Volatility as an Asset Class with Jason Buck, Zed Francis, Rodrigo Gordillo, and Luke Rahbari

We’re back this week bringing you the second half of our Miami event – sharing the open discussion and panel portion that focused on volatility as an asset class. The panel was quite the collective of talent, with Luke Rahbari, CEO of Equity Armor Investments, Zed Francis, CIO and co-founder of Convexitas, Rodrigo Gordillo, president of Resolve Asset Management and Jason Buck, CIO and co-founder of Mutiny Funds.

In this packed VOL episode, these four stir up an interesting discussion on volatility as an asset class, why we should care about volatility, and why it’s necessary to have protection in your portfolios. How volatility comes in waves, and we need to be ready to react to its movements. Defining volatility vs risk, rebalancing your portfolio, offense + defense, low volatility, long volatility, these are just a few topics that are being dissected in this episode and it’s a conversation you don’t want to miss!

Follow along with our panelists on Twitter @RodGordilloP, @jasoncbuck, @convexitas, & @luke_rahbari






Check out the complete Transcript from this week’s podcast below:

Volatility as an Asset Class with Jason Buck, Zed Francis, Rodrigo Gordillo, and Luke Rahbari

Jeff Malec  00:07

Welcome to the Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. And Happy Thursday everyone, you’re back. We’re back and volatility is back maybe a little bit, maybe never left. I think that’s what we’re going to talk about today. I gave you a little soliloquy last episode talking trend and the misconceptions out there. And the guy who spurred those thoughts MEB Faber is going to come on the pod next week, so don’t miss that. I’m gonna have to think of a good baseball hat to wear. On to this episode, we shared the first part of our Miami event with Kevin Davitt. Last week, and this week, we really get into the nitty gritty sharing the panel portion of that event focused on volatility as an asset class. We’ve got yours truly moderating a panel with quite a collective Luke Rahbari, CEO of equity armor investments, said Francis CIO and co-founder of convexity toss, Rodrigo Gore, do president of resolve asset management. And last but certainly not least, Jason Buck CIO and co-founder of Muni funds. Nothing much more to say except send it This episode is brought to you by arsons, vix and volatility specialists and it’s managed futures group. We’ve been helping investors access volatility traders for years and can help you make sense of this volatile space. And intro you too guys like we had on the pod today. Check out the newly updated vixen bald white paper at RCM old.com/white paper. That’s RCM ulta.com/white papers and now back to the show.


All right. Thanks, everyone. Thanks to Kevin for that lovely talk. We’re going to also try and keep it high level but probably fail miserably at that and dive into some deep alternatives. lingo so if anything, is unclear, just raise your hand ask a question. introduce our panelists here. First up, we got Luke Rahbari, CEO of equity armor investments, which sub advises on the rational equity armor mutual fund, as well as run manage accounts for investors blending long equity exposure with their own volatility index. Luke, was that good? Pretty good. Don’t miss anything. Next up Zed Francis, CIO and co founder of convexity OS, which run unique tail and convexity option overlay strategies in equity counts as well as offer to programs in the futures based managed account space. After that, we’ve got Rodrigo Gore do if you want to see me murder that name go back. What was that? Three? What three years ago? We did a podcast and it took me about five minutes to get it. Correct. So yeah, exactly. Rodrigo is the president of resolve Asset Management global, I’ve learned to add the global where they have advised on the rational resolve adaptive asset allocation mutual fund, as well as run some private hedge funds, and deeply involved with the return stacking index, which I’m sure some of you have heard of. And last but not least, to my left Jason buck, CIO and co founder of mutiny funds, which run a multi manager ensemble approach long volatility fund and the fund whose name goes least well with your food today the cockroach fund so named because you can’t kill it. Anyone have anything they want to add on the bios there?



Jason Buck  03:38

Yeah. I’m frequently seen on result risks with Rodrigo. Yes. may have seen me on YouTubes



Jeff Malec  03:46

Yes, and I’ll throw a pitch in Jason does a fantastic podcast called the mutiny investing podcast Rodrigo and his group to resolve ribs every Friday with some great guests from across the financial world. Myself have the derivative podcast so if you’d like all that content, go sign up, subscribe, learn learn as much as you can. We have guests like this on all the time. So I want to start Kevin was mentioning volatilities endemic changes constant, you need to be proactive. All those good thoughts. These guys have been proactive, have created programs that try and harness volatility trying to look at volatility as an asset class. So I want to start with Luke and just ask how do you think evolved about vol as an asset class and as a portfolio allocation in the constructs of your model? Well, vol


Luke Rahbari  04:39

is definitely an asset class. But I’m gonna give away the secret here. There’s three things without volatility. There’s yesterday there’s today and tomorrow, and how many people think that which day is important yesterday? Let me see your hands. Today or tomorrow. When it comes to volatility, right, well, what’s the least important? No. Today, that’s why I’m the expert and I’m up here. It’s today that’s the least important because if I told you if the VIX or vol Q or spikes are trading at 90, you’d say, Wow, that’s really high. But it’s not really high if it was trading 150 yesterday, right? Or maybe it was trading 30 yesterday and is high. So volatility, as Kevin said, it comes in waves, you have to take a look at it, not only on an asset class basis, but also on a time continuum. And I don’t mean sound Star Trek, right. But there’s some events coming up where volatility goes up, there’s some events coming that happened, volatility might go higher and might go lower. Last year, we had a lot of anomalies with volatility when the market went down, and volatility went down. And it’s bad for people like us, if you’re long risk assets, meaning stocks, and your long volatility to hedge that. And you at the end of the day, you look at the market and it’s lower, so your stocks are lower, and a hedge that you bought, which is volatility is also lower. And so your spirits, and your AUM, and your number of calls from clients go higher. So there’s a relationship and volatility and before taking too much time. The other thing I’ll say is volatility has changed over the years. You cannot just look at volatility in the asset class that you’re trading or managing. And I coined this phrase volatility from every asset class will bleed into other asset classes. The only question is, how fast and how much if you’re just trading equities, and you don’t care about FX volatility, if you don’t care about fixed income, volatility, you’re gonna get kicked in the face. Okay, so you have to keep that in mind when you’re investing in a particular asset class or managing what you’re doing.


Jeff Malec  07:06

Love it. Jason, same question. Yeah. How do you think in terms of your portfolio construction of ball as an asset class?


Jason Buck  07:13

Yeah, sort of like a higher level, whether it’s fall as an asset class or ball is the only asset class we can have that debate endlessly. At a high level that we think that the, you know, the world or portfolio construction breaks down to implicitly short ball or long ball trades. And we think about pairing those up. We’d like to say offense plus defense wins investing championships, you need both to survive and thrive in any environment. The other thing I like to think about ball as Luke is referencing his time, you know, and it’s very different from all the other asset classes due to time, tenors, durations and explorations. But at the same time, repeating myself there with time there is it’s the last bastion of active management. Maybe I’m a weirdo. I like looking at Ball surfaces through time. And watch how they undulate and move. And it reminds me, you know, the ocean that we have on our windows here. But it’s a really tough, difficult environment, what sort of somebody’s long ball short ball relative value ball, we allocate to 15 Ball managers, and we probably attract another 30. In the space, we follow everybody. And we think it’s a very dynamic space. And like Luke saying, the markets are constantly changing, you the hardest thing in the world is, I really want to see a back test, you can’t really back test long ball or tail risk, it’s an impossibility, that Mark has changed way too much. And you know, a lot of these instruments haven’t been around for long enough. So you have to make a lot of guesses when you’re back testing and which we go back to we view as the last bastion of active management. It’s a really interesting and complex space. And then we tried to just seek and talk out with the best managers in the world.


Jeff Malec  08:35

And the defense is the volcanes. Yes. Zed.


Zed Francis  08:43

As I say, I don’t I don’t think it matters. Like why it doesn’t matter if it’s an asset class or not. And volatility can mean a lot of different things. There’s an infinity amount of tenors, for any amount of strikes, they all mean different things. They’re all different decisions. So there’s not really like a blanket statement, in my view, it’s a tool. And you can use that tool in many, many different ways in the simplest unique thing about volatility instruments is a convexity component. So the only kind of thing out there that you can invest $1 to make way more than $1, or vice versa, you can potentially receive $1 and risk a lot more than $1. So how we think volatility, and convexity is is a tool is to utilize it within your portfolio to create liquidity during nasty events. And that gives you the opportunity to utilize that liquidity to accumulate additional assets for the long haul. That’s our view of utilizing the tool. But again, there’s a lot of different flavors of how to construct and utilize that tool.


