Join Jeff Malec and Jason Buck as they dive deep into the inaugural Return Stacked Symposium held at the CBOE in Chicago. They break down key presentations from institutional leaders like Jonathan Glidden and Roxton McNeal, exploring how portable alpha and return stacking are revolutionizing portfolio construction. Hear their candid insights on leverage, uncorrelated strategies, and why this approach might be the future of investing. From pension fund strategies to practical advice for RIAs, this episode offers a comprehensive review of the cutting-edge investment conference that’s challenging traditional portfolio management.. SEND IT!
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From the Episode:
The Secret Club That Runs the World
Return Stacked Podcast episode: Saving Delta’s Pension with Portable Alpha – Jon Glidden
The Derivative podcast episode with Homer Smith –
Dunn Capital MGMT Whitepaper – High-VOL Trend Following
AQR – Cliff Asness = Cliff’s Perspectives
Check out the complete Transcript from this week’s podcast below:
Overheard at a Stacked Portable Alpha Symposium:
Jeff Malec 00:42
You all right here with Jason buck, Jason, haven’t seen you in ages. What’s a few days, three days Jason was here in Chicago, came in for the conference we’re going to talk about was a lovely, sunny it rained right when you got here, and then it was perfect weather for three days. You keep joking with your colleague there that you’re going to make them come at a non ideal weather time.
Jason Buck 01:15
Yeah, ops guy, CJ, has only been to Chicago during good weather, so I’m waiting for the next polar vortex, and I’m fortunate to come up there and
Jeff Malec 01:22
see you. It’s always good. Now, what are you talking about? So going to dive in. We did this for the EQd in Vegas. I’ve got a lawn blower outside my window, if you can hear that. Did this for the EQd in Vegas, which was well received. So thought we’d try it out with the return stacked symposium. They were calling it, I don’t know what, why you call it a conference or a symposium. I’m the guy who wears the YouTube shirt to the YouTube concert, so I’m wearing the return stacked schwag that I got. So you want to start with some top level overall
Jason Buck 02:02
thoughts. Yeah, I’m actually, I’m actually looking at the the agenda for the conference. And actually it was the return stacking symposium conference agenda at the SIBO. So it was like they got symposium and conference in there. I think symposium is just a fancier word for conference, but they return stack symposium and conference, so they’re good to go. But I was at the seat SIBO. Go ahead.
Jeff Malec 02:23
I was just gonna, as you mentioned, SIBO. I’ll throw in like I had not actually been in the new SIBO yet, and they’d get mad, as they want to be called CBOE now. But that place is awesome. I was, I would have lost money on that. I’m like, no one wants to move into the old post office. It’s in Chicago where the highway goes under the post office. I’m like, no one wants to move in there, but the retrofit everything, that’s a sweet space.
Jason Buck 02:47
Yeah, sorry, the CBOE global markets was where it’s technically held. But that you said the old post office renovation is awesome, actually, yeah, the downstairs was just filled with restaurants and everything. And then the views and the windows and everything at the CBOE was was pretty spectacular. And it was an it was, it was an it was a nice meeting space. And then not to throw you under the bus, but I was thinking about, they have those commercial like, kind of vending machine, soda fountain things that are always amazing. And I was, what do you think the over, under, if you had one of those, how many Diet Cokes would you drink in a day?
Jeff Malec 03:16
It would be a lot. Yeah, probably three, maybe
Jason Buck 03:19
three. But yeah, we’re going double digits.
Jeff Malec 03:23
I try and limit myself to just one. I just went and got a McDonald’s one before I got on.
Jason Buck 03:30
But yeah, the freeze where
Jeff Malec 03:34
you can make your cherry vanilla, diet, Coke Zero, whatever you want. Those are great innovation.
Jason Buck 03:43
Well, I thought the pinnacle was the freestyle seltzer. I haven’t seen that where I got to choose all the flavors and have my own Seltzer, but I got us a topic there generally, one, like you said, Great location. Two, they did a great job for their first symposium conference, like putting together and having great speakers and the entire setup around it, whether it was, you know, food, drinks, etc. And then, you know, it’s always hard to pull off a conference like that. I think they had packed house. I think it was almost like standing room only. And so, you know, on to bigger and better, hopefully on the next one. But then I think it’s really hard to pull off, you know, when you’re having the agenda be return stacking, and to have different speakers talking about return stacking, it’s hard not to, like, beat people over the head about return stacking, but I think they did a good job of letting people kind of free flow, talk about whatever they wanted, even if part of it maybe disagreed a little bit with return stacking, but try to keep it in that general vicinity. And I know, you know, I’ve been talking to resolve in newfound for years about putting a conference like this together, so I was glad to see it finally come to fruition.
Jeff Malec 04:43
Yeah, I wrote down in my notes, overall smart people talking to other smart people about smart things, right? It was refreshing to just there wasn’t. And I think some people might have thought maybe it was too high, too detailed, but to me, it was refreshing, of like they dove right into it. We’re getting into tracking error and some complex topics right off the bat, but agree very well done. Corey, you know, you’ve seen him in person way more than I have. Maybe this is my fifth or sixth time or something, but always taller and bigger and stronger and more handsome than I want him to be in person, yeah, the resolve guys are great. It’s hard for me. I can’t remember them when I first met them, like six, seven years ago, if they were all good at presenting and talking at that time. I mean, maybe covid And being on the resolve riffs and stuff has kind of honed their abilities there. But it’s odd to have all those partners also be good kind of in front of the stage? Yeah, I’m
Jason Buck 05:44
trying to think, I think, obviously, they probably hone their skills being on the mic more. But I want to say, knowing them going back a decade, I want to say they were always had the gift of the gap. They’re always pretty good talkers, maybe. And that was before Mike, so maybe it was better off Mike than on Mike. But no, they were all, they were all fantastic as well. And I think that, you know, it’s hard also in a conference like that, where you have the audience is kind of a bit diversified there, where you have a lot of RIAs, a lot of allocators, a lot of institutional traders, you know, fund to funds, high net worth individuals, you have a little bit of everybody. So it’s, it’s hard to hit all those pieces to make make sure everybody’s happy. And I’m sure we’ll get into this later. But for me also, you know, it’s great to have the speakers and everything, but that’s kind of subterfuge for the other the other conversations that go on during those interstitial moments right when you’re out in the hallway, you know, grabbing a coffee, or you’re having lunch, or, you know, we had a nice little happy hour at the end where you get to talk to everybody. And, you know, usually the conference speaking maybe gives you a little jumping off point. But otherwise, it’s really about those one on one conversations that you get out in the hallways during events like this. For me, I’ll
Jeff Malec 06:44
throw out another give prop to CBOE, where they had the cocktails, and you’re standing kind of directly on what I would call Congress Avenue. I think they renamed it something now, but looking east, and the Buckingham Fountain is right at the end of that road. It splits into the park there. So the fountain was going up the lake. Was there? Beautiful day anyway. Well done. Well done.
Jeff Malec 07:12
So let’s dive in. We’ll just kind of go panel by panel here, per session. I don’t know exactly what they’re calling it. But first one kind of gave us the state was titled The state of portable alpha with Shane McCarthy, who’s CFA global, head of client and partner group at lab quantitative strategies, who I don’t know that much about, actually myself, but he was great. He had all the data, which I liked. So I have some notes, unless you want to go first.
Jason Buck 07:45
Yeah, overall, the couple of the notes I had from his talk was, you know, the best things about return stacking or portable alpha, or whatever we’re going to call it in this I think we should maybe just agree to call it return stacking, or return stack, but we’re talking about the old school portable alpha and getting increased diversification and kind of getting rid of the dead cash problem that you have when you diversify. But he had, he talked about, you know, what’s great about return stacking is you could be a regime agnostic, and then, more importantly, you can increase your return per unit of risk. So I think it’s going to be a general theme that we had throughout this was people are talking about that dirty word leverage a lot of times, but like, I think you know as different ways of saying is you can increase your return per unit of risk. Was one of the things that Shane wanted to highlight. But yeah, the go, let’s riff off of your notes. And there’s a there’s a couple of the pieces I had to touch on there, but that was the general overview, I thought, from from his opening remarks.
Jeff Malec 08:35
I’ll take a step back that it was interesting to me. For a long time, they’ve kind of shied away from portable alpha, but they were most guests, and return stack guys themselves were talking and calling it portable alpha. So I think worthwhile to just note, right? Return stacking is portable alpha, kind of the institutional investors call it portable Alpha. Return stack guys came up with their own term for it, and then also interesting to note, for a long time, I’ve shied away from talking about leverage, like, in essence, it is leverage. And so, yeah, a lot of these panels were getting right into there and talking about leverage.
