US government, but are a little different. And so they

have a little bit higher yield. So like you, you know, people in the UK were rather than buying gilts starting to buy some of that, you know, little bit riskier stuff to get an extra 20 basis points, because that's kind of all they need. They need just a little bit to, you know, out earn their liabilities to pay for the new folks. And then, you know, nothing continued nothing continued to happen so what do you do you go out the risk

curve a little further and they start buying like truly illiquid stuff like private investments that have you know one month gates you know like not not you know crazy like private credit funds or whatnot yeah right so it's like i have access to the capital but so this is where it separates from just an ldi story right so it's like that's the base of what's going on but then what you're saying now is what i didn't understand of this isn't that ldi enabled this leverage and more risk taking or it depends i guess what side of the coin you look at it but um you're saying okay your your secondary pot of collateral if you look at it, but you're saying, okay. Your secondary pot of collateral, if you will, they started going out the risk curve and illiquidity curve a little bit to try to find that extra 20, 30, 50 basis points per annum.

And so your secondary pot of liquidity is obviously getting more illiquid. And thus, if there's giant moves, it becomes problematic because your access to that liquidity for collateral needs is diminishing as you keep going out that risk and liquidity curve. So that was definitely happening over there. One of the biggest separators, though, I would say, you know, this all falls under what we'll call effective risk management. So there's definitely folks out there that had no problems because they didn't allow their clients to do this. They said, you know, we actually think it's plausible in our model that a 200 basis point sell off in a month is possible. And we got to make sure we have enough collateral

to be able to handle that. And when their clients said, well, can I do this? And they said, no. And maybe they went to a different manager that allowed them to do it. But one of the biggest issues is the- Let me pause real quick. So what does that look like in terms of leverage?

If I'm like, cool, I want to put on this and this and this, like how much, we'll go back to my example of a billion dollars they had, how much of that nominal? Are they at $2 billion? Are they at $3 billion? Are they at one point? Yes. Let's talk about in duration terms because it's easier to like comprehend. And apologies if you're already going to get there.

No, no, it's fine. So, you know, if you're buying cash only instruments, like 30-year treasuries, 30-year gilts, the longest duration you can kind of get to in gilt space, because they don't really strip things out with liquidity. It's like you can buy 30-year strips here, which basically have a 30-year duration, which is like a zero coupon bond, where you put money in a day

and then you just get money back in 30 years. And because you get back in 30 years, it basically has close to a 30 year duration. If you have like a 30 year treasury, you obviously have a bunch of coupon payments and then you get in theory, your a hundred bucks back. And because of that, the duration of your 30 year treasury at these rates

is like low 20s at this point, similar to gilts. So, okay. So the most you can get from cash investments is kind of like low 20 duration. The problem is you have really, really long day liabilities and not all your assets are in fixed income. You own a little bit of equities, you own a little bit of credit that's shorter duration, you own a little bit of private investments that are shorter duration. So then your LDI portfolio just has to make up for all the duration that those assets don't have. So you can push your LDI portfolio to have a duration of 30, 40, 50 years. And I would say most risk managers would probably try to cap things at about 40-ish years. But again, we've had 13 years of pretty stable interest rates globally. And when that happens for a long time, you know, sometimes the we'll call it the asset raising sales team

can convince good risk managers to take on a little bit more than they necessarily wanted to. So that's your starting places. You know, let's say like an LDI portfolio in the US on average, probably has like a 30-ish year duration. That might even be a little long, but like 30-ish year duration. And like in the UK, it was like a 40-ish year duration, something along those lines.

But obviously when rates start selling off, which they have, you know, prior to the last two weeks, you know, start of the year to, you know, a month ago, they'd already sold off substantially. That means the duration of your portfolio is extending simply because you are trying to maintain the same amount of exposure, but your asset base is falling because you have some leverage within there. And so your duration slowly,

but surely extending. But if you're a good risk manager, you would have had many, many, many, you know, hard conversations with clients to say, you need to give me more capital well before two weeks ago. It's another way of saying that, right? If I buy a million dollars in 30-year bonds, if I'm in year 29, right? Like I'm pretty darn sure I'm getting my million dollars back, my principal back, ignoring the coupons.