Rodrigo Gordillo  09:39

Yeah, I’m the only manager here that’s mostly terrified of volatility. I don’t primarily or we don’t primarily focused my partners that are in the back on long volatility strategies that I have used in my whole career because born and raised in Latin America and Peru. My family lost all their money. odns 7,000% inflation regime that creates all types of volatility happened again in Toronto when the housing market went down 50% And happened again, in NASDAQ with all my family’s money in 1999. So, when I looked at how people thought about portfolios, what I saw was people had their asset allocations, and would let volatility happen to them. And what I wanted to do is I wanted to set my volatility profile, and allow my asset classes to happen, right? So we are dynamic, long, short, futures managers, that we have an active mandate, we have a passive mandate and all throughout my career, understanding that gap risk, that volatility risk, that thing that terrifies me the most, have always employed a long volatility portion, that all comes together to create something that has steady volatility throughout, I don’t want to have 80% volatility happened to me, like, in a way, that was always fascinating to me to see people at the bottom of a, of a crash, saying this is an opportunity of a lifetime, as if it was, you know, they just lost 50%. And now they want to buy hand over fist, but they don’t have any money. It’s not an opportunity a lifetime, you just, you’re gonna see at vawg on the way up, you’re gonna, you’re gonna have to see the equivalent of laboring up five to six times you can always lever up, it’s always an opportunity of a lifetime, if you like at all right? For us. It’s always I don’t want any ball ever. I want to have steady, pick your target, whether it’s 812 15 you choose your target will deliver that consistently. That to me is harnessing my fear was the goal here. And that’s what I’m what I’m here to talk about, okay.


Jeff Malec  11:42

How did your family keep replenishing that coffers to go through all those bombs?


Rodrigo Gordillo  11:46

Yeah. So my father, luckily, is a brilliant, brilliant man. He was a mathematician, professor at the University of Lima did his master’s in operations research in Monterey, California, he worked for the army, he was the man who brought the first computer to Peru was lucky enough to be using computers when nobody in Peru had computers. And that kind of was a thing that my dad kept doing just plowing in money, losing it in the financial markets and building it back up again with a business. So he, for boys, he managed to get through all that we learned a lot of lessons and emulate him as an academic. don’t emulate him as an investor.


Jeff Malec  12:25

And I’m gonna, we’ll stick on this for a minute. And whoever wants to jump on up, like how do you think have evolved, and as a portfolio allocations, we’ve talked about some of its characteristics. And I’m Miss speaking here, when I’m saying what I’m talking about long volatility, right? We’re thinking Jason saying, offensive side of it. Yes, it’s the risk assets are short volatility. So you want to pair long volatility. Let’s talk a little bit about how you view that as an allocation, how you view that sizing together. Who wants that grenade? That’s


Jason Buck  12:58

the way we think about it’s pretty simply, like I was saying, we break out the world into implicit short haul long haul trades. And another way think about is that dad was talking to references linear versus convex. So if you think about the implicit short ball trades, like stocks and bonds, there’s a very linear instruments and we like to pair those pretty equally with long volatility, trs commodity trend advisors, because you have that convexity, and you get this nice portfolio effect emergent property when you’re pairing linear with convex instruments. So you know, during risk on times that can last a decade, you’re writing that linear wave, and you’re you’re bleeding out a little bit of that convexity, try to offset that portfolio. And then you get that huge pops and pops and convexity, you know, in a risk off event happens that really balanced the rest of the portfolio. So a lot of people think they would negate each other. But when we’re talking about linear versus complex instruments, you get a very unique emergent portfolio effects.


Luke Rahbari  13:47

Yeah. Much, much simpler and maybe more apropos for you guys, is, why should you care about volatility? Well, depends on the asset class you have. Right? So if you’re long stocks for a lot of your clients, what kind of volatility to those asset classes or do those stocks have? And how are you going to hedge it? Right? You’re not going to hedge NASDAQ volatility, which all you have more than, you know, as sorted i, because 80% of the market gains came from 11 stocks. Everybody knows what those 11 stocks were, if you have five or six or seven different ETFs, and they match the market, then they all have the same stock in there, or one of those guys is a super, super great stock picker. Right? Because he didn’t have apple. He didn’t have Google. He didn’t have Tesla. He didn’t have whatever net Netflix and all the rest of it. Right. So first, you got to look at the asset class you’re investing in. What is the volatility of this asset class? What is the correlation to the overall index like the NASDAQ. Right? Kevin was making fun of me earlier how old I am. And because I talk in Dow terms, even when I called all Officer whatever people, you know, oh markets down 18 handles that doesn’t what is the Dow? Because I’m all right, not Spoos last few years, s&p, NASDAQ and Dow have all become become the same 50% of the s&p is NASDAQ. So which volatility Are you hedging? You’ve got to s&p manager and you’ve got to NASDAQ manager, why am I I’m diversified? Well, they all want the same thing. Right? So knowing the volatility that you own, knowing the risks that you have, and then how do you find the correlations? And What instrument do you use to hedge that? That’s super important. And understanding that understand your exposure, right? As Rodrigo says, if it goes down 50 to 50%, how much am I going to go down? Is it more than 50%? Because if you thought you were diversified, turns out with a lot of managers, they all want the same thing. And you’re not


Jason Buck  15:53

set before it. So I just reminded me like, you know, I hate on these like things. A lot of times we give generic answers, I was mad at myself. So I want to just be more specific. And I’ll talk to our own book. This is how we think about the world is if and Rodrigo and I can speak a little bit differently about this is if you think about Harry Brown’s permanent portfolio, it was a quarter each stocks, bonds, cash and gold and came up that in 1972. But these ideas go all the way back to the Talmud of having proper portfolio diversification. So we just think about what we do as a modern example, that that’s why I wanted to give you a kind of percentages instead of just giving you kind of grandiose projections is like, we break down the world stocks bonds, instead of cash, we use long volatility instead of gold, we have CTAs, because we just think as a higher beta, over time to inflationary environments. So your Trend followers, CTA trend followers, so commodity traders, that trend follow, because then if you’re trading those at commodity markets, you have a better idea of capturing a little bit of that beta to inflation, then you have a pure gold because, you know, gold is great for 1000s of years, but any intervening year, gold might not do well. So it’s about trying to capture that beta. So the idea is, you’re pairing the axes of growth and inflation. That’s the four quadrant model that, you know, Harry Brown came up with Dalio copied, you know, everybody uses, but that’s the idea is you want to worry about what happens in global macro environments of growth and inflation, and kind of pair those things in equal proportion. And then whether you use a little bit implicit leverage, that’s up to everybody, you know, how they run their portfolios. But I just wanted to be clear, like we use equal amount, stocks, bonds, long volatility, commodity trend, that’s the way we look at


Jeff Malec  17:16

the world. Maybe you’ll answer my question these guys. How much? I’ll even add a little bit to that of like, why should Why should these people care? Right, like you’re saying, Okay, how much volatility you have, what are you going to hedge? Why should they hedge? Right, I think we might just assume it’s evident. But


Zed Francis  17:35

so there’s two big questions. See, you know, do we think folks should utilize a hedge within their portfolio? And I think the answer that’s yes. Do we think long volatility is the right hedge? From our university answer’s no. And the reason for that is we don’t think adding correlation risk to your portfolio is a good decision. So our means of adding diversification your portfolio is something that’s targeting essentially, the assets you own most of the assets that you own in relation to our relationship with investors, or long equities, our returns are negatively correlated to equities, which is very different from being long volatility, because long volatility may or may not perform in a negatively correlated way to all of your equities. And we don’t think adding a additional correlation risk that’s meant to be the main fulcrum of kind of positive carrier delivery to your portfolio during the drawdown events should rely upon correlation to actually achieve the designed purpose of being within the portfolio. The why hedge really, it has to do with like it will say construction of the hedge is almost more important than the actual investment efficacy of that hedge. Construction from our seat is if you are adding something to your portfolio, what is its job during that drawdown event. And we don’t believe something that just has a warm and fuzzy mark to market is actually that useful of a tool, it needs to be cash liquidity in your portfolio that you can utilize a service lifestyle expense real money, or be an opportunistic, real investor. Because those are the real wealth creation moments over the long haul is the ability to actually deploy assets during the drawdown event. So you know, a lot of strategies that may be negatively correlated look like a decent return during the nasty events, you can actually use the capital, what is it really doing for you? So without getting in, like, you know, spending option speak and all that we’re just firm believers don’t add additional correlation risk to your portfolio, make sure what you’re doing is negatively correlated to what you actually hold, and then make sure the delivery of that allocation is liquid during those events, you can utilize those proceeds.