Jason Buck 09:12
We should highlight there to just for shout out to Rodrigo Gordillo. He is the one that came up with return stacked, or return stacking, and I think that’s incredibly invaluable, because, like, portable Alpha didn’t really mean anything to anybody, but, like, return stacking really grabs a hold of people with a simple phrase, and it thinks about constructing pieces of your portfolio in a much more interesting way than I think portable Alpha ever did, where people is kind of a nebulous term and nobody really knew
Jeff Malec 09:35
what it meant, right? Alpha, that’s I’m looking for returns that have alpha moving them into different places. So means the same thing. But to your point, right? Return stack, I’m just putting it right on top. We did a return stack pod earlier this year where we stacked all those guys on top of each other. We’ll do a link to that. But back to Shane, right? He had all these stats, which I loved. He was showing. You know? Basically that the concept has become more and more accepted in the industry. He had that bigger he had some stats on different endowments and institutional money. The bigger funds do this a lot more. But big takeaway for me that in his data there, that’s no longer niche. It’s gaining serious traction amongst the pensions, endowments, foundations, etc. He used the old real estate analogy, right of like, people get nervous about leverage and return, stacking or portable off of but real estate, no one has a problem putting down 20% to own this whole thing. In theory, that’s a similar thing. And then I wanted to get your thoughts. He mentioned, and this was throughout the day, he mentioned, a lot of these groups are having more tolerance for tracking error. And he actually had a graph that had it said Alpha slash tracking error, which was interesting to me, if they’re equating the two things as right if, I guess, if you are above your index, that’s alpha, but that is also tracking or positive tracking. So anyway, what were your were you triggered when you heard tracking error
Jason Buck 11:11
in a way, I think, outside of leverage? Probably the second most term or talked about was probably tracking error throughout the symposium. But I want to go back to what you said, though too about he had some great charts on the usage of portable alpha, return stacking on with high net worth, individuals, family offices, institutions, pensions, endowments, and I want to say most of them had in that 40% range. And I just, I was a little dubious of that. I just, I think it’s really catching on more and more, and it’s coming back after some issues they had with portable alpha that was basically stacking equity, like returns on equity like returns on equity, like returns going into 2008 which gave it a bad name, but I think that, you know, the institutional adoption is there, but it’s a lot smaller. And maybe, maybe that percentage is hiding the magnitude, like where maybe people are, you know, 100% allocated stocks and bonds, and maybe they’re tacking on and maybe another five to 10% to alternatives. So it’d mean, you know, they’re using portable Alpha return stacking, but maybe they’re only using it in small amounts. I just thought that 40% seemed like a really large number, or percentage to me, that people were using it, given how much we try to talk to people about it in the lack of usage, we kind of see across the board. And then obviously, we’re in a room where people are very interested in the topic, so it’s a lot of echo chamber there, and then going to tracking error. Like you said, it’s it’s interesting, even if you stacked a bunch of betas on top of each other, and that’s the way you use return stacking. What are you using for your benchmark? Right? We work a lot on this, and it’s difficult if you have global stocks and global bonds, if you’re targeting different durations than you would like an ag or a V bank, 6040, I think using any sort of benchmark is really difficult when you’re doing a return stacking and you can show it in the in the best way you can. But like you said, it’s gonna, it’s gonna vary, you know, and people are using anywhere up or it’s plus or minus 300 bips, you know, over quarterly or annual kind of time horizons. But once again, it’s like, is that your benchmark? And is that alpha? That’s debatable, right? You’re just stacking up betas, and your portfolio is going to vary a little bit over even your benchmark betas, especially when you’re using a bit of rebalancing premia that I’m sure we’ll maybe get to in some of the other topics of discussion.
Jeff Malec 13:15
Yeah, and he, I think he said there’s amongst the polling, or ever he’s getting this data, there’s been more tolerance for tracking error, so which also tells me if people are like willing to take on a little more risk, they’re willing to look for different alphas and put those in the portfolio. And then I think he was the first dimension, of course, because he went first, but he put a cost to it right, of which we don’t necessarily talk about all the time, but there were some audience questions around it, and he’s saying, yeah, the cost of stacking is basically sofr plus 65 VIPs. So he put a cost on that. And then throughout the day, we heard other people be like, Yeah, that’s the bogey. That’s what you have to get over. Your alpha has to be outperforming that. So for plus 65 in order for this whole concept to make
Jason Buck 13:58
sense, right? That’s your financing cost when you’re having adding leverage, right? And so that’s what, yeah, like you said, top conversation throughout the day is that your hurdle rate or your bogey if you are going to stack these things on top of but also easier said than done, you know, there’s going to be times maybe when your strategy is unperformed, underperforming so far right, over short, short time horizon. So I think that was a bit easier said than done.
Jeff Malec 14:28
Segment two was Jonathan Glidden, I believe, as I say, his name CIO of delta, pension. So he was introduced as I wrote down here, there’s a CIO Hall of Fame question mark. So Rodrigo was introducing him and gave all his accolades and mentioned that he’s in the CIO Hall of Fame, which, congrats. But I didn’t know there was a CIO Hall of Fame. But my takeaway he was even as he’s. In about five minutes talking. I’m like, this is the best speaker of the day, and, no offense the other guys, but he was just polished. He’s done it. I’m sure he’s been in front of 1000 boards, and somewhat had the biggest job there, right, running this huge pension, and had brought, will put in the show notes, some of the articles and whatnot, to what he’s done at the Delta pension, but basically brought it out of the dark ages, seriously underfunded. I think the one chart he showed had the liabilities of the whole pension were greater than the market cap of the company, which I wrote down like bankrupt question mark, but brought that all the way back using portable Alpha. But I’ll leave it there and get your thoughts on Jonathan before we dig into it. Sure I
Jason Buck 15:46
knew, I knew Jonathan was actually going to be good, because about year or so ago, the returns that guys did a podcast with him that I thought was really enjoyable, and like you said, he’s a great speaker and really compelling. So I knew that was, it was going to be one of the good ones. It did remind me, like you said, he has, to be such a great speaker and compelling speaker, and a clear thinker and speaker, because he is dealing with a board of directors for that pension plan. And so it reminded me, going back to even the earlier one, that I think it’s really difficult for human beings to not have that benchmark, right? So even if you’re talking to board of directors, they want to see a benchmark to see if you’re over, under performing, right, but like, over what time horizon. And so that’s why, you know, if you’re Jonathan at Delta, you know you have to be really good at communicating your board director, especially when you’re underperforming. And like you said, they should be asking you the questions when you’re quote, unquote over performing right, because that is tracking her to the upside. But I think that’s what makes these decisions really difficult for your for people in general is one, you know, a lot of these pensions have boards. They have to talk to our endowments. But even two, even if you’re doing it individually, you know, your neighbors are going to be, you know, going cruising along with 6040, and you’re going to out, or you’re going to over or underperform over, you know, months, quarters, even years. And it’s just really hard for us to not deal with some sort of heuristic benchmark. But when you’re doing this, it’s the question is, the question is, what’s your benchmark? Other than, you know, maintaining your purchase power parity, outpacing inflation, reducing volatility and drawdowns, that way your money’s there when you need it most. You know those kinds of things. They’re not, quote, unquote benchmarks for that. You know people, for understandable reasons, default
Jeff Malec 17:18
to love it. He had a great little heuristic. I’ll go for your thoughts. You’re gonna list it, yeah, yeah, on the back end, what your thoughts? Whether this is a fourth pillar out there. But he basically said there’s four ideas that have been groundbreaking in the investment world in the last 3040, years, the first of which was out of Chicago, here, University of Chicago. Markowitz, all that volatility equals risk. We’ve done tons of podcasts debating that which is, it can and does sometimes, but not always. The second gave a little backstory on Jack Bogle, low cost indexing. Likely probably agree there. Third, which definitely agree with was Yale david Swanson getting into privates, sort of that private equity, illquidity premium, which is now switched, because everyone followed the model. And then fourth, portable alpha, which I wrote down here, oh, they were going to call it Rodrigo. It’s folly. Rods folly when he was putting portable alpha in this concept as the fourth kind of groundbreaking thing that’s happened to the investment industry. Thoughts, comments, yeah, I didn’t, I mean,
Jason Buck 18:36
I didn’t have a problem with this choosing those four. I mean, obviously, you know, I’m a huge fan of Harry Brown and permanent portfolio. So maybe it would have been a fifth in there, or whatever. But kind of the fourth one is, he’s saying, and he gave credit to Bridgewater on that with like, their risk parity is leveraging the variance for more uncorrelated assets. So the idea of increasing uncorrelated asset streams, but then lining them up with their variance to try to maybe, you know, in that case, it would be leveraging the bond part of the portfolio to match the variance of stocks. But what he said with that, the new revolution is, is leverage for greater portfolio sharp ratios. And even the quote was, there is a thing called good leverage. So once again, this is tying back to our theme. We’re gonna be talking about a lot about leverage or tracking errors. And so, you know, just highlighting, there’s good thing called leverage. And he convinced his his board of that. And then he was talking about sharp ratios, which I think people forget, is they tend to look at Sharpe ratios on individual strategies when the whole point of sharp ratios is on the portfolio effects. So that’s what’s more interesting. Is if you combine, you know, low sharp ratio individual strategies, you may get a higher Sharpe ratio as long as you’re getting uncorrelated assets, and you’re getting a little bit of that rebalancing from them. So I just thought there was another thing to point out is, once again, I think people misuse sharp ratios all the time, and Sharpe ratios was much more of on that, you know, efficient frontier, or your total portfolio, and how well that was doing, especially if you had uncorrelated. Negatively correlated asset classes.