In year three, and I'm down to 800K in that, like that's pushed my duration out that whole, right, 27 more years in order for my view of when I'm going to get that principal back. Yeah, but like ultimately – By definition, the duration is actually the same, but it like the the psychological view of what it is right as soon as you started using like in the uk they're using swaps in the us they're using swaps and futures like each firm does it use a different tool okay so they're like technically actually adding more duration yes they're adding more duration to those ldi portfolios for the same amount of capital that you have and the capital is also going to be invested in in guilds and or treasuries in either place so as you know you start losing money you're trying to maintain the same amount

of exposure because again the exposure you have is just paired off with your future cash flows like the goal is just to hold on for 50 years. If I buy these things and I'll be able to pay out everything, but I got to be able to hold on to everything for the whole, you know, 50 years. As the market, you know, started selling off, rates started going higher. That just means the duration of portfolio is naturally extending because your capital base is falling, even though the exposure that you're trying to hold remains the same. And so, you know, at March, you probably had a call of clients that said, hey, I need you to contribute, you know, a little bit more money. And June, you probably said the same thing, like as a good risk manager.

And then, yes, the last two weeks were chaotic and you probably were calling for more money, but it wasn't the like margin call. I need more money tomorrow. It is, hey guys, I need more money. We're still fine right now, but like, I don't more money tomorrow. It is, hey guys, I need more money. We're still fine right now, but I don't need it tomorrow. Where things got hairy, most likely, but pretty confidently, is larger pensions will do everything in separately managed accounts.

You get a lot of benefits from that and the manager gets a lot of benefits for that. So if you are running an LDI portfolio and an SMA, separately managed account, then it's pretty easy to go ahead and recapitalize that portfolio. You're talking to one person, it's their account. And when you say, hey, guys, do you have some cash? Do you have some credit? Do you have some equities? We need some more collateral. It's pretty easy for them to say, yep, we'll go ahead and move it from pot A to pot B. You're now collateralized. Not a big deal, or at least much easier in terms of the situation. Where you have issues is in commingled products, whether it's a US like CIT or a fund or anything along those lines, where it's a bunch of investors in a single product. Because if you have leverage in a commingled vehicle and you start, you know,

getting a little bit more risk and a little bit more risk and a little bit more risk, there's kind of a lot of other things you can do. Like, are you going to call a hundred people and say, Hey, we're going to give you your money back. If you don't give us more money by the end of the week, that's not really, they might say, yeah, perfect. That's not really a successful process in a commingle vehicle. And in the UK, again,

because it's essentially mandatory for any sort of corporation to have a pension plan. That also means there's a lot of small pension plans, you know, a lot of 500, 100, 500, you know, 1000 employee type places also have pension plans. And so you're talking, you know, 20 million pound pots of money that the manager probably doesn't want to do an SMA for. So, hey, we got billions and billions of potential assets, but they're all in $20 million increments. What are you going to do?

Well, hey, we know how to do this LDI things. Let's just make it fun. And we can have multiple different funds. We could have like the low duration fund, the medium duration fund, the high duration fund, the leveraged high duration fund. And we can go ahead and basically do bespoke LDI for you by just having different allocations to all these funds. because it's really difficult to recapitalize that vehicle. And that is likely where the stress really came from two weeks ago, is those funds that had derivatives in them to extend the duration to 40, 50 years,

started going to 60, 70, 80, 100 years on the aggressive sell-off and and guilt's ie treasuries just uk style and along with it you know swaps over there are cleared like they are here now but like you know this is a this is an exchange you know margin calling this isn't you having an otc instrument with like a bank where you can might get some flexibility you know you as you know well you know jeff like when the exchange says give you more money yeah you're on the shot clock you don't have a lot of time to go ahead and solve this situation and so ultimately like what really caused the waterfall event in the uk is one the really big part of the market by overall market one two their duration is really really long because the plans are open. You know, three, like everybody has a pension. Like it's basically mandated,

which creates a bunch of smaller pensions. And then finally, like the asset managers say, hey, like we need to be able to service everybody and we don't really want to do teeny tiny SMAs. So like, let's create a vehicle that's easier to accumulate a bunch of these assets. And that commingled vehicle was probably the ultimate downfall. biggest issue was basically having you know a decent amount of these assets and funds rather than sma vehicle because there's there was there was no release valve right you know you're just marching and so those funds had to go in and sell gilts basically right so they were forced liquid and youate. Actually or synthetically? Yeah. And so I'm not picking any managers, so I'm not going to say.

Who are the managers? Like banks we're talking about? In the UK, there's three. There's smaller ones and stuff, but there's three predominant. It's legal in general, it's Insight, and it's BlackRock. Those are the three majors. They basically own the market in the UK.

And why do they need, is a manager needed? It seems like it's what used to be simple enough where you can do it in-house, but I get it for the small. I mean, like again, a lot of people don't really love doing bond math and key rate durations and maintaining. Like you need a trading desk.