Jeff Malec  19:51

I like let’s dig in on this a little bit. Cuz I think you all do a flavor of this of right you’re, you’re in saying hey, I’m even though you said you’re not longboats But you in essence, you are sometimes, right or your long gamma instead of okay. But regardless, in a down market, you are a 25%. Let’s say, for sake of an example, you’re not waiting for the investor to call and say like, Hey, I want to redeem that, because I’m going to now put that into stocks that are underwater, it’s automatically getting taken out. And that liquidity is there for the investor to use.


Zed Francis  20:22

Even how we work with folks is directly in your account, separately managed account. So essentially, we’re placing trades directly into where your assets currently are sitting. So if the market is going down, and we’re hopefully doing our job, those are instantaneous cash returns sitting in your account for you to use that day. There’s no process of redeem and wait for the check, and then we’ll see what the market is in two months, we receive that check. That’s your money. unencumbered, please use it. That’s the whole point of being involved in the portfolio, is to allow you to use that money to accumulate additional assets, like that is the value creation is on the operational side. You know, we think we’re obviously decent on the investment side, too. But the operational construct is what we think is the most important identifier and what makes us unique in their ability to help people’s portfolios during drawdown events. And then


Jeff Malec  21:11

rod, you guys tackle it a little bit different way of like in the same portfolio that can get redeployed some of those volatility assets. Yeah,


Rodrigo Gordillo  21:18

again, going back to why I invest like an 80 year old, I do it because of what happened in my formative years, right? What happened when I dealt with inflation early on in my life. Then I dealt with a REIT, a real estate bear market, then we dealt with the tech bear market. And it all affected us by by the fact that we were highly focused on a single asset class every time. We were in 100%. In cash in Peru, we were 100% in real estate when we landed in Canada, and then we’re very, very heavily invested in tech. So the common denominator is to diversify. So how do you protect against those big events? The vast majority people here would imagine is, long US growth assets, whether it’s equities, real estate, I would imagine like, what percentage of people here have over 50% in equities, private real estate, private equity right now, if you raise your hands? Right, that’s pretty much everybody. I don’t get that. I never did what I didn’t get why my dad did that. So the way you tackle that is similar to what Jason’s talking about, right? You want a portion of your portfolio to be good for growth environments. So low inflation, high growth, high liquidity, that’s your equity portfolio, private real estate, private equity, you want something that’s going to be there to protect against non inflationary bear markets, and that’s going to be your sovereign global bonds. They make money in bad periods, and oh, wait, buying a simple iShares TLT was up 35%. That’s a 20 to 30 year US Treasury. That’s better than most hedge funds did in that in that year. And then you want something that nobody’s thought about, except for Latin Americans, which is something that can protect against inflation. So you want your base to have some commodities in there that include gold, right? And so now you have your three legged stool, that should be your do no harm portfolio, that’s the base of half of what we do with the rd mi X mutual fund. It’s if you don’t know anything, how do you create a balanced portfolio that has thin left tails in a distribution? You don’t have these blow up events? And then what’s the problem there? How can I hedge myself against the risk of just being long everything? Well, we’re seeing it now quantitative tightening is a problem, right? So liquidity long secular liquidity events, where the Fed is pulling out, liquidity is going to affect commodities, it’s going to affect equities, in effect bonds, I need somebody that something that can short in case that happens to me whatever it is, whether it’s commodities, gold, equities, or bonds, and that is the CTA space, that managed futures that we run a systematic global macro space that does more than trend, and can short things to fill in the gaps of that risk parity. And then sometimes those systematic macro players are net long everything because everything has been going up for 12 months. And there’s an event like COVID, where volatility just spikes and everything is offside. How do you fill in that last gap along volatility strategy, just in case, right so that those are the major pillars of what how I think about my portfolio, the rebalancing across these asset classes, a pillar of a solid long only globally diversified portfolio with inflation protection, long short global macro and then a tail protection just in case. That’s what we call the All Terrain portfolio. And that’s how I thought about the world since you know, I started in the business.


Jason Buck  24:32

This is the first time he is this public unveiling of all terrain, you trademark. This is the first alternative. The first time I heard you say that CFA



article recently that Adam wrote.


Jeff Malec  24:43

And Luke, if you can talk a little bit about you’re doing this rebalancing daily Right, yeah,


Luke Rahbari  24:47

yeah. So but I just you know, I also have a little bit of a similar background from Rodrigo. I’ve been through a life event where we lost everything and had to Start over, but either I’m cursed. Or these life events happen to people more than you realize. So for people who are here 87, crash 91, mini crash 1998 99 Whatever internet bubble global pandemic 2008 There’s some other stuff I’m missing. So these once in a lifetime event seemed to happen a lot. Right? So maybe that’s why you should invest in volatility and have some hedge, right? Because remember, when you start at $100, and you lose 10%, you’re at 90, when you go back up, 10%, you’re at 99. Controlling losses are a lot more important than trying to catch all the upside all the time. That’s the first thing. Secondly, you know, I think everyone here looks at the world differently. Well, you have to find out is how it fits you and your, in your clients in our OCIO models, we were really negative bonds last year, really scared of bonds because of how far they’ve gone down. And how a small move was such a big percentage move in bonds, right? When the tenure is at two, and it goes up to three, right? That’s a 50% move. Well, we couldn’t handle that for our OCR model. So we changed some stuff around, we did some structure products. And in our in our funds, what we do is, we’re long risk assets, which are stocks, and we’re long volatility, and we rebalance every day. So if we start out at 515, and let’s say the market goes up, then just using big numbers 10%, our stocks have gone down, we sell some of that our vol I’m sorry, to stocks have gone up, we sell some of that our vol has gone down, we buy more vol and then we were at 515. Again, tomorrow. And we found that, as you said, there’s no good back test. But over the long term, that’s a more efficient way of holding holding risk assets than than just being bought long. Right. And other thing for benefit is you guys run a business or you run a family office, you manage money, if you’re managing other people, you need parts of your portfolio that are that are risk where they can hit homeruns, you can buy the I don’t know in videos of the world, which we actually we actually like. But you also need a place in a portfolio where you can point to Hey, I know the markets down but this thing is holding steady. You don’t need to liquidate, you don’t need to get out of the market, you don’t need to time the market, we’re going to be okay for a little while let’s run this out. It might not return as the market is doing or might not give you huge returns. But this is what keeps you in the game. And it doesn’t force you to liquidate at a bad time. Right? Because over the long term, we all know the market tends to look like this. Right? But it’s those things in between that that can slap you around.


Jeff Malec  27:56

If you got something where I was gonna jump in, I’m like, What do you you’re a good one for this. Do you think it’s more a mathematical advantage or a behavioral advantage of adding this defensive adding long volatility


Jason Buck  28:08

behavior? I was actually going to piggyback more on like what Luke was saying. I also want to just clear defined terms because I know Sid was about to take umbrage with long volatility versus tail risk. We’re all kind of talking about the same thing you want structurally negatively correlated assets that have convexity in your portfolio, is that fair? And the idea, but also what Rodrigo saying is, like, if you do that in your portfolio, a lot of times proper diversification means there’s part of the portfolio you absolutely hate. And that CNBC is telling you is the worst thing ever, everybody’s telling you get rid of it. And that’s proper portfolio, just, you know, if a part of your portfolio doesn’t want to make you throw up, then you don’t have proper diversification. And most of the time, it is long volatility tail risk that makes you want to throw up is that negative line item, but it’s there when you need it most. Because like, as Luke was saying, is like, you know, we’ve all been through it, whether we’re Peruvian American, whatever, like we’ve all been through crashes and devastation within our own portfolios are our families. And what that structurally negatively correlated asset class can do for you, is keep you from doing anything stupid. Because how many of us is like, I think, is it Jason Zweig says, you know, I can show you a picture of a snake. But if I throw a snake in your lap, you’re gonna have a very different reaction. And everybody likes to think when the weather Yeah, everybody likes to think that when the market sells off, they’re gonna get out, you know, they’re going to be calm, they’re going to add to their position they’re going to buy at the lows, but nothing ever happens. We’ve all lived through 2007 2008. And so having these structurally in your portfolio that can provide you with these convex cash positions. More importantly, behaviorally, it keeps you from doing anything stupid at an inopportune moment. And then more importantly, it can force you to rebalance at a lower nap point with those other asset classes. And that’s what helps you helps you compound more effectively and efficiently over time. You’re reducing that volatility tax, but in any quarter a year, you’re going to hate that diversification. But it’s about your Terminus wealth, where are you going to end up how are you going to outpace inflation? Are your savings going to be there when you need the most you need a properly diversified portfolio and you need things that can provide cash when you need it most. So you don’t do anything stupid. So


Jeff Malec  30:05

let’s talk a little bit about Kevin’s up here saying buy NASDAQ options. Yes, why why not just buy puts on the NASDAQ and call it a day? Like why if people like this is all too fancy, I’m just gonna go home and buy some puts. And that will be my hedge.