Jeff Malec 20:03
And then for him, he was breaking it down into more real numbers. They use 40 different hedge funds. So really going, I wanted to say OG wild, but it’s probably not the right frame. But really going smartly into Hey, if you’re going to do this, do it as mostly diversified as you can and then adding leverage of 40% I took a little offense. He had one chart where his hedge funds were in physical assets, which did make sense. And then I wrote in big letters here, duh, that he basically brought to them of like, Hey guys, what when people have money when the economy is doing well, what do they do? They fly around the world in the country, and earnings are good. When people start to lose jobs and the economy’s not doing well, what do they cut back on flights? So basically, he came in and and taught them, hey, we need to be diversified. We need to have things that are non correlated to the economy, because that’s when we actually do well. We don’t need to be doubled up on on on the economy, which is music to your ears. I’m sure there’s other
Jason Buck 21:05
things than that, though, with the leverage too, I think that’s there’s a lot of hidden leverage that people don’t realize, right? If you’re just investing in SP 500 index, those companies that are within that index are going to use debt and financing. So they’re using leverage inside those systems. You know, these days, you know, private equity or private credit are really hot, or venture capital, those are just different forms of leverage where you’re leveraging up equity or debt. So I think there’s a lot of other leverage built in there, like, there’s a there’s a couple slides in there. I took umbrage where people were saying this is their level of a leverage on there, when I think it’s much higher, and basically they’re able to maybe this will be part of the other discussions, hide it and swaps, etc, you know, or adding more private equity into the book, so you’re able to kind of get some pseudo leverage, so to speak, in there. And so, you know, the key ways that we talked about throughout the day, I’m sure we’ll touch on, is like, you can use managed futures and use that poor performance bond. You get managed futures to have more capital efficiency, sometimes referred to as leverage. Or you can use swaps with banks and counterparties too. And that’s what some of the bigger institutions once you’re, you know, at hundreds of billions of dollars, you’re allowed to, you know, negotiate with banks for getting, you know, swaps on products you want. So you can get even quote, unquote cheaper leverage, but you’re still going to play. So for Plus, you’re just maybe, hopefully going to play so for plus bips instead of sofr plus points, yeah?
Jeff Malec 22:22
Which he actually said it was 40 bits per month. So it’s still right around the T bill ramp. Yeah, yeah. Two quick stories. I loved his story he had just started. Was it? There is, I think it was his previous place. He was at Emory University, and they basically we’re like, Hey, we’ve just been everyone’s donated their Coca Cola stock. Our whole endowment is basically Coca Cola stock. And so he was new there, and they were like, Okay, go sell $3 billion worth of Coca Cola, which is just a crazy story. I should have asked him afterwards how he did that. And then the other funny part to me, which I actually talked to him for a minute afterwards, and I’m going to hopefully get him on the pod. We talked about that, but I’ll, we’ll put a link to this blog post we wrote. But at the same time, mostly that he was doing all this, they had someone in charge of their fuel hedging cost that was just trading oil futures like crazy. Like, made billions dollars and lost billions of dollars. So it’s kind of a commentary on, like, even though this side of it and he I’m jumping a little bit all over the place. But the also interesting that twice we heard from pensions that fund them, and then they’re out of it. The company’s like, I’m done with that. I put up all the money I needed to for that, and now it’s on your guys’ hands to keep funding that. So I don’t know if there’s a comment in there. Yeah,
Jason Buck 23:46
no, I know you wanted to point out that maybe that was before his time there. But also, if you put the article in there, that was fascinating to me about the article, is that he kept going to the board. He’s like, Yeah, positive carry on all our hedges on oil. And it’s like, some nobody raised their hand and be like, Wait, why do we have positive carry on our insurance? They should have the first clue. Like, yeah, something like they were making, like, $50 million a year on their insurance, on oil
Jeff Malec 24:09
hedging, what could go wrong? And then he said, and I think that was during the Q and A people, a lot of the questions in Q and A and throughout were basically the human element. How did you get this put through your board, which kind of resonated with the RA, audience and individual but how do I get this? How do I convince my client to do this? How do I convince as the client, how do I convince my RA that this is what I want to do? And there wasn’t really a silver bullet answer. There was just like, hey, you got to somewhat dumb it down, explain it in simple terms, use a mortgage example, or something like that, and like, hey, all leverage isn’t bad. Here’s why I think this leverage is good.
Jason Buck 24:51
Yeah, I think we’re throughout the day. You know, we’ve talked about this a lot before. It’s like everybody’s trying to use, like, different metaphors and different ways of. Talking about what these systems entail, and trying to help people understand and make their brain clicks in different ways. But as you know, I kind of feel about it’s like, I’m not sure you can convince anybody of this, and in general, right? Like they either have to have gotten burned in some way, shape or fashion, and they realize, you know, they’re trying to stay rich with a return stack portfolio, and they’re trying to actually get proper, uncorrelated or negatively correlate diversification into their portfolio, and actually, you know, increase their sharp and hopefully return, reduce their drawdowns and like, until somebody is fully convinced of that. I think convincing themselves, convincing them out of whole cloth, is incredibly difficult. So I really feel for for for Jonathan and at Delta, or, you know, we’re also talking to Roxanne later when he was at UPS, or other people that are at, you know, in at an endowment or pension, where they convince a board of these things, I think, is just incredibly difficult. And we just try to send out our bat signal and just look for like minded people that are look, have been searching for something like ours, because I’m not gonna, I’m not gonna go up and, you know, when we’re out in Chicago and stop people on the street and convince them that they should broadly diversified, right?
Jeff Malec 26:01
Hey, do you like cockroaches? Come up here? Yeah, a few other notes I had here. One he, he admitted. He’s like, Oh, you, Ra’s have a super harder job. He’s like, I have to, I have one client, the pension, yes, I had to go in front of this whole board and everything. But I have one client, one set of assets and returns. You have, who knows how many clients each have a different profile and everything, so it’s a much harder job. And then he had a great quote, alpha makes everything better. So like, as you’re doing this, as he was selling it to the board, they were having success, the hedge funds were providing alpha, and he’s like, Hey, that made my conversation much easier.
Jason Buck 26:40
Returns make everything easier, don’t they?
Jeff Malec 26:42
Yeah. And then how is my joke at the I asked a question slash joke after his talk. Do you
Jason Buck 26:48
remember it? I can’t remember your dad joke on that one. It might have been the bathroom. Remind me what that one
Jeff Malec 26:53
was. No, he was talking about how he saved this whole pension. I said, Hey, can you come? Can you quit and come to Chicago and fix our problems? Exactly, depressingly, he’s like, I don’t think there’s any fix in that. Any other thoughts on Mr. Glidden,
Jason Buck 27:06
no, I, like you said, I really enjoyed, if you can put in the show notes, the podcast that returns acted with him is excellent, and then it reminded me of a paper they wrote with him, or a little essay that we’re actually going to put into our newsletter this month as well, because I think it’s great, the way he talks about it and but once again, even with those that’s like, it’s really, it’s really about to get these hear people tell the stories in person. It’s the Q and A after, where you get the more unique questions than people speaking their book for an hour and then catching up with them the hallway to add those follow up questions or or get into some of the details that you always want answered. I
Jeff Malec 27:46
All right, moving on. Panel three was Patrick casley. Casley, head of solutions, one river asset management, talking convex overlays, enhancing compounding through diversification. So this is right up your wheelhouse, right talking volatility traders and trend to be the first and second responders. He had his, which I’ve heard him say before, Sumer wrestler analogy, which you could talk to a little bit. I loved his four types of down move chart, which was great, a sharp like a march 2020. Moves down really quickly, bottoms out. Let’s call it 2022. Just a long, slow grind, lower V shape recovery, kind of a gamma. And then he had what works well in each of those, which was some of its long volatility, some of its trend and some of its gamma traders, which gets a little into the weeds, but I’ll leave it there. And here’s some of your thoughts.