And ultimately Jeff, like they're not charging substantial fees like i'm talking like they're charging three basis points uh like big big pots of money and those like funds that are smaller pools probably charging like you know 15 basis points so like outsourcing this does make sense like you know for for folks um but your your uh largest asset manager uh in the world uh sent out a piece last week that basically you know patting themselves on the back saying you know what is all this ldi and like we're great at it and like it was kind of a champion piece and it's part of it and again like yeah oh yeah like we you know problem solve kind of like yeah and as part of that piece again and like kind of like the context around it was like

you know we're good at our jobs you know let's say something different, I think, to our minds. And the exact words for this segment was, we've been reducing leverage in some of our LDI funds, acting prudently to preserve our clients' capital and extraordinary market conditions. So that's, you know, the fluff of, we, we, we delevered. And we, and we we did so like maybe not at the best time. And like, we were kind of forced to do it. Now we can, you know, sugarcoat it and say like to preserve our client assets. But again, your clients hired you to own assets, to match their liabilities, which you were doing.

So taking off any exposure is not exactly doing your job. That is a forced decision that is not good for your end client. And again, they give you a little hint, like LDI funds, that they specifically said they're funds rather than LDI, again, signaling where the event likely took place. Do you feel like this is a problem, right? Some Ben Hunt, who I like, but he gets a little conspiratorial, right? He's like, this proves financializations run amok and right, like all this stuff of like, it went too far and it got sold by these groups of like you need this you need this let's add more leverage right was it a money grab of them to kind of and i know you don't know all the answers but just your thoughts on yeah so i would say there's two pieces that so you know leverage is a is a interesting term within this context right because again like these weren't absolute return bets of any variety it is like i have to make all these payments in the future and i'm building a portfolio that pairs them off but the key is again you've got to be able to leave the

both sides in a drawer like you can't have anything happen like in the middle so it's like you know essentially like a convergence trade now obviously like the most famous trade is a disaster with long-term capital management but again that was like you know an arb position with a ton of leverage where this is ultimately like you know i got a bunch of money to pay in the future. I need to buy assets that pair those off. And if there's decent risk management, the correct operational structure, like it's, it's, you know, never say never, but like, it's very unlikely disastrous things happen. Now, when you stop, you know, focusing on good risk management and more on absolute return or possibly, you know,

increase sales and put things in, you know, a less, you know, efficient operational structure to be able to access additional collateral for something that involves derivatives. Yeah. Like problems can show up. So, you know, leverage is like an interesting word where you're like, you know, I'm trying to like, I have one over here and I'm trying to have one over here. And yes, I need derivatives to make that happen. There's, there's, it's not taking leverage in a, I'm making a bet type of scenario, but you do need to have good risk management and good operational structure to do things correctly. On the other side of it, without a doubt, what took place before the Bank of England showed up is all these folks basically said, listen, we need more collateral before the market opens tomorrow or else the pensioners are going to be left holding the bag. So they came in with a compelling pitch to a central bank to have the

save me. Common person, all the UK citizens are going to be left holding the bag. And we don't, we don't actually care where the market goes. Ultimately, we just need to convert the liquid stuff into liquid stuff to be able to post. We got to keep the drawer closed. We need a bridge, right? We need a bridge to be able to keep the drawer closed. And so, you know, the bank of England responded. And as you've seen, like every single day, you know, whatever their number was that you've seen, like every single day, you know, whatever their number was

that they were willing to buy every single day, they've been only buying like 10% of that, right? It's the, you know, facility they created hasn't really been used after- More the headline than the amount of ammo, right? Right, right. So we, like most likely the funds were forced to de-risk. They didn't have a choice to find more collateral.

So they already went from, at that point, probably 80 years duration back to 40. So they're stabilized. The SMA accounts had the little bit of time they needed, if they even needed it, to go ahead and re-collateralize themselves. So the Bank of England will say for a moment, job well done, I guess. Like, you know, minimally stabilized things, a pension.