Zed Francis  30:24

As I think the biggest problem is something like that is what’s your monetization plan? If you were out there buy a put because your exposure is mostly in technology, maybe that makes sense for your portfolio? The question is when an asset goes down, 1015 30? When are you actually going to monetize that position? Because that is the you know, the more difficult piece almost of the entire decision is not when to get in, but when the heck do you actually get out of this thing, and actually utilize those proceeds to go do something proactive. So, you know, we believe that active management smooths that out that you’re constantly monetizing that position as the markets moving, keeping that risk exposure pretty, you know, in a defined area. Thus, you know, when the market moves, we’re doing something when the margin was when we’re doing something else. But if you were going to go home, and just go buy a putt before you do that, have your sheet of paper on the post it note next to the computer, when you’re going to actually sell this thing. And even when things seem really distraught, and you probably feel like you need it to be there, you got to stick to the plan, because that is the the harder piece in my opinion of the equation.


Jason Buck  31:38

It made me think like some of that Rodrigo said to is like, I don’t want to be the one that quote to live up here. But he did say if you don’t have portfolio insurance, you don’t have a portfolio. So this is about going back to the behavioral aspects of it. And we’re sitting here in beautiful South Florida. I don’t know anybody that builds coastal real estate without home insurance. I mean, it’s really that simple. But everybody goes around without any form of portfolio insurance.


Jeff Malec  32:00

But I want to get more to the cost of that. Right. So that is there. At some point, it’s prohibitively expensive to like, I don’t want to build this coastal home and the hurricane insurance is $10 million a year. Right. So at what point does it become prohibitively expensive to just buy the puts?


Jason Buck  32:14

Well, two things? Yeah, sorry, I’m gonna piggyback your other question is one. You know, we don’t complain about house insurance, car insurance or life insurance, right? We just keep paying those premiums, but some reason we hate portfolio insurance. The other one is, I would bet everybody in this room has tried to trade options themselves. And I bet everybody in the room has the same experience I have where it didn’t work out too. Well. I’ll give you the worst example in history. I was a commercial real estate developer going into 2007 2008. I saw who were the worst mortgage providers on the planet, the worst banks on the planet. I started shorting all of them in 2007 2008, using put options, but because I wasn’t professional options, trader, I thought it was all about delta. If I was directionally correct, I would be correct. But I fucked up my Vega, I fucked up my theta, I fucked up everything you could possibly do. And they managed to lose money. shorting the mortgage and housing bubble are the worst players. So as your mind, yeah, so as that was saying, it’s really, it’s really a it’s it throws people off, it’s very easy to put on options trades to your point. But what is your monetization heuristics? You know, how do you roll when you taking it off? Are you then naked? Any protection beyond that? That is incredibly difficult. And that’s why I say it’s the last bastion of active management.


Luke Rahbari  33:23

Yeah, I mean, I agree I’m, I don’t tell you how to get clients or how to manage clients. Right? I don’t know how to do it. But I think everyone here maybe some more than others. Do, we’ve traded options for a long time, right? You go to a doctor, you go to a mechanic, whatever, just make sure that they’re aligned with what you want to do. If their portfolio analytics or thoughts are the same as yours, and then you will be comfortable with what they do, right? Because insurance is going to cost you and sometimes it’s going to cost you a little more than other times, but if you’re comfortable with their philosophy, then you’ll be comfortable with the manager. And then you’ll have a total portfolio allocation that really works for you. But if you if you’re uncomfortable with the risk that you have on and you want to go buy insurance, and I I’m going to get killed for saying this, maybe the first thing you should do is just reduce your risk or move into something else, then rethink it. Right? And then get back in in a more risk aware format.


Jeff Malec  34:34

Not by options,


Luke Rahbari  34:35

no, use a manager that’s going to lower your risk User Manager duties and just long Apple


Zed Francis  34:42

as I say, the only, you know, my comment is everybody’s really bearish up here. Like this is all about, like protection and like, world ending, like, you know, my whole view of utilizing these types of strategies is that redeployment. Like that’s what that’s what’s exciting, like you know, in 30 years time with think most assets are going to be higher. Like I think, pretty much globally, we’d all think that’s the most likely outcome. So it’s utilizing these strategies to actually accumulate additional assets during those drawdown events, when 30 years you have more things, yes, being able to write out, you know, nasty times is important. But to me, the exciting bit is accumulating additional things like to end up with more things in 30 years than you would otherwise.


Rodrigo Gordillo  35:24

And the last thing I’ll say about doing it yourself is that we’re all kind of specialized in the areas that we do, right? You can’t be all things to all people, if you’re an advisor, your job is to grow a solid business and have a relationship, you know, be smart enough about choosing how you want to invest. And if you can pull it off easily with passive investing, that’s great. But to take it a step further, you actually need to find good partners to do it for you. Like we attract a very unique set of people, we call them tops, technically oriented people, that’s those are the only people that come to us. And they they’re almost always X traders, that knew just as much as we did. But somehow, you know, we’re on a plane couldn’t put the trade and blew up for this or that just got busy, and doesn’t work out for their private accounts. Same thing for advisors that was bringing him in client events, couldn’t do this, couldn’t do that and missed this opportunity. It’ll if it hasn’t happened to you yet, it likely will. You want to out. So you want to focus on the business and what you want to do in your life the most and then have an ensemble of managers that what I what I consider will be the decade of active management again, to help you through this event. I think we all have slightly different ways of skinning the same cat. And you just want to you want to outsource to a diverse set of managers that know what they’re doing.


Jeff Malec  36:41

And, Jason, I know you’ll have thoughts on this piggybacking on what Zed said, like you can view the protection as the ability to lever up more to increase your offensive exposure.


Jason Buck  36:51

Yeah, it’s not something we’re breaking down. Are we bearish or bullish? It’s kind of like, irrelevant, right? Like, it’s like, we’re both right. The offense plus defense is the way to think about the world. And it’s just like, just acknowledging that bad shit can happen so that you want to protect yourself against that. But then the other question is like, you can either take on your exposure, which probably most people do need to do if they’re uncomfortable with their position. Or if you have structurally negatively correlated assets that have convexity to them, maybe you can run your equity a little bit hotter. It’s about the combination of those. And if you have that true structural negative correlation, and then enters into a very interesting conundrum, right? You don’t have to necessarily lower let’s say, a long equity position, you could run a little bit hotter than most people do, because you’re truncating, that left tail, and then more importantly, you have that convex cash position to redeploy at those lower nap points that helps your compounding over time that both Zedd and Luke have been hitting on.


Jeff Malec  37:42

What does that look like in terms of daily rebalancing, monthly rebalancing, quarterly rebalancing. I know, your friend, your friend, Corey Hofstede has written a lot on rebalancing. Anyone have any thoughts on that?


Jason Buck  37:55

I’ll tee these guys up in a way as we think about this often get caught. He’s a good friend. And we talked about, you know, how many at bats do get right. And this is one of the problems if we’re fair about tail risk. Like if you think about typical buying puts, do you buy them, it puts and rolling them and really trying to capture that one every 10 year event? Going back to that point, the monetization is key to that. And so if you only have one bite at bat, every 10 years, you better monetize that perfectly, or hit the home, right? And can you trust a manager to monetize that perfectly? Maybe they’ve done it the last two times, but is too good enough sample size? No, it’s not. But if you can find managers like these two sitting up here that are rebalancing on a daily basis, you can have some more statistically significant exposures that you can more reliably count on. And that can improve your compounding over time, but I’ll let them touch on that better than I could.