Jason Buck 28:51
Yeah, I think, you know, we talked about these metaphors and analogies that help people understand. And so typically, throughout our industry, especially on the long vol side or tail risk side that’s harder for people to understand is, you know, as soon as any of us come up with a metaphor analogy that works, all the rest of us tend to copy it. And because, if it works, it works. And so he even started, I think, bringing up David dredge’s analogy of an f1 race car. It’s not the car that can go fastest in the streets, it’s the car that has the best braking and the turns that then can accelerate into the straits faster, which David has done a great job over the years, bringing out. And then the other one you referenced is first responders, second responders. I think, you know, one river does a great job of riffing off of that, but that that comes from Makita and my buddy Jason josefiac, when he was kind of building those risk mitigation strategy essays that Makita put out. But the idea is you need, you know, first responders and second responders. And the idea around there is that if you had some sort of liquidity cascade as as Corey hostines, trademarked like March 2020 when you have a very acute event, whether that’s endogenous or exogenous, you really need those like long volatility and tail risk strategies that provide that negative correlation for those shocks, when markets shock down because everything else in your port. Folio can get sold off. You know, everybody’s throwing out the baby at the bath water, even things like gold, etc, get sold off because everybody’s going to cash. So if you have that structural negative correlation that you get from like tail risk puts, is like, you’re a liquidity provider into that market. So you’ve been inventorying all those tail risk puts during the good times, and then as soon as it hits risk off, you’re the one selling that market. And everybody needs to pay more to hedge their book. So that’s your kind of first responders, and those acute stress points. And then your second responders are when you have, like, stronger or lower grind down environments where that can be like 2008 or 2022 typically you have strategies like commodity trend following, etc, that tend to do better and those, and that’s why they’re called Second responders. And then you could argue, historically, you know, where do you know long bonds, or just the Treasury markets in general, fit in there, especially if, if you know they, they knee jerk responses to cut rates. You know, you can get a nice ballast from there too. So you get into other and then we can get into within those first responders, second responders to use, you know, Delta, Gamma, Vega strategies, etc, and just thinking about the layering of those. But like you said, I think the interesting riff was just kind of showing the four shapes of those as well, just besides, like, you know, sharp and acute versus, you know, long and drawn down, right? It’s like, do we have V shaped recoveries, K shape recoveries, you know, all those sorts of things. Do we just kind of L shape, you know, flat and long periods? But I’ll let you jump in here and save me.
Jeff Malec 31:24
Save me. He, he also added a new moniker, fast twitch and slow twitch. Oh, I like that one. Yeah, that was a good one. So that was good. Volatility is your fast twitch trends your slow twitch. I think he was the first one, and really, kind of only throughout the day, who actually went practical? Of like, right? The other guys are just adding alpha, adding hedge funds, like, okay, which ones? Like, What’s my goal? If your goal is non correlated and get a longer compound growth? He was kind of getting heavy into that. And then also, one of the only ones is, like, it doesn’t necessarily need a positive expected return. It doesn’t need a positive sharp, if it’s basically vol if it pops at the right time. So he had a lot of cool charts, a lot of cool back testing. I think he was one who ran, like a hit a button, and it was the charts were moving in real time, right? Yeah, yeah, which is always cool. Like, we’re such at the end of the day, we’re just primates, right? Like, ooh, moving, moving chart. Actually,
Jason Buck 32:22
one of my things that leaned over to CJ, I was like, we need to use that app that does the moving charts for us. Because, like, yeah, you can overlay those into your charts, and it does that, yeah. And what he’s really showing is the rebalancing effect, right? And, you know, Corey has talked a lot about rebalancing timing. Look the hard part, obviously, with you and I talking about this is like, we agree with almost 99.9% of what the setup stage so. And it also feels like we’re talking our own book. But rebalancing effects, especially with negative correlated strategies like in March 2020, you know, the market sells off. You’re able, if you’re able, to monetize those terrorist puts, and then you if you have a a system for rebalancing, you know, you’re rebalancing to buy those stocks at that lower nap point. And that really affects your compounding over time. And this is the things we talked about with ergodicity in a non ergodic environment, of how do you compound your wealth effectively and efficiently over time? There was some questions. I need to go back, and I haven’t had time yet. They have a paper called the convexity rebalancing act that talks a lot about this. Maybe we can put that in the show notes. I haven’t spent a lot of time on it, but he was saying, you know, they were looking at calendar, calendar rebalancing versus threshold rebalancing. And so, for example, in Harry Brown’s permanent portfolios, it was a quarter each stocks, bonds, gold and cash. And instead of having, like, a monthly, quarter, annual rebalancing, he suggested that use thresholds, so anytime they got 10% out of that threshold, so if that 25% went up to 35 or you down to 15, you would rebalance across the portfolio, which happened like once every 1.4 years, I think, over the last, like 40 years. So that’s threshold rebalancing. And a lot of times people like that, because then you’re not rebalancing too much just based on an arbitrary calendar. But they were talking about how monthly rebalancing worked much better than threshold rebalancing, and they said that the threshold rebalancing had twice the variance. So I really need to read through that paper just to make sure all the parameters that were in there, because Roxton and I were talking a little bit about after and we both were a little dubious of that. So really need to dive into that paper. So especially if we put in the show notes, that would be a good one to look at. And then, as you know, like I should be somebody that loves monthly rebalancing, as we’re forced to do that as a function of monthly liquidity. But, like, even I was kind of dubious that that that was the right solution. But whatever it is, I mean, any sort of system for rebalancing helps. And you know, you get that rebalancing premium from having negatively correlated assets to hopefully help you compound better throughout time.
Jeff Malec 34:37
Yeah, I had written down here big rebalance debate, which I don’t remember there was a debate, but maybe that was between us. And then good chart on rebalance timing. So yeah, that was great. And then he also had a unique which I want to get, maybe I’ll get his presentation. He had a unique way of looking at correlations amongst all the different asset classes where he. He reversed them down to zero, I think is what he was saying. Like, if you took all these back to zero, which would basically take away all their outlier returns, what did the result? And they all look pretty similar, which is kind of similar to some of med papers work of like hey over the long term, these things all have a sharp, round X, and they all kind of tend to do the same thing. It just has these different peaks and valleys, which is what you’re looking for in portable alpha, different peaks and valleys. But yeah, overall, he had the best charts by far. I’m just trying
Jason Buck 35:30
not to get victory lap, because these are the things I’ve been arguing with you for a better part of a decade. So it was good to see some of those stuff. But then again, that’s confirmation bias, so we’ll throw out my argument on that side.
Jeff Malec 35:42
And Patrick is a good guy talking with him after they were all good guys.
Jason Buck 35:47
Been a fan, unfortunately, unfortunately, I’m a big fan of one river. They do stuff very similar what we do. They’ve been around forever, much bigger institution, but they’ve been in the ball, in the trend space for, like, the history of the firm. So really, always like listening to anything they have to say. Eric Peters has to say, it’s always great, but to your point, yeah, we need to up the female quotient on the next return stacking symposium, definitely.
Jeff Malec 36:13
Although right around this next panel, they started to show up a couple handful. Yeah. The next panel was portable alpha for the quote, unquote, taxable masses. So basically, getting it off the institutional more towards, I’m a raa, how do I get this in my clients books? This was the unfortunately named for the financial business, Michael crook CIO of milk, milk capital advisor. But also it got me thinking, like, how good is this guy got to be where his name’s crook, and he can still raise money and manage money. But, and I wrote this in the beginning, as he started talking about refreshing, less technical, right? He was kind of talking about how you deal with clients and talk but towards the end, there were tons of charts and numbers and stuff so, but at the beginning, it was refreshing, it was less technical. And then there was, at one point, a math formula on the screen. And I’m like, wanted to send out a PSA. Nobody ever put math formulas on in a slide deck. So I’ll stop there. Your thoughts,
Jason Buck 37:16
yeah, just throw me for a loop there, because it reminds me of one of my other things I’m always talking to hedge fund managers about is, there’s a great book on Steve Jobs presentation philosophy, and one of them’s, like, all pictures, like no words, or, if you it’s just the fewest words possible, or in really big font. And I’m sure you, you and I the same issues, like we’re in the back of the room. A lot of those slides are unreadable for the audience because everybody wants to put, like, multiple charts and lots of words on it, same as they like to do on their pitch decks for hedge funds. But they got to get you. Got to get, got to get better at being more visual and doing the slide charts for the back of the room. So that was just a side note there.