Whatever the English slang. Yeah, but what's, as you mentioned at the start, like we're all the way back, essentially, to the same level of yields. And in my view, it is a completely different story now. Okay. So initial catalyst, yes, likely pension driven, mainly from the commingled funds associated with LDI and the pension world. Now, I think this is the, you know, we'll call it ultimate fear of all central banks kind of like move, which is, you know, for over a decade, it was, you know, don't fight the Fed, don't fight central banks. And the last week and a half might say, oh, man, maybe

it's actually finally profitable to fight these central bank policies, i.e. maybe the market finally has some control of fair market value rather than any sort of manipulative fair market value that central bank policies can kind of drive. So I think this is very different. I think this is, we'll call it natural sellers making bets versus any sort of forced liquidation from the pension plan community for this second move here, which I also think is why, you know, our Fed microphone pieces have been out every day for the last couple of weeks because I think they kind of realize this is a credibility problem.

And if we lose credibility, that means we lose control. And if we don't have control, you know, saying we don't, we can't stop things if they actually get bad. Well, yeah, it was kind of right. It was, Hey, we're, we're tightening and going to do these purchases at the same time. It's like, what? So that's what you're saying like that. They lost credibility saying they can do both those things at the same

time. And the, the initial initial actor if you will it's likely been mostly cleansed and now it's now it's more a marketplace saying wait a second like maybe you know yields should actually just be higher yeah and maybe maybe that long-term cause cures this right like that's to me would all this have happened if we weren't, didn't go down to zero rates, right? Was the extending duration, all that just because we were at such low rates? I mean, it's a huge driver of just natural duration extension, right? Like a 30-year bond at a 10% yield versus a 30-year bond at a 0% yield, it has 2X the duration, just naturally, same bond when yields are zero. So it's a just natural massive duration extension by having really low discount rates. And is it fair in

coming back to volatility and options talk, like kind of duration equals volatility in that scenario, right? I always think it's funny. I feel like this is why a lot of basically non-fixed income people duration is hard to grasp and what i mean by that is raising my hand like don't tell anyone that i started my career in the bond pit and i don't really understand duration but yeah yeah i mean like and i think i think the the simple reason for that is if you're an equity investor, longer timeframe is viewed as less risky, right? Like if I have a 30 year holding period, like there's almost no risk to equities.

If I have a 10 year holding period, like more risk, but still nothing. And if you said like one day, you're like, Oh my God, that's a ton of risk, right? Fixed income is literally the exact opposite. Like a one year, one day bond has essentially zero risk. Like, are you going to have default like in the next 24 hours? You probably know about that. That's going to happen versus 30 years, like a heck of a lot of things can happen. So I just think the, the most people are absolute return space, meaning, you know,

equities, VCP, you know, estate, where time is your friend. Like time means less risk. Where in fixed income, it's obviously the exact opposite. The more time you got, the more risk you have. But that's confusing. That 30-year bond, 10%, 0% has the same, technically has the same time period to it. Time period.

Right, but the known, like fixing them, you have a known amount of the best case scenario, right? Best case scenario is to get all your coupons and your money back. Like you can't do better than that. Like you get to mark to market better than that over a 30 year period. But like, that's the best you can possibly get. Where obviously most other assets you're hoping for upside

beyond a known situation. So that, I mean, that's why it creates that situation because you know the best possible seat and only bad things can happen in comparison to that seat um and if you have a zero percent coupon like there's not a lot of great things going to happen i give you money and i get it back in 30 years right there's 10 percent like at least i get 10 coupons every year for 30 years and I get it back in 30 years. At least I get 10% coupons every year for 30 years and then get my money back. So it's a less risky proposition of higher yields. Right. So I guess you're another way of saying on that 10%, you're going to get some portion of those coupons before something bad happened, which in effect lowers that duration.

On the zero, there's none of that. yeah right that's why your austrian like hundred year bond whatever it was like one percent was pretty darn scary and didn't one of those countries had a hundred year bond and ceased to be a country right like so whoops there's been many i mean ford issued hundreds and also went through restructuring. I'm still a little confused. Where did the derivatives come in? So I've got my LDI. I've got that.

That's all this. I want a little extra return. So I'm going to, I started doing private credit. It's less return and it's just matching the duration of reliability. So again, like, you know, we'll try to use round numbers. So say, you know, say you got a hundred million of assets today and a hundred million discounted today's dollars of liabilities.

So you're like, okay, I'm one for one. I want to like, just be done. Make those assets look exactly like those liabilities. And if you were a UK pension, just to make numbers, we'll call it simple. Say that a hundred million liabilities had a very, very long duration. It had 30 years of duration and your assets. If I just wanted to invest in guilt saiyan treasuries just cash investments the most i can get to for simplicity's sake is 20 years so i got i got a 10-year duration

mismatch so how do i fill that hole i'm going to go ahead and buy swaps and i'm going to buy enough swaps to get the duration of my assets to also 30 years. So now, you know, my assets have a 30 year duration, my liabilities have a 30 year duration, and my assets get their two thirds, you know, cash investments and gilts and one third via swap. So that's where the rate like, you know, the derivatives come into play is just, hey, the liabilities are just really, really long duration. So I need to add more duration to my assets. And who's on the other side of the swap? The banks?