Luke Rahbari  38:43

Yeah, I mean, seriously, nobody knows where the markets going, or valance going. Okay, you can only work in generalities and long term. I agree that they are of stock picking asset picking is definitely back. Okay. It’s back for sure, though. But again, you have to construct a portfolio and you have to look at and a lot of times your clients or the people that invest with you end up having the same kind of thoughts, as Rodrigo was saying, as you do. A lot of our clients or people that come to us don’t believe the Federal Reserve, you know, every every time I hear someone talk about rates, here’s another big clue rates don’t matter. It’s the balance sheet. Is he reducing the balance sheet or not? That’s the only thing that matters. Because if he takes rates to 10%, and he buys 90 trillion a week, okay? Right. It’s it’s a whole different relationship. So you just got to be aligned with what your expectations are for your investments and find a manager that’s going to deliver that for you. We believe that the best way to hold risk assets is with some volatility. And to rebalance. Get back to that point because another big important point is that assets, risk assets are not mean reverting their trend. They either go up, they go down, but volatility is mean reverting. You’re marrying two different types of things together for better total return, then just total return meaning less risk. You’re trying to get through there and then just being long, we’re just being short or whatever. Right?


Jeff Malec  40:29

I think Zed might disagree that rates don’t matter. Do you want to get into that?


Zed Francis  40:34

I was just gonna say rebalancing, I think the answer has to do it way more often than you think. You know, if you’re a diversifier within your portfolio generates three 4% portfolio level cash, that’s probably time to go buy more things, because again, you have no idea where the bottom is going to be. And even probably, more importantly, is there’s a lot of 10 15% draws during bull markets, those are opportunities to add additional investments, you know, what before, we have three consecutive years of 30% rallies, they take, you know, significant more bites at the apple, and rebalance more often than not. The other piece with the rebalancing side that we focus on, is doing things in separately managed accounts allows it to be tax efficient rebalancing. So the buys and the sells of what you actually own and your portfolio, or stuff that you and your advisor, you yourself are doing to go ahead and increase potentially tax loss harvesting, you know, make sure that the assets that you have are efficiently being rebalanced, because, you know, all this stuff is really nice, but it follows on you’re paying a 45% tax bill on it at the end of the year. You know, that’s it’s a lot of movement for not a lot of rewards. If you can do this in a tax efficient manner, then it becomes incredibly attractive within your portfolio. So more often than you think and then also with a tax conscious mindset, I think is very important.


Jeff Malec  41:52

You don’t want to get sideways on rates don’t matter.


Rodrigo Gordillo  41:56

Oh my god, we’re gonna global macro now. I, we, we wrote a paper called the rebalancing premium. And one of the things that people don’t understand with regards to rebalance more often, is how much money you can make out of nothing, as long as you are invested in things and move differently from each other. Right? So we’re talking about a lot of what we’re talking about here comes across, as you know, you got your equities, and you got your convexity trade, long ball trade, you know, whatever these guys are doing, that’s you have two unique bets. Two completely non correlated bets where you can grab from the winner, maybe it’s long volatility, that’s mean reverting and buying the loser. And over time that creates what, we’re a piece called Shannon’s demon, but you can really have mathematically two asset classes that are losing money. But if they’re non correlated and highly volatile, you can make a positive sloping equity line. Okay, so how does that look like in the real world? In the paper we wrote, we show across 80 different futures contracts, you roughly have long term 13 unique bets. If you’re able to rebalance across those as often as possible, this is across commodities, equities, bonds, the whole gamut. You can actually if you assume that all of them make zero over time, simply by rebalancing you can make as much as a 4% Excess rate of return. So this is this is volatility harvesting, diversification, harvesting. There’s a lot of names for this. But not rebalancing is a bad idea, just broadly speaking. And you know, there’s, there’s different frequencies that you can look at, but it is useful to understand the value of it and the value of being diverse, having different assets, and rebalancing as often as you can.


Jeff Malec  43:45

So a lot of this sounds too good to be true. So I’m going to bring it back and say last year was a difficult year for, quote, unquote, long volatility. One of the reasons why was that


Jason Buck  44:00

you put it on me? Yeah, this is a typical question because like we were talking about define things, you know, whether it’s a long volatility tail risk, and like we said, we allocate to 50. Managers who follow 30. The idea is, there’s so many path dependencies to volatility and a sell off. And that’s why we believe in ensemble approaches, especially if it is a one every five, one every 10 year event, we can argue what it is, you want to make sure you capture the meat of that move as much as possible. So we’ve heard you know, people banging the drum that you know, long volatility or tail risk, or none of those things worked in 2020. Well, it really matters what strategy you have. If you’re rebalancing more frequently, you probably did just fine in 2022. And your clients did even better because of tax loss harvesting. And then so and then if you did cross asset ball, if you’re a European manager or trading ball around the world across, you know, FX, commodities, everything you did exceedingly well, in 2022. The hard part and 2022 was for the deep out of the money tail risk long Vega funds, understandably so though they did what they said they were going to do on the tin and we always knew this was coming. And it always surprised me when people are surprised by it. It’s like, if you have a slow, protracted drawdown, you are not going to get a pop in volatility. It’s just not. It’s the way it’s mathematically works. I mean, we’ve been in a medium ball environment, let’s say the average of all last year, I believe, was 25.5 on the vix index, what that means in general is about a 1.6 expected move up or down on a daily basis on the s&p, all those moves were pretty much within there, and it just like that slow grind down. So it’s that that slow bleed to death is really going to affect your your long Vegas strategies. So it’s understandable those managers get hurt. But if you have different managers or training, long gamma, people are doing dispersions trainings that were working great in like the first quarter that first half of 2022, and then kind of faded off a little bit. It really depends on what volatility we’re talking about. And this is where we get into like deep amounts of nuance for different it’s horses for courses. And this is why we believe an ensemble approach is what worked great in 2008, didn’t work very well, maybe in 2020, or vice versa. And then what’s not working well are working well in 2022 is going to have different effects. If you have liquidity cascades that happen sharply, you need certain strategies that work for those. And if you have these long, protracted draw downs, you’re gonna need other strategies that work for that. So it’s really impossible, no a priority, what that drawdown is going to look like. And so we try to manage accordingly across, you know, a broad swath of volatility or tail risk strategies.


Jeff Malec  46:14

And, Kevin, I’m gonna put you on the spot if you bought the NASDAQ like 11,007 50, put at the Jan of 22. Right, or a straddle that went like what was the was probably at the same price at the end of the year are down some, even though the NASDAQ was down 20% or whatever. Isn’t that just coming back to the post it now? Here’s why I have it. Here’s my Yes. And the behavioral element of when you’re mid April, or just before the election? Are you at that point? And are you able to actually follow through on your plan, that’s why people stop exercising, were just I was just making sure you’re paying attention. If


Jason Buck  47:02

we’re talking about like path versus terminus, we all talk everybody and most of finance only talks about terminus, and we don’t talk about path and we’re talking about managing the path to get there. And we work in a nonorganic system, give me my red flag now is. And so your life expectancy versus everybody else’s, is very different. And so we really have to manage the path, not just the terminus.



I have a general question that everybody I’ve been observing this show, everybody here has observed that, that the environment, the nature of the players in the sandbox may have changed over the last couple of years was zero data, exploration options, etc. Has that influenced the trading and volatility and and like you were talking about muted volatility slow grind down as those products? Have they played a role in that? Is that going to be a continuing factor? Or? And if so, how have you adjusted?


Luke Rahbari  48:01

Maybe it’s so the amount of players that are that are in the market? And whether they push a product down like volatility or to sell a lot of premium etc. can have an effect? I don’t think it can, it can have a long term effect, or I don’t think he can keep it that muted for that long. I think part of the reason it was so muted is everyone it’s still the Feds game, right? Oh, the markets gonna go down a lot more. So then he’ll stop raising this that, you know, that’s a part of it. We’ve looked at a lot of stuff high yield never really broke down. If you’re looking at a high yield ETF, hyg never really broke like it should have, if credit is going that badly. The P E ratios and s&p long term P E ratios and s&p is 15 and a half you thought you know, it’s still I don’t know what it is today. But it never got down to if the long term is 15. Maybe you want to buy at 15. But at 12 you’re really excited. It never really got down there. Right? There could be a lot of factors you don’t know. So and it takes a lot of time to kind of recycle through. So it’s hard to say if I knew why it didn’t. Maybe I you know, I’d be the king of the world. But it’s hard to say you just got to manage it that you just gotta manage it the best way you can.


Jason Buck  49:27

And first that no passes, that is like yes, and yes, all those factors matter. They’re all going to work talking about complex adaptive systems interacting with complex adaptive systems, and all those things matter. But at the same time, like, I don’t care because I can’t predict the future. So I tried to find you know, an ensemble approach that can covers many path dependencies possible. But Zedd and I were just talking about the zero DTE the other day, so I’ll let him answer that.