Jeff Malec 37:51
I’ll give you some advice. So he was talking, he was bringing it back to practical things, right? So in a taxable account, you maybe want to use Munis for treasuries, right? He was talking expense ratios. He was talking, which I actually wrote down because I’m not as familiar with this is the RA space, 9060, equity replacement strategies. He’s saying, Those are great, but clients, he started again, the clients will fire you in the drawdown. And this came up later to have, like, just want quarter over quarter consistency. So even if 9060 looks better from a math standpoint, if the client can’t live through it, if the path doesn’t work for them, they’re going to, you know, they’re not going to stick with it. And then he was basically saying, the hurdle isn’t that bad, which was basically just cash plus 30 bits, which is right around what everyone else has been saying. Well,
Jason Buck 38:40
yeah, well, yeah, that was my question for you, because I, unfortunately, during this I got pulled out into the hall a few times, but that was my general takeaways. Like, I was hoping for maybe a, you know, reading about poor buff or for the taxable masses, I thought there was going to be some interesting techniques. I didn’t know if we were going to get into, like, AQR, tax loss harvesting, those sorts of things that have gotten really popular these days. So I was hoping there was, there was something we were missing on the taxable side. But no, it’s more about, like you said. It came down to, I similar to leverage, right? It was like cash plus, you know, 3040, bips. It was definitely sub 100 bips, which, which was your quote, unquote tax alpha. So that was refreshing to hear. But also, like you said, it boils down to how you’re stacking those within a taxable account to make sure you get the best taxable efficiency out of it, which is, you know, I wouldn’t say easy to do, fairly trivial to do with, like the return staff products, right? In thinking about the individual clients from RIA perspective, that’s why they have those building blocks in there, so you can adjust based on somebody’s tax exposure or tax profile.
Jeff Malec 39:35
Then he had a great line, triple underline, outsource the leverage right, which I hadn’t heard before. That was a great one of, like, you don’t want to, like, ask your clients do this. You want to, you’re outsourcing leverage. This does it for you. You don’t have to stress about and then he had another good thought right towards the end that might have been in response to a question about private assets, basically saying a lot of our as a. Being pitched on private credit and private equity right now, but it might be 10 years too late, right? That’s the last alternative, uh, battle. And maybe these liquid return stacking alternatives are, uh, more flexible liquid alternative, liquid choice, that you can have the same sort of non correlated stuff, but in a more liquid format.
Jason Buck 40:21
And maybe, for those who haven’t read it is he’d probably be at the next return stacking symposium. Is Dan Rasmus Dan Rasmussen, of her dad. He’s written a lot about PE I mean, he started his career at Bain, but like he talks about, in the heyday that 80s, 90s and maybe early 2000s they were buying companies for a multiple of two to 3x and then they’re putting maybe two to four turns of leverage on it, and all of those have gone up three to four times. So that’s why, you know, it takes, you know, decades for those returns to really manifest, and that’s why people are performance chasing in those but maybe those are disappearing at this level of multiple and this level of leverage. And as they’re saying, people aren’t getting their DPI these days, but I’m not going to be the one to say today is the death of PE, because it could probably run along a lot longer than I can, you know, imagine it would.
Jeff Malec 41:07
And to me, that news last week, or two weeks ago, EA Sports got taken private by Pe. Like, that’s before they die, they’ll start using that playbook, right? Like there’s too many, yeah, it’s all
Jason Buck 41:19
extended pretend and, pretend and yeah, continuation funds, except they have so many tools in their toolkit to just keep, yeah, they’ll just keep the train going,
Jeff Malec 41:26
yeah. But to me, it’s not even extended pretend. Sure, maybe there’s now they’ll switch like, hey, there’s more value in in public equity than there is in private, because we kind of bastardize the private side. So let’s go into public equities that are and who knows they maybe they can run the same playbook, but super interesting. And then I got a shadow some of the charts that Michael had were rightfully so, and which I think was good overall. People were talking about risk. They were showing drawdowns. They were showing this, but some of them were super sharp downturns that he was showing, which were making some of our friends in the back of the room a little a little nervous, as they were like, Why? Why is this chart pointing straight down up on
Jason Buck 42:04
the screen? Looked like the fart coin, fart coin chart in the last week? Yeah.
Jeff Malec 42:14
Next panel was Dylan Pierce from the return stack was hosting, talking to a what do we call it? A gaggle of advisors, panel of advisors, four different advisors. Brandon arms, Portfolio Manager at W, J interests, which I think is a good name, instead of capital or wealth or all this stuff. Uh, Homer Smith, he’s been on the pod. We’ll put a link back to that owns convergent wealth partners, rich to scan, oh, an advisor with Pacific Capital associates and Sunu Vargas. Don’t quote me on that, Vice President global macro strategist at Carson wealth. So this was kind of designed, hey, these guys are actually putting this in practice, using it out in the field. Let’s get their thoughts, which I thought went quite well, super practical. Any immediate thoughts from you before I go through my notes? Yeah, you skipped
Jason Buck 43:18
over lunch break, which is always the favorite part of my day, because like to have those side conversations. It goes back to, I really wish I could think of that Steve Jobs, books on presentations, but it’s a very simple title, but that was one hack I’ll throw out there. The other hack I’ll throw out there is when you have lunch with like, 100 people, you know, if they ask you any dietary preferences before, even if you don’t have any, and it’s an annoying to have some, maybe throw one in there, because then your your lunch gets set aside, and people may, may take a little more care and making it so, of course, I did that, but I think it backfired on me. I think I ended up getting the veggie sandwich then because of that. But what would you say your restriction was? I think it was just, I just want someone to pay attention to me. Yeah, I just want somebody to pay attention. It’s like the green m&m theory, right? That’s all I’m doing. And then, and then those, those were set aside, so it was easy to find mine. It was
Jeff Malec 44:01
also weird that it was like, your name and big letters on the yeah on the box. I wanted to take it just so you’re like, wait,
Jason Buck 44:08
yeah. And then during lunch, I got to talk to the buddy, Jim Carroll from vixologist on Twitter. X you know, probably the nicest person involved space. So it was great to talk to Jim. It’s so funny. We’ve always tried to link up whenever I’m in Charleston area. And Charleston Area in South Carolina, and end up running into them in Chicago. So hopefully I’ll see him also next month in Charleston as well. But had a great, great conversation with Jim during the lunch. Just a reminder, like that’s that’s the best part of these events is more of those, those personal connections and those side conversations that you get in during those interstitial moments. So going back to the the advice the panel of advisors in the field, the return stacking and practice one, it was obviously, you know, one of the things Homer kept pointing out was really the psychological effects of this, or the sales side of it, not so much the portfolio construction and what they’ve been focused on at convergence, he’s been focused on. Lately, it’s also like saving clients that are selling their business on inheritance taxes, etc, and the amount of health like you can get there as an advisor versus maybe the portfolio construction are two completely different things, and that’s the real value add. I think that a lot of advisors can think about is more the estate planning side than the portfolio side, because as long as you’re getting broadly diversified portfolios, as mad has shown a million times you’re gonna get in relative bands of returns, but you can really make that difference on doing their estate and tax planning. But one of the other things that Homer pointed out, that maybe you’re that you pointed out earlier, is a lot of times when you have a lot of diverse client bases and Ria, you may buy into, like this return stack concept, but to get each one of those individuals to buy in is incredibly difficult, and we’ve seen this in practice a million times. But one of the things Homer pointed out was in 2022 it was great with clients for that quote, unquote, outperformance over like a benchmark, 6040, but then since 2022 it’s like, what have you done for me lately? Right? So if they’ve trailed it all in 2023 and 2024 2025 that makes it an incredibly difficult to talk to clients, because they conveniently or quickly forget how they were. They were saved in 2022 by having these diversified, uncorrelated or negatively correlated portfolios.