Yeah. So that's another one that's interesting. We'll call it UK versus US. So in the US, many, many, many, many market participants are trading those swaps, right? Whether it's macro hedge funds or pensions or insurance or the banks, There's a bunch of folks. And we're talking

specifically the long end. The CME came out with Ultra Futures and tried to extend it so those groups can offset their exposure on the swaps they sold. Right. So in the UK, it's even longer. The US, things get capped out at 30 years, at least for the moment. Mnuchin

tried to get the 50 year, and amazingly, Congress didn't like that for some reason. But it seemed pretty good to issue a bunch of 50 year paper back in the summer 2020 today. But without that sidebar, the U.K., because they had very long duration liabilities, they did the same thing as you know you're saying the cma creating the ultra they created a 50-year swap because they needed longer duration they're like how do we do this okay the best way to do this is create a derivative that is even longer duration and that's the 50-year swap in the uk now these are just you know we'll call it estimates from chatting with friends over in that space but last i I caught up, I asked for the estimate of like, okay, you know, long-term guilt. So like the longest cash instruments,

and then the like 50-year swap, like who actually is long those, i.e., you know, receiving coupons versus paying coupons long duration in those instruments and they were saying ah pension community is about 50 percent of the 30-year gilts is you know who owns them and then about 90 90 plus percent of the 50-year swaps right so you have you know basically one place owning all of it yeah um Which is obviously not a great seat when everybody is having this unwind. Right. And then who's taking the other side of it is banks.

Like they're just playing the curve trade. Like they'll go ahead and, you know, quote, unquote, sell them, you know, pay on the 50-year swap. And then they're going to buy, you know, 20, 30-year swaps. And they'll accept the curve risk associated with it because they obviously think they're going to make enough money on the spread to go ahead and facilitate that. So the banks are definitely facilitating and hedging themselves. They're not just naturally on the other side. But yeah, I mean, the UK pensions were very one sided in that market. So does this all fix now? Does it all go away or it's still

a problem or what can they do to plug the hole so those small funds seems like one or so you know the problem is you know it's it's kind of the responsible thing to do if you're a fully funded pension plan is to try to best match your liabilities. So then you're more likely to be able to pay them in the future, right? Like, you know, the US corporate pension system is a disaster in comparison to the UK pension system, only because we adopted LDI, you know, in the last seven, eight years versus 15 years ago, i.e. corporate pensions still haven't fully recovered from the great financial crisis. There's still a bunch of pensions that are 60, 70% funded, which ultimately becomes liabilities on all of us citizens.

In the US, it's called the PPGC, which is essentially the federal backstop for all corporate pensions like it becomes it becomes all of our you and i chicago taxpayers right on that chicago real estate tax bill it shows your probably pretty even different question but yeah 42 000 in firefighter pension and 24 000 and like so yeah, I mean, like ultimately, like will some regulation come in? Right, so the knee jerk reaction would be don't let these pensions do derivatives. And you'd think that would be a mistake, right?

Yeah, I think it'd be a mistake. And I think the lobbyists over there will be able to fight that. What they might be able to do is say that, yeah, you can do anything you want in your own account but if it's a fund like you can't take either either no derivatives or you can't take duration over something random number like i would not be overly surprised if you know when the dust settles in two years that they do do something to the funds because they'll at that point in time they'll

be able to go through all the wreckage and say like, Oh geez, like something very specific was the problem. It wasn't like the whole space. And then it's interesting too. That'd be right. Did one of those funds just put in like a billion dollar guilt sale that like the market couldn't handle them. If they did like simply iceberg that or something over a week or something like who knows what again you're getting they were getting probably margin call like

actually margin called by the exchange so there was no choice like they probably were you know doing the like oh shoot like you know our risk parameters say if a x basis point move and guilt causes us to run out of cash like you you got to start liquidating stuff now, like that probably happened, you know, the week and a half leading into it. And then helped us get to where we did. So, so at the end of the day, it's not derivatives are bad. Leverage is bad. It's just some risk mismanagement in your opinion. Yeah. It's, it's poor risk management and poor operational structure which is you know nine nine

out of ten times the issue with everything yeah you put yourself in the wrong structure where you have no liquidity and you did some not fantastic risk management like you got yourself into trouble and then so you just mentioned a second almost like an equivalent on our side would be like we'll bring it back to equity ball space. There's all those like VIX ETNs, right? Like they were quasi leveraged in a commingled vehicle. Now, if you were able to like risk managed, short the VIX and were able to re-collateralize things

during hairy times, like you wouldn't have blown up in February 2018. But because you were doing things one for one. Like if you were just like each unit was only short, you know, 20% of a VIX future and or like there was a mechanism to recolateralize it. Like you would have made money, you know, for another bunch of years.