Jeff Malec  49:48

And for zero DT zero days to expiration, zero days to expiration options. So what do you got? You release those daily? is the whole point. Yeah, though for whatever reason someone wants to trade that option that expires that day.


Zed Francis  50:05

Yeah, don’t get distracted by that it’s not important. You’re gonna get a lot of articles and stuff written, obviously, the volume is really big. But essentially, it’s just one day jump risk. The people that are servicing those flows are very good risk managers and understand what they need to do to take the other side if needed. If that wasn’t the case, those options would be very expensive. They’re not. So I think it’s a that’s a lot of headlines, one day options, but you know, there one there one day they don’t adjust meaningful risk out the curve in any format. So a lot of headlines, I wouldn’t really focus too much on that and focus your attention elsewhere.


Jeff Malec  50:45

A little more color who’s trading this? In your opinion?


Zed Francis  50:48

I think it’s all over the place. I think we have a lot of like event D things on the calendar. So I think there’s this amount of retail, but I also think there’s a decent amount of institutional determine one day type of things for what’s going on. And there’s plenty of market makers that are willing to serve us a lot of trading volume at a fair price for them.


Jason Buck  51:06

But the other day is like especially in q4 this last year, it’s like everything is around CPI and FOMC meetings, and then everything has been really event driven. And so that’s why maybe zero GP is part of that too, as well.


Zed Francis  51:17

Yeah, I would say like institutional style, players are probably using them for one off events in their portfolio. And then there’s a nice amount of other folks that are using them for other reasons. And more importantly than that, is last year 2022 for equity, volatility was not weird. It was exactly what should be expected and has happened. Ever since 2008. A lot of markets dynamics changed post great financial crisis. But essentially, the common theme since then, is in the first move lower and equity markets, volatility is stagnant or potentially even compresses. We’ve seen that in basically every draw since GFC. Now, when you get to the potentially second leg, it lower in equity markets, then you see a volatility explosion, we never really got a second leg at any point last year, you didn’t get it in December 28. Teen you know, a little bit of volatility down, and it pretty, you know, not happy month for equity markets and a pretty volatile fashion. He didn’t really get it, you know, February 2020 into the first week of March 2020. Volatility did not expand it needed that second leg to actually have that inflection point and accelerate. So, you know, I think there’s a lot of headlines that last year was weird. It was exactly what’s taken place the 14 years prior. And I think it’s because the market dynamics that create that didn’t change in 2022. They’ve remained the same.


Jeff Malec  52:49

Yeah, real quick was the bill


RCM Alternatives  52:51

correlates what you were saying before, there’s a very old Sam Wall Street never quite the Fed. Okay, now.



I’m too late now is contracting at the greatest level, and ever has since World War Two, in the last six to eight months, has been to continue with the February Who do you believe will have increased volatility going forward?


Rodrigo Gordillo  53:18

So can you repeat, it’s about the fact that the empty money supply has collapsed in ways that we haven’t seen in a long, long time and whether that collapsing liquidity is going to have effects long term effects in the market and whether it’s going to sustain asset levels? Again, I think that question is again, part of the noise, right? It’s part of it’s like, Warren Buffett says, you know, the market and short term is that waiting machine in the long term is a voting machine. If you think about the dynamics that affect markets long term, the way bear markets generally work, right? The traditional bear markets are ones where you have these long term, multi year bear markets, whether it’s due to lack of liquidity, or it’s due to evaluation, compression. There, there are the weighing machine is what we need to focus on. And to do that, you have to go back 100 years to understand what drives all markets. And we’re talking we’re not just talking about the s&p, what drives equity markets, what drives bond markets, how does liquidity affect both of these markets? How does it affect commodities? How to interest rates affects us in our life time or investing lifetime. And that is a bit more clear, right? There’s in periods of abundant liquidity, persistent positive growth, and in low inflation, you’re going to have 40 years of domestic equities and bonds do amazingly well. And we’re going to what has happened is that we built our intuition to be like my long only portfolio equity heavy is going to do really did really well in this environment, right? Well, what happened in the 70s was the complete opposite, right? You saw equities and bonds do poorly while inflation was up, but we haven’t experienced that. And forever now we’re starting to see a bit more of liquidity compression, whether it’s through and to, I think there’s that that whole liquidity conversation is much more complex in the money supply. But there might be a liquidity extraction coming and it’s may continue. And that’ll create inflation, volatility, inflation, volatility leads to an environment that our intuitions whatever we thought our lived experience taught us is going to be dead wrong. Right? You are, we are not going to feel the same way we felt in most of the last 40 years. And if that’s the case, you don’t want to confuse your own experience with the expertise of understanding how these these asset classes evolve over time, right. So broadly speaking, what is equipment lack of liquidity do increases volatility at times spurts of volatility, so it’s, we call it inflation, volatility, lots of volatility collapses and volatile, we’re gonna see a lot more that you’re gonna need to manage across that you can manage it by being diversified across inflation, assets, growth, assets, and bear market assets. You can manage it with volatility assets, but you’re going to have to be more thoughtful than the easy market to the last 40 years of just investing in whatever you throw money at makes money. That’s that’s, I think, is going to be over. Right? So yes, I think liquidity or lack of liquidity is going to play play a big role. And you’re just gonna have to figure out how to how to manage it by diversifying and being more active.


Jeff Malec  56:42

Wouldn’t you, I could argue that the whole system is set up to not let that happen to make the next 40 years repeat the last 40 years, right. You could argue the Fed and the banks. But so what and I also wanted to bring up which I was like, sorry about that. Right, you want to everyone will say well, that couldn’t your experience in Peru that couldn’t happen here. So I don’t know if there’s a question in there. But


Rodrigo Gordillo  57:05

no, I mean, like, we say that but then the markets as we know, it don’t function. Right. In the 70s. It happened in the United States, it wasn’t hyperinflation, okay. So there’s a, there’s a different when you have the most liquid market in the world that has is the currency of the world, you’re going to have a different dynamic. But we saw what rising rates have done to both bonds and equities, you know, I hear all the time like, well, I can’t wait for bonds and equities to go back to normal. And the answer is no, that is normal for a rising rate environment. So people prior to 2022, said, the Fed can never raise rates beyond 2%. It’s not, it’s just we’re gonna go bankrupt. Here we are. Right, we have inflation at 8%. That could have never happened before. So it’s not possible to have a properly working financial capitalist system. Without inflation being a lever. Now, the Fed has not had to deal with that third dimension they’ve been playing, they’ve been kind of been balancing on on a two dimensional scale forever, right. They for the last 40 years, where it’s if it’s a bear market, they add liquidity without care for inflation. If it’s a bull market, they take away liquidity. Now, they’re trying to balance on a bone because inflation has become a third access that they need to handle. We’ve had to deal with inflation for 100 years with the exception of the last 40 years, right. So now the Fed can’t play that game. They can’t control the economy the way that people have experienced in their lifetime. They no longer have full control. It’s not it’s not an easy game to play, in the end, inflation is going to be a problem. Because volatility volatility is going to be a central tenant of the next decade. And whatever volatility inflation volatility leads to all types of volatilities everywhere, right?


Jeff Malec  58:55

You want to get on your macro horse there?


Zed Francis  58:57

No, no, I was gonna do something like, where do liquidity comes from? Is people wandering in a situation when there’s forced liquidations? Essentially, right? Whether it’s a group of people owning the same asset that have to sell for whatever reason? And I think people probably got fixated on banks, because obviously, what happened in Oh, 789, they’re in an OK spot, because essentially, they don’t have as much risk anymore. So we’re like, okay, everything’s fine from that scene. I actually think we’re the greater liquidity risk is comes from just investors in general more broadly, because I think everybody over the last 20 years has greatly reduced the liquidity in their portfolios from investment choice, going to more and more illiquid investment vehicles, from kind of traditional listed equities, bonds, so on and so forth. So, you know, the stampede event that causes massive illiquidity probably comes from issues with having an illiquid portfolio as a more general investor, in my view, but because of that, it’s rather than 10 People that are the source of illiquidity, it’s, you know, hundreds of millions of people, it can be tamped down for a long time. But when there’s a consortium across all those people for a needed reason, whether it’s, you know, oh, geez, I can’t afford my house anymore. So I need to go find assets elsewhere to service things, and whatever it happens to be the fulcrum. It can be a more dramatic illiquidity event, but it’s harder to achieve with the amount of people involved to cause it.


Jeff Malec  1:00:28

Do you think Wall Street slash pension slash institutional investors have figured that out by going into private equity and private credit where they don’t have the market down? And so can keep it in place? And then there isn’t a liquidity crunch? Just almost by definition? Because there isn’t liquidity?