Jeff Malec 46:14
There was a good point I’m forgetting. I didn’t write down, unfortunately, who exactly said it, but they were talking for a second about like, hey, even before you get to return stacking, there’s return stacking, like, things you can do in your portfolio. So we’ve said, first of all, if you have a choice between a five vol and a 10 vol program, right? If, like, you’re looking at two man’s futures programs, one’s five ball, ones, 10 vol, choose the 10 vol like you’re getting free quote, unquote leverage. There free volatility. And that’s easy stacking. You just choose, choose that which I’ll, we’re gonna have 700 links in the show notes. The done, just did an interesting paper of basically, like you, why? Why you want eyeball trend? So it’s kind of along these lines of, like, just saying I’m going to stack something. It doesn’t necessarily in a vacuum, doesn’t make sense. The more volatility you have, the less capital you have to put to that, and the more you can use that cash elsewhere and stack it. Well, that’s, I can’t
Jason Buck 47:12
remember if you talked about privately or you asked on the mic, but this is the thing we’ve been talking about long time, even with institutional allocators, is that if I can give you the same program and it’s a 10 ball or 20 ball or a five ball and a 10 ball, you’re gonna pay less fees per unit of risk. And it’s amazing how them don’t care, right? Because it’s more like the cya effect of everybody wanted low vol. You know, we’ve seen in the last decade plus, that everything’s moved to sub 10 vol because that’s what the institutional allocators prefer. Whereas, you know, when you’re coming up. And we love our Market Wizards, you know, in the 70s and 80s, they were running 40 to 80 ball, you know. And you can, you can attenuate your allocation size accordingly, which you were saying is like. So you get better bang for your buck, for last lack of a better term, and you get better usage of your fees, and then you get better capital efficiency. And I think besides even what Dunn wrote about that. I think there was some great pieces more recently by footfastness on AQR. Go ahead, throw that in the show notes as well. Just, I’m just gonna reference everything now so we get the show notes will be longer than the show but Cliff talked about too is like, not only do you want that high volt, you also want it in in his references in a commingled fund, right? Because you have all those protections as an LP in a commingled fund, especially if you’re dealing with managing futures at high vol where if somehow they were to go into some sort of debit, you’re not responsible for that. So I think that’s just another layer of protection that people don’t think about. Is like, if you can be in high vol commingled, uncorrelated strategy, it has enormous multiple layers of value to you as a portfolio construction tool.
Jeff Malec 48:41
And then again, a lot of this panel was spent, which doesn’t necessarily apply to maybe our listeners, but how do you sell this, to your board, to your client, to your RA, to your wife. I don’t know what, who you’re selling it to your husband, who you’re selling it to, but a lot of that just comes back to right? I would just take it like, ignore. How do you sell? How do you sell it to yourself? Like, how do you Yeah, mentally, what is they had a bunch of what was the guy’s example of, like, thinking about leverage when you’re riding a bike in your cul de sac versus if you’re riding it on the freeway, you’re, like, doing the same thing, but two very different risk profiles. And he’s like, I didn’t quite put together which one’s the leverage.
Jason Buck 49:23
But there’s a weird dichotomy, though, too. Of like, I think the simple way to think about is the get rich portfolio versus the stay rich portfolio. And unfortunately, we’ve always maybe thought about 6040, year stocks is maybe the stay rich where 20 years that’s really been the get rich portfolio. So now, if you want to stay rich, and you know, we have a 90, you know, times when, you know, inflation picks up, or stock, Bond correlations go up, all of those things matter. But maybe that’s kind of the divergent part of selling or pitching it is that people that are pitching it, or, you know, trying to convince our clients to stay rich when their clients still want to get even richer. And so maybe that’s part of the process too. That makes it. So incredibly difficult to to really sell these programs, to try to get your client, just to, you know, to admit they’ve been incredibly fortunate, and now maybe it’s time to shift tact a little bit. Maybe do a 180 and try to stay rich.
Jeff Malec 50:18
The next one was requested that he who shall not be named like Voldemort, but he requested that he was not named. So we’ll just call him a nice gentleman from a large pension, one of the largest in the world, top 10. So a few. My first interesting thing was he started a story, which it feels like I’ve heard this story on dozens of podcasts, of someone goes into a big pension or a big prop firm or somewhere, and almost immediately, as a young person is given some bucket of money to trade and loses it. So part of me is like, Oh, great, you got training on the job. But part of me is like, what are these? Do the pensioners? Do the people, the stakeholders, know that their money is just getting thrown around? And are, is it? Are the people in charge of that asleep at the wheel, or is it part of their brilliance, of like, hey, I can hone these people with real world experience, with what’s a rounding error on our hundreds of billions of dollars?
Jason Buck 51:19
I think, as you say, it’s more of that advancement of paper trading into a rounding error, because that’s what I was going to bring up more than anything. Is like when I talk to these, some of these pensions or endowments, as soon as you get over, like $100 billion you’re beta, you just have to accept it, right? And so a lot of them will talk about their active strategies, but those are on the periphery. I mean, some of the people there were talking upwards of almost a trillion dollars. So the idea that you’re going to have active strategies and you’re not going to be passive beta, which essentially is like nor just bank, the Norwegian sovereign wealth fund, it’s like just accepting that, because you know your active strategies, and maybe less liquid markets obviously are going to be severely capacity constrained. So you know, you’re talking a matter of bips around the fringes. Does that really help at that at that level? And then the even when they call me up to talk about volatility or tail risk strategies at those sizes, once again, it’s incredibly difficult to hedge that you got. You know, you can’t do that necessarily listed markets. So, you know, you’re gonna have counterparty risk. Are they gonna pay you out appropriately? Can you swap it? You know, like, do a cash leap on a daily basis? There’s, like, there’s so many inherent problems of once you get over 100 billion, that when you’re getting closer to a trillion, closer to a trillion, like it, just accept it your beta. It’s fine. And maybe you can, yeah, stack some betas. But even getting leverage is going to be incredibly difficult, because who is the counterparty to that leverage?
Jeff Malec 52:33
And I think in this anonymous talk, there was some talk about, like, they can’t even really move the needle, right? Like, no matter how much first game, basically what you’re saying, which brings me, do you think CalPERS right? When they was at CalPERS, who famously ditched the tail hedges, like, was, maybe that wasn’t because there was a line item. It was just someone there was like, hey, this doesn’t even make sense. Like, even if we pay out on this, it’s not going to move the needle.
Jason Buck 52:57
Yeah, the it could be that because we weren’t privy to those conversations, so it’s easy to villainize them or and villainize that CIO when it happened, the only thing the counter argument to that would be is he only cut one of his tail risk programs. They had two, so he cut one of them and kept the other one. So who knows what those conversations were necessarily like? So they actually people do forget or don’t know. They actually made some money on a tailor’s program with a manager that we know very well. So that’s part of that story too. Once again, I Don’t speculate what happens in those private rooms. Other than it’s a rush off plot for everybody to put their hopes and dreams on. One of the other things I want to bring up with pensions that I’ve seen lately too, as this is now you’re starting to see this new nomenclature, the total portfolio approach. And once again, it’s like, meet the new boss, same as the old boss. Like all of this nomenclature verbiage changes as, you know, as we went from, you know, you know, tech companies, whereas like fan mag to like, like, they’re always the acronyms are constantly changing. But the newest one that you’re going to hear a lot from pensions and endowments, the total portfolio approach, to me, it still seems the same as the Yale Swenson model. It’s just they don’t have buckets anymore, right? They’re still doing broad diversification across asset classes, etc, but they don’t have a hard and fast rule of like, this has to fit inside this bucket, which is always actually a big problem. Talking to some of those institutions, if you ran a different strategy and they didn’t know which bucket to put in, they’d automatically kick it out. So it’s nice that they’re not, I guess, strictly adhering to those buckets, but I can see that portfolios essentially look the same as the Swenson model. But I guess at the fringes, they’re allowed to move the needle here or there without having to convince their board that there’s any sort of portfolio drift outside of the specific asset classes. But maybe I’m missing something on the total portfolio approach, but it seemed pretty much similar to what they’ve been doing before. Just they’re kind of removing some of their own shackles, I guess, a little bit, but still, still kind of same thing.