I think that VIX ETF switched to 20%, right? That's right. No, like people, you know, wake up and say, Oh shoot. Like let's, let's blow up a different way in the future. You mentioned, so us have added this in the last seven to eight years. So I think that's where people are grasping on it. Like this is a problem in the U S this is coming for us too. Structurally it's different. Right. We're we're we're u.s pension plans aren't big enough

in terms of like everything that we we we have in terms of assets they just don't go into our treasury market not big enough right yeah i mean like it one u.s corporate pensions aren't big enough to like do much of moving assets like period um next our our liabilities are just way shorter like you know because they're closed plans like we don't have 100 year duration things like we don't need it like our liabilities are just way way way shorter and like a funny thing is because u.s corporate pension plans are less well funded because we're underfunded corporate pension plans own a bunch of equities they own a bunch of pe plans own a bunch of equities. They own a bunch of PE. They own a bunch of all this. They're not 100% LDI because they still have

ground to make up. They can't go full LDI until they're 100% funded. So it's just a totally different landscape in the US in comparison to the UK. There were a couple articles I read of like, oh, this is how pensions got out of the hole they've been in. And this is why you see so many doing so much better now. So that seems like that's yes, that's true, but not in a nefarious way. Just they started to manage it a little bit better. No, you, I mean, US pensions want rates higher. Yeah. Like that increases their discount rate, meaning lowers their liability. Like the best, like the highest funding status for like U.S. corporate pensions since 2008 was March 2020. Because equity was, we're only down, I'm sorry, not March 2020, March 2022, this year. And the reason for that is equities were only down whatever, like 6% from all time highs.

And treasuries sold off a crap load. Like, so their discount rate was 100 basis points higher. That was way more meaningful to improve their funding status than, you know, how much equities had fallen. That was immature. And last piece, Orange County, SNL crisis similarities. I don't know how much you know about those or what. No, I mean, that's just swapping fixed payments for, well, floating payments into fixed payments.

And again, like, yeah, it's a collateral issue. And the problem is they didn't reserve any collateral. They just spent all the money, right? So it's like, you know, there's always, there's, you know, similar. If they could have just put things in a drawer for 10 years, you never would have heard about it. But they spent all the collateral, you know, doing municipality things. There was nothing to recapitalize the collateral pool. And then in options speak, is it kind of like these guys are short a bunch of gamma?

That be fair to say? They, you know know they are um and in their short gamma for actually a completely different reason yeah like you're really thinking it has it has to effectively do with the duration mismatch of the liabilities and the physical assets um which i would you know that that's a fun whiteboarding exercise. But yes, they are short gamma, just in a different way than you think. We do bar napkin exercises, not whiteboard exercises. Let's sketch that on a bar napkin next time. That's right.

Your strategy, one of the best performing past performance is not necessarily indicative of future results. Volatility strategies this year. So without giving away all the secret sauce, tell us why certain vol strategies have struggled this year, right? The classic, the VIX is broken, the market's down 25% and the Vix hasn't spiked it's been staying at 30. so basically give us a quick overview of how you've approached that and why it's done uh okay yeah i mean i think most folks in the volatility space that are negatively correlated i.e they want to make a bunch of money when the market goes down. That's not, you know, like a relative value strategy. It's a specific intent. They tend to look for expansion and volatility.

I, you know, they need vol to explode and that's the windfall event. How we approach things is essentially we're long gamma. And what that basically means is our portfolio as the market goes down, gets shorter and shorter and shorter. When the market goes down, gets shorter and shorter and shorter. When the market goes up, gets less short, less short, less short. And then we rebalance. You know, at some point in there, hey, we're way too short. Let's go ahead and rebalance things and get ourselves back kind of in line.