Zed Francis  1:00:46

Right. So it can starve it off longer, right. So you have fewer but likely larger events? Definitely.


Jeff Malec  1:00:52

Any of us believe but Sorry, you guys are still here.


Luke Rahbari  1:01:01

Just Just real quick, I would say that I don’t think maybe I’m wrong. But I don’t think anybody here up here would say that you should put 100% of your money with one of our funds. Right? I think what were other I think what we’re really talking about is volatility as an asset class, what it does in a portfolio, what active management does, and what portion of your portfolio should be in that for the, for the actual client, some clients who are more conservative, or some clients who just don’t care, right? Again, it’s about an entire portfolio. That’s why I’m sure everybody here including us, when people call us and they want to buy our funder, you know, we talk about the rest of our OCIO. This is how we look at the world, this is how we are seeing things, this is how infrastructure is going to help some infrastructure bill is going to take up some of these stocks, this is how it might hurt him, you know, you can make an argument for anything, I could make an argument that solar power is bad, because the sun’s going to burst out in two and a half billion years. But as a carbon life form, I’m my time is limited here. And I gotta make hay. Right? So it’s, it’s got to fit what you’re doing in the time period that you’re in. But I absolutely believe that it should be a part of your portfolio. And it’s reducing risk in ways that maybe you hadn’t thought about before other people they’re telling you, they’re reducing risk, that that’s how I look at it.


Jeff Malec  1:02:36

Young man in the back.



Thank you, I think there’s a lot of advisors who maybe embrace some of us that we need a different kind of diversification in the current environment. They’re wondering how to increase exposure to alternatives. How would you recommend the advisors strike the balance between the risk of reducing exposure to the digital asset classes like, you know, investors, you’re reducing exposure 6040, or whatever the investor thinks is the benchmark in order to put more diversifiers in the portfolio, then the advisor might feel like there’s a risk of the crack near grad or advisor complaining if the markets actually go on and run the same way. How do you guys think that maybe trying to strike a balance or efficiently as diversified as the portfolio, while also trying to preserve the strategic allocations that clients are used to?


Jeff Malec  1:03:36

That’s what we call a plan. Exactly. Whatever you want to tackle, yeah, actually,


Jason Buck  1:03:43

I actually have a terrible answer that Adams not gonna like is, I don’t believe I can convince anyone of anything. And trying to convince people to move away from what they have to what I have, I find a fruitless task. Are we just trying to find people that believe in what we believe in? And then we work from there? And I try to I know, it’s a it’s a tough answer. But like, I just think it’s an impossibility. I’m never going to twist anybody’s arm do we do most people Hey, what we do? And so I have large allocations along volatility and CTAs almost more than anybody I ever meet. And that’s the way we run portfolios and if people like it great, I’ll find those other weirdos. But otherwise, I can’t convince anybody of anything.


Rodrigo Gordillo  1:04:20

All right. I call I call BS on that. I think you don’t give yourself enough credit. I think everybody here that has been speaking about this for decades. I just want to give you some props. You at the margin like you’re not we’re not going to move everybody wholesale but at the margin, you have changed minds. And you have brought people to a more sane way of investing. So I think you are helping you are changing but the average advisor continues to have a hang up with 40 years and something that has actually worked right again, their experience their their intuitions tell them that doing anything outside of a heavily equity weighted little bit of bond portfolio is The only way I keep being proven wrong every time I try to go outside of that. And so believe me, I’ve, I know, I’ve had these discussions for 15 years. And so I think we can talk a little bit about this. But overlay strategies is a way that we found help people get their their diversification while maintaining what the maintaining the tracking that they need to their benchmark, right. So in July of 2021, I realized that there was a bunch of ETFs, and mutual funds out there that gave you more than $1. For every dollar you invest with them, right. So there’s an ETF that gives you 90% equities and 60% bonds are fun is basically risk parity, plus another 100%, unsystematic, global macro. And you know, there’s, we identify 10 different blocks of stacks between a beta and an alpha, two betas. And what you can do there is you can replicate a 6040 portfolio by X ray and each one of these mutual funds securities, and putting them together in such a way where you get your 60 or 40. You give the client what they want. And then you you tack on trend futures or systematic macro in the case of the paper that we wrote, which is returned stacking strategies for overcoming a low return environment if you guys want to look it up. And then really providing the advisor the opportunity to say to the client, not not, let’s make space, but rather saying yes, and let me give you what you need, and something on top that has a zero correlation over time to your traditional exposure. So that’s my way, I still am trying to do like the full, The Full Monty, which is super diversified, you know, similar to what, what mutiny does. But I’ve also come to terms with I can help more people by allowing them to overlay on top of the thing that they care most about. And I know that that’s something near and dear to your heart as well.


Zed Francis  1:06:52

Yeah, so we understand that that’s problematic both from a tracking error and also a disruption a cost basis, you know, even if you wanted to get out of those equity holdings into something else, if they have a cost basis of zero, that’s a huge problem from a tax situation. So redesigned our program to only be implemented suddenly managed accounts via an overlay. What does that actually mean and real people speak is your current asset base is non disruptive, you don’t have to sell anything to have us involved in your portfolio, we just get training authority in the portfolio, limited power of attorney, and we just drop our trades directly into the account you already hold at whatever custodian you custody assets at. And that way, we don’t disrupt any of your current holdings. And we’re just an additive to that current portfolio construction.


Jeff Malec  1:07:45

All add quickly, while the Mike’s passing over that in futures accounts, right. You could argue, hey, client, you’re buying T bills over here to earn that 4% interest. You can own those in the futures account and access any of these programs with that same money that’s holding the table is a way to accomplish it.


Luke Rahbari  1:08:03

I would I would answer your question in a non portfolio way at all. And I would just say that everyone’s a liar. Okay. So when you say I want to do this, for my client, this that whatever, that’s not what they really mean, drill down further. Get their Beta, right, when Netflix was trading 680, right? Every arm and if it gets down to 500, I’m gonna get in there, right? Until it gets down to 500. And then you’re like, wait a minute, there’s a problem. And what’s the beta of Netflix and the NASDAQ and when Netflix is at 500? That’s because the rest of NASDAQ is down another 12%. Right, and everything’s on fire. Ask the client push the client, what are you comfortable with? If that’s what you’re comfortable with? Maybe they want a lot of risk. Maybe they don’t, right? There’s all sorts of different things you can do. But you kind of have to push him. And you also have to kind of bring him to reality over the last 25 years. And this is no exaggeration, the way the US government calculates inflation has changed at least 25 times. Okay. You cannot they can’t just come into your office and bark out numbers. And you say okay, that sounds right. Yeah, that’s don’t don’t believe the numbers. Don’t believe what they tell you the risk tolerances, because I used to run an institutional desk, and I talked to institutional managers. And they did the same thing. If this stock ever gets down, yada, yada. I’m like, well, it’s not down there. So what do we do? Well sell a put that sell the put the stock would be down and then did call cry. Right? So push them, ask them questions, say what are you comfortable with? Oh, I see what your risk profile kind of looks like to me. This is the bucket you should be and maybe you should be a little more of this. Maybe they were willing to take a lot more risk. Maybe a guy who’s 30 years old is a dentist and he’s making a crapload of money should be taking more risk. Ask him why he’s not taking more risk. Find out what other problems he might have. Have in his life? What is the flow that you should be in? And then you got to construct a whole portfolio. That’s why a lot of our conversations from our fun, just always lead into our OCIO. Well, what else do you have? Because just coming into our, you know, our couple of products, that’s, that doesn’t make sense. Right. So it’s just asking questions, really understanding what risks you’re comfortable with. And then when it happens. All right. I was ready for it.


Jeff Malec  1:10:28

Any other questions?



So can we talk about not introducing correlation risk or some sort of basis? Do you guys think about hedging on either private positions? Business, real estate, something where there is no clear and negatively correlated? Assets?