Jeff Malec 54:48
And there was some interesting talk at the symposium, round of like, using a like an 8020 call it stock bond, just for. Not that’s an actual allocation like to what you’re saying. Okay, we have the classic structure, but that’s just to give us a risk. That’s what we want our risk profile to look like. So that’s where our risk assets are, even though, underneath there we’re just going here, there, everywhere, total portfolio approach, but we can, and you know, that’s basically like, give me equity risk with or lower than equity, risk with equity, like returns. The last one was with one of our favorites, Roxton. I wrote down in my notes here. Has Roxton ever been in a room where everyone in that room understood what he’s talking about? He just goes quickly. He speaks fast, and he’s as smart as it gets. So thoughts on Roxanne as I pull up my other notes here, I was
Jason Buck 55:50
thinking about, well, one other thing is, like, when you’re referencing something you want to say about the previous talk, and then also, Roxanne also had another panelist on this, and Corey was moderating. But for obvious reasons, some of these institutions don’t want it out there publicly, necessarily, what their managers were talking about, which is another reason to be in these rooms, to go to these events like this and that way you know whether it’s Chatham House rules or people just don’t want to talk to about at all. This gives you insights to be in those rooms where people are at least allowed, you know, talk more freely than they normally would. So you can probably get some better insights. And then do those, like I said, those follow up questions, Roxton. Obviously, I could listen to Roxton all day. We think very like mindedly. I appreciate how fast he talks seeing how, as you know, I listen to things at two to 3x speed. So he’s Roxton is like Taylor built for me. Loved the podcast. He’s always done with Corey in the past, and he so he was talking about orthogonal return streams instead of necessarily uncorrelated. And so man, after my own heart, he was talking about correlations. It’s hard to figure those out, because obviously correlations are conditional, especially during liquidity events, so therefore you shouldn’t maybe rely on correlations as much. But if you have orthogonal strategies, which is probably just a fancy way of saying uncorrelated, but the you think through the return driver of that orthogonal strategy, it’s more like combining those orthogonal strategy, but at the same time, man, after my own heart, doesn’t necessarily believe in alpha, and he said even those orthogonal strategies are just undiscovered beta. So eventually we’ll write those down as beta. I mean, you know, you can argue that, basically, you know, that even Warren Buffett was just a factor investor, right? He used the low vol factor and he leveraged it up 1.6 times. But discovering that before it was a beta and running it for 80 years is a superpower. So I think, you know, and get maybe too much into semantics, is it alpha or beta, or is it just undiscovered? Beta doesn’t really matter. Is you just want to try to, you know, put together a portfolio of as many orthogonal return streams as you can,
Jeff Malec 57:54
which, at the cocktail hour, before mentioned, Jim Carroll was doing, he’s like, basically saying an orthogonal is a 90 degree edge, right? He’s like, Wait, if I have this one and this one and this one, this one and this one, don’t I just have a circle? He’s like, do I have nothing, which I know you and Corey have debated in the past, right? If you have, what’s the point of diminishing returns, if you have so many orthogonal, non correlated return streams, do you basically just get the risk free rate. And maybe that’s not a bad thing, because if you lever it up
Jason Buck 58:24
and you get right, well, as as was talked about on many of these panels, it’s probably the risk free rate plus right. So hopefully you’re getting plus two to 300 bips, but then you know exactly what you are over that risk free rate, and then you can attach any sort of leverage or capital efficiency to it. And this is essentially what the pot shops do, right? If you can consistently produce, you know, two to 300 bips over the risk free rate, well, then you can use swaps at banks, or you can use managed futures to use better capital efficiency, to toggle that to kind of whatever return profile you want. And then it can be arguable too, if they’re truly orthogonal or uncorrelated, you could also harvest a little bit of rebalancing premium, whether that’s over calendar rebalancing or threshold rebalancing, that will probably add, add some bips, and it can be arguable how many. And so that’s what you’re doing, right? And I think that’s just a much more rational and reasonable way to look at it. Is, you know, you’re just trying to get a couple 100 bips over that risk free rate, which will be probably a couple 100 bits over inflation, and that’s what’s really going to protect your portfolio over time. And then, by including as many orthogonal or uncorrelated strategies as you can, you’ll hopefully reduce, you know, increase that Sharpe ratio, increase that Mar ratio, reduce those those drawdowns and those those downside variants as much as you can, so you can, so you can hold it during times when everybody else is panicking. But I think that’s a pretty resilient or simplistic way to look at it. That makes a lot of sense
Jeff Malec 59:50
to me. Two other things here. Roxton was going super deep on Plan dynamics in the beginning of like, well, this investment won’t line up with that. Plan sponsors views on this, and this is. How they get their bonuses. And so it’s like, for sure, three dimensional chess at that level of 10s of hundreds of billions of dollar pensions and endowments. And who are the stakeholders who’s getting paid? What to do, what? Which was probably, which is why, I think that’s when I wrote down of like nobody in here maybe knows or cares into that detail, but he just knows it off top of his head. He was just riffing on it. And then two, they echoed one of my favorite concepts, right, of like, it’s not just enough to have statistical non correlation. You need to have what I call fundamental non correlation, which I can’t remember what their term was, but um, you know, orthogonal like these, need to be doing different things. Like you can have, you can end up with a portfolio of all trend followers that have non correlation to each other, probably not trend followers, but maybe long short equity managers that have non correlation to each other. But when things go bad, those correlations are more likely to go to one. So as you said, Nice to be echo chamber and hear what I want to hear from them. Yeah, and
Jason Buck 1:01:01
I’m sure you maybe we’ll get to it next. But after that, we had the happy hour too, and so ROX and I were able to pull each other side and go a little bit deeper dive into even figuring out those orthogonal strategies. Or, like, how do you look at that matrix or orthogonal strategies? Because shout out to Adam Butler. I brought up the three body problem that he loves so much is, like, as soon as you have multiple orthogonal strategies. You know, how orthogonal are they to each other? Right now, you get a whole different matrix of or morass of problems that you’re running into, and we talked about different ways of ranking those off of, you know, information theory, you know, entropy copulas, you know, but at the end of the day, you’re still using past performance to predict future results, and it’s still kind of finger in the air, and you’re just trying to use probabilities and statistics to build the best portfolio you can. And then, like you said, you need this fundamental overlay of what, what’s the general return driver in, you know, basically, risk on, risk off, which is, you know, how the way you think about is, like you have offense or defense or the four quadrant model outside of that, they’re probably going to be highly correlated to each other within that framework. So maybe the max you can get his two either Offense, Defense correlated, uncorrelated, or maybe four, given the four global macro quadrants at best.
Jeff Malec 1:02:07
And then I think it was Roxton noticing he was just going deep of like, yeah, and we had 100 million in profits from such and such tail hedge. But the bank said, No, we’re calling force majeure on covid, and we’re not paying this out. And he was like, What the So it’s just like, literally, you can’t learn those lessons unless you’re in the in the arena.
Jason Buck 1:02:27
Yeah, well, it’s gotten better and it hasn’t. So I was having this discussion actually, actually, after Roxanne mentioned that is another friend of mine in 2008 he made billions of dollars for clients in the tail risk hedging, right? But it was all counterparty risk across investment banks, and he was able to get his money to his clients, but it took upwards of 18 months for the negotiation and lawyers involved and everybody to get that settlement. So it’s kind of like, to me, it’s like FDIC insurance. Yes, it’s say you got 100 grand at the bank. It’s FDIC insured. But if the bank goes under and those assets gets frozen, how long is it going to take for you to get them back? So once again, once again, time becomes your absorbing barrier. And maybe, I think people forget about that a lot. And luckily, like, you know, we’ve talked about these Counterparty is does these days with, you know, cash sweeps on a daily basis, so that’s gotten a lot better. But I don’t, you know, I do worry that they’ll figure out a way to screw the client in the end, in the future, too. So there will always be a novel way for them to make sure they don’t pay out in any sort of timely manner. And quite frankly, even you know, you and I argue about this, but the list exchanges, you know, could have some sort of cataclysmic event that blows out through all of the collateral and everything, but those are too big to fail. But the question is, if something does happen, how long does it take for the government to backstop that, and how long until clients are made whole. So, I mean, these are all things to think about, because, you know, time can be one of your biggest absorbing barriers, depending on what your liabilities are.
Jeff Malec 1:03:50
And then I asked, I think I asked a question on every panel, so I didn’t disappoint on this last one, but basically said, which I want to get back to one of my other questions as we wrap up, but in this one, I said, Hey, all day we’ve been talking about adding these non correlated strategies. Right? Alpha matters. It helps. Blah, blah, blah, like, but really, what’s happening outside of everyone in this room and everyone into portable alpha and return stacking, what’s happening in the whole rest of the world is people are adding correlated strategies. They’re doing option overlays and covered call strategies and buffered notes and stuff which are basically just using the same equity index derivatives. So I can’t remember my exact question, but I was like, What are your thoughts? Is that a problem? Is that a type of portable alpha? And Roxton is like, I don’t want to be controversial. And then went into a five minute tirade on how buffers or BS just do less stocks. What are you doing? They’re not going to protect you in the downside like yada yada yada. Soon, that was refreshing. And get me quick thoughts on that.
Jason Buck 1:04:51
Yeah, I think even the guys that resolved for returns, it was years ago. I think they wrote a great paper and essay on it, or they talked about. As well as, like, just, you know, regress a buffered note to 60% exposure to equities. I mean, that’s or any sort of call overriding, etc, like those kinds of things. That’s all it is, is holding less equities, which is essentially what 6040 is, right? The you know, almost, you know, 90 plus percent of your risk is in the equity bucket. So I think that’s what you know sometimes. And maybe we’re we run a follow this too, is a lot of times. Maybe you don’t have to use derivatives or options or more complex strategies to instantiate the trade you’re looking for in a very simplistic manner. And sometimes Occam’s Razor is the best, and maybe it’s just holding less equities.