Vice versa, market ripping. Hey, we're maybe not short anymore. The market rips so much. Like, we got to go rebalance things to get ourselves back into the seat we are. So it's a very, very different mechanism of how we're trying to deliver our P&L. And the, we'll call it geeky term would be, we're long convexity with respect to spot, i.e. movement in the market. Most other folks are long convexity with respect to vega or vol, i.e. they they need volatility to move so it's like a completely

different fulcrum we just need the mark we want the s&p 500 to move a lot and most other folks actually need volatility to to move um and this year you know has been a pretty big divergence in those two things but ultimately that's kind of been the case ever since 2008 like there hasn't been a lot of events where volatility has expanded greatly other than like a two and a half week period in march 2020 or a two and a half hour period in february of 18 right exactly and and Right, exactly. And, you know, not to belabor it, but like, that's kind of our expectation is in the first leg or so down, you know, a 10, 15% move. Certainly if there's a dramatic second leg where a 15% move turns into a 30, 40% move, all, you know, all those products don't matter. Like they're not influencing the market anymore.

Like volatility is allowed to explode. But those products are like a volatility based funds or like a JP Morgan hedged equity, something like that. That's trying to, that one's not a good example, but there's a lot of things. There's a lot of things in the structure of product space that cause like that kind of situation, essentially when, when, you know, the strikes are way, way, way out of the money, how the banks would hedge that risk is is vega they're not

going to use a delta driven instrument they're going to use vega but like as they become close to the money like they start using delta to hedge the instrument rather than vega meaning like they're shifting how they hedge meaning you know they're actually you know selling vega so there's a bunch of that stuff and then yeah like you know you're VEGA while the market is down. So there's a bunch of that stuff. And then, yeah, like, you know, you're buffering out things and your hedge equity products and, you know, your, you know, PUT related products also likely actually sell volatility on the first kind of legs down. But again, like when you get to like full online mode, then, you know, that's different than volatility is really, really allowed to expand at that point in time. But, you know,

our expectation and what we've seen for the last, you know, whatever, almost 14 years now is actually when the market moves first leg down until you get to like true illiquidity panic that volatility is benign and even sometimes contracts. And so that's not saying that realized ball isn't catching up to implied ball um you're saying realized price movement actual price movement nothing to do with the ball movement so there's two two pieces of it there right everyone else is complaining of like realized never catches up to implied implied stays high and the realized

isn't doing anything um so is that a piece of that puzzle or that's different in your opinion that's a piece of the puzzle i mean realize obviously picks up implied will do a little bit of the catch-up like or else it's like you know the old like if there's you know really attractive money laying around especially something that's possibly convex people you know find it pretty pretty quickly um but yeah i mean like ultimately the realized volatility year to date has been you know decent but isn't enough to kind of push implied dramatically higher on media options a longer dated option sure on weekly stuff like of course yeah someone had a

good i can't remember who now but it was a good tweet showing the 3600 call i think it was the december 22 3600 call went off in jan 1 at like 29 or something and even at the lows here it was at like 28 right it actually was down a tick from the and you think i'm down 25 what the heck's going on um yeah we we've been showing in that simple one like the the 4 000 put the december one because we're like yeah i said call and then put sorry yeah no no but i mean same difference i mean it's the same difference but like the reason we do the 4 000 one is we're like okay like if most people were collaring uh their equity portfolio at the start of the year they like round numbers and the 4,000 foot is probably something they might actually own um and and like you said like

it kind of went off in the year the 4,000 foot about like a 28 and i'm not going to quote it exactly because i don't know exactly what it is but like it's probably like uh yeah 25 now like like what how could that possibly? So I'm going to give you two minutes to talk about what you saw last week on how vol has changed a little bit. Something a little interesting to you last week. Yeah, so this is not exactly new year to date. I mean, I think part of the reason, additional reason, why, as you said, you know, volatility on fixed strikes, i.e. the specific options in the S&P 500 is flat to even down in the examples we just said, is a vast majority of active market participants on the equity side. So who's active on the equity side? Like, obviously, like, you know, hedge funds,

some mutual funds are active, but then there's a lot of passive investment. The active guys that can actually trade options are kind of lighter risk. Like if you look at PD reports, you know, from a UBS or Bank of America, places where people actually, you know, hedge funds used as prime brokers, like their current gross, you know, hedge funds uses prime brokers, like their current gross, you know, both long and short and net, you know, longs minus shorts exposures are almost at all time lows. So, all right, you have, you have your active managers already kind of making a bet that the market is going lower. So why the heck are they going to like panic buy puts? Like that's good. They might be losing money, but they're losing way, way, way, way, way less than like what they're like theoretically benchmarked to. So if that's the seat of most active managers,