Jason Buck  1:10:45

Great question. So this is actually what we try to talk to our clients out, but we never get any traction on this is like we started off talking about everything in the world is implicitly short of our long haul, and people don’t take their life holistically and approach. My partner had to unfortunately, the fairly he coined the term we use, like an entrepreneurial put option, because we’re entrepreneurs, and we work with entrepreneurs, and we think about their global risks, right? And so like the march 2020, to like 2020s, what happens to that? Pandu? Andy happens, sorry. And so what do we do in that scenario, right? I think, you know, my, my mom wants a single screen, movie theater gone, right? My dad sells machine tools gone. My sister’s a surgeon, you think that’d be fine. Gone, they can come in for elective surgeries. So people don’t think about their life risks, right? And then your house risks your car. It’s like everything in your life is implicitly short volatility. So it always boggles me how, you know, entrepreneurs, if they have anything left over, you know, with their business and their savings, they go out and buy s&p 500. They’re just not leveraging up for risk on event, right? They’re just leveraging up that in that scenario. So it’s like, how do you really hedge your whole life risk is a very difficult assignment of like, you’re saying you’re taking basis risk. But part of that basis risk. What we find, though, is, especially if we’re going from a risk on low volatility environment, to then a risk off high volatile environment, you’re gonna see that manifest in the s&p 500. I mean, it’s the most liquid market in the world. So that is going to be for those liquidity cascades, they’re going to really get you caught with your pants down, you’re taking some basis risk from your own individual life. But when you have liquidity shocks, it’s going to manifest right in the s&p 500 is the most liquid market in the world. That’s the way we think about it.


Rodrigo Gordillo  1:12:18

I’ve had this discussion with my business partners where there were quants. So we’re very focused on basis risk, what what is it that you’re hedging against? Well, if it’s a bond market, and you should hedging the bond market, if it’s a commodity or gold, you should hedge against gold. But the reality is, when it comes to your life, that big illiquidity event is you want to you want to get the hedge in the most liquid market that you can. And if you had something like the COVID crisis, and everybody lost their job, and you had a nice, convex option there, you’re you’re going to be better off with some extra cash. Right? So definitely don’t think we, we bonded over me asking you like, I got a great idea. Let’s go to the BC managers, and let’s sell like long convexity trays because of what are they nuts, like, eventually is all going to end maybe down 70%? Let’s, like you don’t understand like they are, they are, they are marked there. They’re competing against each other, they need to be everybody else. And anything that might suck a little bit of extra return on a given year is 100%. Unknown. He was right. Like I could not convince a single private equity person to use to add convexity to the life. Look at him now. Right. I think we’ve had a pretty spectacular year for tech and VC and in growth investing, I think so


Jeff Malec  1:13:36

VCs write like a three beta or something to the NASDAQ. If you put the indices together, you can replicate with options.


Rodrigo Gordillo  1:13:44

Of course you could, and you don’t, behaviorally. Yeah, but but even again, I’m trying to convince people I’m sure I’m sure through our conversations, we’ve convinced one or two people to put some hopefully, fingers crossed, but even a little hedge would help. Great paddle.



Absolutely, John, and Kevin, and everybody else is really gonna throw Jason cuz I actually heard you speak last fall at John’s event in California. In Miami, thanks again. Uh, but everybody, I just thought, how do you get beyond the negative connotations? You guys both talked about Buffett Brautigan, we talk about Buffett and think anybody else, you know, we were talking negatively about do with overlays. When then again, they go ahead and are probably one of the biggest users of it. Right. So had you been through an advisor commute? How do you kind of get past that negative connotation that it’s like, you know, you should eat healthier. When you go to a championship exercise all the time. You don’t always do. It’s like the old way doctor tells you to do it.


Jeff Malec  1:14:39

When you’re you’re saying like buffet like Oh, stay away from those derivatives. And then on his left hand, right,


Rodrigo Gordillo  1:14:45

well, starts to Warren’s back to Luke on Buffett. I mean, everybody lives including Buffett, right, like Buffett does and derivatives are. You know, the last thing you’ll touch except He does buy a bunch of derivatives and he has throughout his career, you’ll never touch crypto. And yet he buys a bank that deals exclusively with crypto like it’s just, I don’t know, I don’t know how to figure out Buffett and his investment style. But I can tell you that, you know, he’s certainly focused on American exceptionalism. And that’s kind of worked out for him. But Buffett has a captured, captured assets through his insurance vehicle. And if I’ve captured assets, I’d probably be taking a lot more risk than I am. But again, in a non ergodic system, where you get to take care of yourself and your liquidity over the next three to 510 15 years, you need to focus on safe withdrawal rates, there is no insurance against against your assets going kaput, you need to make sure that you are that you have a smooth ride in your lifetime. And in the vast majority of advisors and individuals that we talked to actually do understand the tax of a high volatility investment, they do understand safe withdrawal rate. So I tried to talk in that language and say, how do we make it so that you’re not suffering from a sequence of returns risk, right, that we saw in the 2000s, that like a lot of people lived through 2002 1010, zero return in the equity market, in nominal terms, right, we had a bit of inflation period there in the middle. So kind of just tried to pull him back into what is this for, it’s for a safe withdrawal rate. At the end of the day, the only way to do that is through through having non correlated assets. And the only way to do that is to be globally diversified outside the United States to diversify against inflation risk and to diversify against bear markets. And then you just explain your solution to them, it’s roughly helped over time,


Zed Francis  1:16:39

how we think about it is, our services are more of a tool rather than an allocation. That tool is meant to be used for a specific use case, ie be negatively correlated to equity exposure, and then have the conversation of what you’re going to do with the proceeds from that tool, and keep everybody on track for that. But then, on top of that, we’re kind of just a very vanilla description of what to expect from that tool, from kind of a day to day, week to week, month to month basis. And so, you know, nobody does 100% overlay day 110 25% overlay of their equity exposure. But after they see it, do what it says on the tin over and over and over again. That’s you know, ultimately how you gain comfortability of utilizing an overlay within within the portfolio. And that, and that’s why we’re focused on more, you know, it’s a instantaneous reaction to the market market goes down 123 4%, you should expect us to actually create positive returns on those smaller environments, rather than the the once a decade. And we really, you know, there’s investment reasons why we do that as well. But having something that has day to day reactivity to portfolios in a negatively correlated means, and quasi does hopefully in a consistent manner, what it says on the tin. That’s how we kind of get folks comfortable with utilizing services and the overlay community.


Jeff Malec  1:17:59

Can you define what it says on the tin? For Tracy? Does anyone do the smartlace podcast? No, they won’t get that Tracy jump, but go ahead, what is on the tin man


Zed Francis  1:18:10

that were negatively correlated. And so you know, you should see us 90% of days, you know, do the opposite of what the market is doing. And then we’re targeting capturing half of the downside and the s&p 500 s&p down 10, hopefully, the overlay is approximately five. And the other side there were 20%, drag s&p Up 10 expect the overlay to be down two. And we’re very clear that this is negatively correlated, expected to lose money when the market is up, over delivering hopefully, those positively symmetric returns that are instantly available within your portfolio. And so that’s, you know, the 10 that we’re hoping for the tax, right, that’s the two sides of the coin, you you utilize your losses during the appears to raise cost basis within your portfolio, adding value even while obviously when we have a negative impact, and then on the way down, utilizing those proceeds to accumulate additional assets.


Jeff Malec  1:19:05

All right, I think we’re out of time,


Jason Buck  1:19:08

specifically because there’s a vocabulary question. And unfortunately, I have this perfect vocabulary question because in the Uber right down here, said, now we’re talking about overlays. And he’s like, Have you ever heard me say overlay because like, once again, overlays become a pejorative. And the hard part is like as what happens whenever we turn mics on, apparently the letters in our vocabulary increase, and we all get more verbose. But what I find over time when with clients is that the simpler I can make things the better because you need that emotional buy in before you get the intellectual button. You can follow up with all this fancy quant talk later. But I found that really as simple as like I started to read the beginning offense plus defense. So it’s not about like overlays, because yeah, we change everything. Like what drives me nuts in the Bay Area these days. Everybody’s talking about riff a reduction in force, right? We used to call it getting fired, getting laid off getting made redundant. We’re constantly changed our vocabulary, make everybody feel good, or somebody blows up an overlay or somebody blows up portable alpha. Now we got to call it by a different name. And so I just like to go for the sake of simplicity to get the emotional buy in. Just use like We’re defense and later on we can talk about very specific definitions of what that means.


Jeff Malec  1:20:05

All right, I think we’re gonna call it there. We ran a little over. These guys will be up here afterwards if you have any other questions. I want to talk to him one on one. And then I think when everyone registered, we have your email so we’ll send out all their tear sheets and how to follow up with Yeah, thank you all Okay, that’s it for today. Thanks to NASDAQ catalyst funds, rational funds stone X and RCM for sponsoring the event down in Miami. And to all those investors and Ras who showed up. Hope you enjoyed the lunch. Thanks to Jeff burger, our editor and producer who took a feed from a crew down there and made it into a pod for you up here. And thanks to Jason said rod and Luke for sharing their expertise. We’ll see you next week.


This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.

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