Jeff Malec 1:05:36
Yeah, I’ve our old pal benifer, used to say that a lot, which I’ve actually incorporated in my own trading. I used to sell a lot of covered calls against some of my positions. It’s like, no, just if you’re worried about the exposure, just sell some of it, sell, sell 10% of it, sell 15% then get back in.
Jeff Malec 1:05:59
All right. Wrap up somewhere on my many pages here, I’ll jump
Jason Buck 1:06:06
while you’re while you’re trying to find I’ll jump into one I was, you know, maybe even thinking more again today is Corey has always been so good with me. With thinking about this is especially because they deal with a lot of RAS, and we work with some RAs, but it’s not necessarily our wheelhouse is providing them with that client 6040, portfolio, but allowing them to return stack these hopefully uncorrelated strategies on top of it. But more importantly is like highlighting, to me, how important it is that it’s long, short portfolios all the way down. Is what he’s always said, is like, if they have to sell some of their stocks and bonds to buy this, it comes incredibly difficult for the client, and that makes the pitch even harder. So you just replace their stocks and bonds and offer a capital efficient way to get these on correlated strategies. And so I’m thinking about even now, like, you know, that’s when people keep up with the Joneses, et cetera. It’s like, you really it’s a spoonful of sugar helps the medicine go down. Maybe you have to give them that 6040, or maybe now it’s 8020 give them that portfolio, but then use capital efficiency to stack some on correlated strategies or orthogonal strategies on top of it. And we’re seeing it even now. Maybe, you know, I think you want to maybe talk about gold a little bit, but once again, is like, if you want to add gold to the portfolio, it’s a nice overlay, not necessarily having people sell off some of their stocks and bonds, especially after a run up.
Jeff Malec 1:07:19
So my thought was kind of equity in your thoughts, I wrote down big takeaway, nobody wants to sell equities. So that was one of my earlier questions. And then one of the panels, do you think this is, do you have any math? I think I was the first panel, because he had all the math and charts. Do you have any math that’s showing how much this is added to the equity bid, so to speak, right? If portable office growing, as you just said, those clients don’t want to sell down the equities. So they don’t have to sell it down to buy the alts. Is that driving equities even higher? Is that a self fulfilling proposition?
Jason Buck 1:07:48
Well, like to your, I think it’s, I’ll use one of your other arguments against you. Like, when you’ve looked at the size of commodity trend followers, or specifically, yeah, they think the CTA space is like whatever number they threw out there. Like half of that number historically has been like Bridgewater. So, like, that number is just in the few hundreds, low hundreds of billions. What do you say? Like, maybe, yeah, that are doing well, and that’s out of that’s the whole CTA universe, and the ones that are overlaying portable alpha and giving people the stocks and bonds or giving them MSCI World. It’s even smaller than that. And so, you know, maybe we get in that echo chamber, that room, but we don’t realize how small we are on the periphery, but I think you’re right at size. It does add to that bid, and it’s almost similar to Mike Green’s passive theory. Is like it’s a constant inflow to be buying more equities. That does affect the markets a little bit, but I think right now, we’re at the size where it’s not even near being consequential.
Jeff Malec 1:08:38
But it sort of raised my alarm bells. Of like, if everyone’s right, if nobody wants to sell equities, is that a good or a bad thing? It seems like a bad thing. Seems like a danger, because then everyone will want to sell them at the same time. Or no, are we creating a whole new type of investor? Of like, no, You never need to sell equities. It’s fine.
Jason Buck 1:08:57
Well, that seems to be the zeitgeist of the market right now, so we’ll see how long it lasts.
Jeff Malec 1:09:01
All right, that’s all I got on that. While we have you any thoughts of what’s going on in the world, gold at New all time highs,
Jason Buck 1:09:10
it’s actually been scaring me back a little bit. Yeah, how many text message etc, I’m getting about gold, which I don’t know if that’s the old shoe shine boy or the cab driver. I’m talking about gold. But even I was at a private event a few weeks back, and a guy was talking about, he got all of his kids to, you know, they’re in their early 20s, starting out their journeys and their working life, and he was getting to put all their savings in gold, 100% gold. I’m like, bragging about, like, you know, it’s 2x than the last year for them and everything. Yeah, wait until they have their first 3040, 50% drawdown in gold, which you’ve seen a million times, is like, then they’re maybe never going to invest in gold again, because they got burned on their savings side. So I just thought, once again, it’s just like 100% in gold. Like, that’s an awfully aggressive strategy. Obviously, we’re thinking about portfolio diversification, especially against what I would consider your stable coin or your your savings. Maybe that’s not the best scenario. But like it is concerning, but at the same time, those that are calling for top and gold, and you’ve seen this, it can run on a lot longer from here.
Jeff Malec 1:10:07
Yeah, and I know you love to play macro tourists, but yeah, well, the reason gold’s going up is because XYZ, no, I’ve, I’ve stated before, I’ve been long or wrong, wrong not long wrong on gold for years and years and years, I just, I don’t get it right. It’s just the classic. It’s Bitcoin version 1.0 it’s only going up because people think it should go up. And I’ve kind of come around to, who cares. Then, if that’s, if that’s the game, who cares, get in the game. It’s like placebo effect.
Jason Buck 1:10:41
Like I argued in this room a few weeks ago. I was like, is it is gold just a Lindy effect? Like, it’s just been around, and people thought it was money. Had some moneyness for so long, and that’s what you’re betting on, right? What’s worked for 2000 years is going to continue to work. And we don’t know if bitcoin becomes the new digital gold, but once again, it’s like, who cares? It’s placebo effect. And if the psychology of the masses are to go to gold, then maybe that is it. But then, like you’re saying, what is given this recent price rights? I don’t like the other thing is, if you study gold for long periods of time, it maintains your purchase power parity over the centuries, but any year or multiple years or decades, it can disappoint you, and it has that lead lag effect, like the bullwhip effects, like we have with supply chains that we’ve we’ve learned to quite a bit about during covid And so that’s the other thing. It could be, you know, they’re like, gold hasn’t? You know, allegedly, if there’s all this inflation from covid into 2223 they were like, Where was gold? And then now it’s jumping out from behind the curtain. Maybe that’s a lagging effect, I don’t know. Because, once again, you’re basically creating horoscopes, and where you can, you know, match any of your Rorschach plot over that, and use any sort of global macro narrative you want.
Jeff Malec 1:11:42
I used to read my horoscope when there was newspapers. I missed that, right?
Jason Buck 1:11:47
That’s how I trade, right?
Jeff Malec 1:11:48
It’s just Any other thoughts while we have you, anything
Jason Buck 1:11:55
I think in general, any splinters in your mind? Yeah, yeah. A couple of things. One the usual, yeah, the week before is that private event is all the talk was. Talk was about AI more so than even gold. And it just reminds me that in real life is going to become more and more valuable. And there is something about being in the room with all of our a lot of our friends, a lot of a lot of new faces, and just being able to have those little conversations put a face with a name, even if it’s only five minutes, here or there, it’s incredibly more valuable to make those connections in real life. And I think that’s going to become more and more valuable over time. And we’ll see where these guys take it. If you’re listening to Rodrigo, the next one’s gonna be 5000 people. The next one’s gonna be a tight 50 and, you know, behind a rigorous process. So we’ll see where these guys take it from here. But I obviously it was, it was great for us, but obviously a lot of obviously a lot of confirmation bias and a lot of like minded thinking.
Jeff Malec 1:12:46
But I’m trying to put a positive spin on confirmation bias, because that’s as you’re saying, like in today’s world, how do I know all these podcasts, all these blog posts on all this isn’t just AI BS, like, it’s good to hear people are actually doing this, who actually saved this pension, or actually doing it in institutional settings, who are doing it in ra settings? Like, hey, we’re actually doing this. It’s giving people the the outcomes they want. So, yeah, long live humans. I’m watching the alien Earth series right now on Hulu. It’s It’s insane. That’s great, like, ignore the alien creature stuff. And there’s this whole subplot about, like, in the future, it’s going to be humans cyborgs, which are humans with like, a knife for a hand or whatever, like enhancements, and hybrids, which are like, they put a human psyche into a synthetic body and then full on like Androids, full on robots. And that made the battle so we fully digress. But I kind of like that. I can see the world going that way.
Jason Buck 1:13:55
Well, like we said, the best we always have with the best hedge fund manager now, or what you can and that nomenclature be like a cyborg hybrid, right? We use technology as much as we can, but then you still need the creativity of the human element. And maybe one day that’ll get competed away too, but we’ll see. For the time being, it’s good to be able to use both.
Jeff Malec 1:14:14
All right, man, good talking to you. We’ll see you shortly. Talk to you. Shortly, don’t go changing all that good stuff. Thanks.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