like what's been happening when the market goes down is people are rolling down put strikes, which is a net selling volatility proposition or maybe just monetizing some of their puts hey we made money on these which again is a net selling volatility you know proposition so what we've seen is during most down days like you know volatility doesn't really expand in fact it kind of goes down and that's probably the mechanics behind it is people are already positioned for the market to go down and so when the market does go down like you trim your winners like you do anything else it's just on the other side um what happened last week is i i do think the end of the quarter had a lot of forced liquidation events mostly in commingled products with leverage uh

which i could go through a list of you know 100 of um because you know again a lot of commingled products with leverage, which I could go through a list of 100 of. Because again, a lot of commingled products with leverage own both fixed income and equities. And that was a really bad quarter for both things. So hey, you got to get yourself back to home base, which involves selling both things. So I think people were extra kind of under-risked coming into this quarter. So it was

not overly surprising that Monday, Tuesday last week was a substantial, you know, rally in both fixed income and equities, like both sides of the fence. But what we saw in the option space on the back of that is a lot of call buying um i think last week had in the sp500 70 more call volume than the previous week and i think it was the highest call volume week ever last week now like the ever stuff you got to be careful with because basically every single trading day is the highest option trading day ever. So it's like, you know, the relative is a little bit more important. You got to be careful with those ever statements. You're finding a new one every month just because there's more trading. But essentially I think that was folks saying that my biggest risk is actually an extreme market rally and I'm convicted by position. So I don't want to auto go buy more stuff,

but I need to hedge my lightweight position. I'm going to go ahead and buy call options to go ahead and do that. And last week we saw essentially the biggest move higher other than the couple of days around the invasion of Ukraine, move higher in fixed rate volatility. Volatility was up a lot last week.

And I think, again, because you had panic buyers of options. It was just, they're buying calls. Most people in their brains are like, oh, it's obviously panic buying puts. But it was outright option buyers and calls that were kind of price indiscriminate. Like we just need to protect our portfolio from massive underperformance if this turns into some crazy, you know, 15% rally out of nowhere. Yeah, I think last week was very interesting of showing the hands of the active managers

in the marketplace that essentially like, they're light on risk and their relative performance, which, you know, is how you're going to raise money and be successful beyond this year, is at risk to a massive market rally, not necessarily a market sell-off. What do you think overall they risk? Are they risking 1% in order to get exposure to that in their call buy?

That always makes... I get the thing of like, I don't want to get full in on equities here and buy the outright Delta One equities, so I'm going to buy the calls, but it always confuses me of like what that math looks like. How much, you know, most, most hedge funds that, you know, I've either worked in and or like associate with the past, they do everything in like shocks is how they would think about money. So like instantly what's going to happen is the risk manager is going to go up and say like okay over the next month like here's our you

know mild moderate severe shocks on both sides of the up 30 percent shock how much do we want probably not 30 but like yeah like a you know teens and over one month the teens rally in the s&p 500 how much do we expect to underperform? And then they're going to say like, okay, like, hey, you know, portfolio management team, we need to find 300 basis points of performance if the market were to rally 13% over the next month. Obviously, he's making up numbers. The PM team says, all right, like if you're telling me a 13% rally in one month and I need a fine 300 basis points performance, heck, I'll just go buy these calls. Like that's the easiest way to go ahead and achieve that without changing my core portfolio very much. And so the amount of premium used to achieve that is kind of secondary. It's like, what do I need to do to like make my risk

manager happy and keep all the positions that i like but by definition probably something rather small in terms of that right like yeah but like right but like probably not inconsequential because like again volatility was was kind of high so it's like you're paying some real premium to like yeah i was like oh we want to participate in this. We're going to buy these calls. We're like, well, you're guaranteed to lose some of that money on that. So it's like, I don't know, like 30, 40, 50 basis points of overall fund and premium. And the answer is like that happens once in the market goes down,

you feel like a King. You're like, you know, I maintained by position and like, I only burned a little bit. Like it's a win win but like where it gets painful is nothing happens or the market only goes up five percent right and now you've lost like the market's up five and I lost money on those bills yeah awesome well I'll let you go I know you're single dad tonight uh so good luck with that um pop in a movie give him some uh chicken bones soaked in bourbon that's what my god i'm i'm just i'm going for the trick of you know it's as you said it's it's rainy and dark outside so just like at 6 30 be like oh it's bedtime like look out the window

it's dark all right dad i appreciate it we'll talk talk to you soon and meet up here in Chicago. All right, sounds good, Jeff. Have a good one. Thank you. Thank you. 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 rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com.

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