Jason Buck: Investing Russian Roulette – An Ergodicity Masterclass

In this episode, the ReSolve team is joined by Jason Buck, co-founder and CIO of Mutiny Funds, to delve into a range of topics, from the concept of ergodicity, portfolio construction, and the importance of diversification in investing. They also discuss the intricacies of the capital efficiency and tax implications of various investment strategies.

Topics Discussed

  • Jason Buck’s explanation of ergodic and non-ergodic concepts using the analogy of Russian Roulette
  • The importance of understanding expected value in portfolio construction
  • The role of offense plus defense in winning investing championships
  • The concept of capital efficiency in using leverage and its implications for investment strategies
  • The tax implications of Return Stacking and how to navigate them
  • The significance of broad diversification in investment strategies
  • The impact of different market conditions on the performance of long volatility managers

This episode provides valuable insights into the complexities of investment strategies, portfolio construction, and the importance of diversification, and is a must-listen for anyone interested in understanding the nuances of investing and portfolio management.

This is “ReSolve Riffs” – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Summary

Understanding ergodicity, a concept that differentiates individual path dependency from ensemble average, is crucial for making sound financial decisions. As an analogy, consider the difference between playing Russian Roulette once for a million dollars and playing it six times for the potential of the same reward. The risk in the latter scenario becomes too high, illustrating the non-ergodic nature of the individual path. This concept is highly relevant in portfolio construction and expected value computations. Ignoring this often leads to miscalculations in portfolio construction, as people neglect to view it in a broader context. Emphasizing the importance of diversification, the aim should be to mitigate risk and achieve more predictable levels of expected value and probabilities over time. The importance of ensemble approaches in finance, best compared to a Tour de France team where each member contributes towards the final success, was discussed. This concept is analogous to diversification in investing, where various strategies and asset types combined, lead to optimal results. The importance of clients understanding the rationale behind portfolio construction to ensure their emotional buy-in was also stressed, as was the need for having both offensive and defensive assets for long-term success. In investing, predicting the future is impossible, therefore diversification mitigates risk. High net worth individuals have unique considerations in investing such as concentration risk and risk tolerance, which can vary greatly. Educating clients about the complexity of investment strategies, for example the tax implications of including commodities in a portfolio, is crucial. Managers must also make decisions about limiting allocations to certain markets or assets to manage risk and scale. A key concept discussed was capital efficiency and leverage. It’s important to understand the difference between leverage with a deterministic payment schedule, such as real estate, and leverage with a non-deterministic payment schedule, like futures and options. The latter can carry significant risk. Furthermore, tax implications of different investment strategies must be considered, for example, the preferential tax treatment but still taxed status of 1256 contracts, used in commodity investment strategies. Lastly, the dispersion of returns in different market conditions was highlighted. Volatility and tail risk protection can drastically influence the performance of managers. In a medium-volatility environment, managers employing relative value volatility strategies can generate profits regardless of the volatility level. However, keeping profitable strategies over the long term can be challenging due to timing and cost difficulties. This emphasizes the need for diversification, risk mitigation, and understanding of the unique complexities of various investment strategies.

Topic Summaries

1. The concept of ergodicity and its relevance in decision-making processes

Ergodicity is a concept discussed in the conversation, which refers to the difference between individual path dependency and ensemble average. The example given is the comparison between playing Russian Roulette once for a million dollars versus playing it six times in a row for the same amount. In the former case, one might consider taking the risk for the potential reward, but in the latter case, the risk becomes too high. This illustrates the non-ergodic nature of the individual path, where the outcome of each round of Russian Roulette is different from the ensemble average. The concept of ergodicity is relevant in portfolio construction and expected value calculations. Expected value is often misunderstood in portfolio construction, and people fail to consider it in a broader context. The discussion suggests that many interesting aspects of life are non-ergodic, and therefore, it is important to hedge out risk and aim for tighter bands of expected value and probabilities over the long term through diversification. The conversation also mentions the fractal nature of ensemble approaches, using the example of a Tour de France team, where the team members work together to achieve success. Overall, the discussion highlights the importance of understanding ergodicity and considering ensemble averages in decision-making processes.

2. Introduction and background of the guest

Jason Buck is introduced as the co-founder and CIO of Mutiny Funds, highlighting his expertise in various areas and his role as a guest. The hosts mention his reputation as a ‘galaxy brain’ and someone they tap into for thoughts on various topics. While the hosts initially joke about discussing topics like Keto and VO2 Max, they eventually focus on investing, which is their area of interest. They mention that they think of what they do as an entrepreneurial hedge, but acknowledge that it can be difficult for people to understand and gain traction in this field. They bring up the concept of capital efficiency, which is discussed by their mutual friend Corey Hoffstein in another discussion. They explain that Return Stacking and leverage are often misunderstood, as there is no deterministic payment schedule like there is with traditional debt. Overall, the conversation introduces Jason Buck and sets the stage for a discussion on investing and capital efficiency.

3. Investing and portfolio construction

Investing and portfolio construction are discussed in the conversation, highlighting the importance of offense plus defense in achieving success. The concept of ensemble approaches and diversification is emphasized as a means to mitigate risk and secure long-term gains. The discussion also touches on the significance of line item risk, and the role of different asset classes in a portfolio. The ReSolve Team mentions the Tour de France as an analogy for investing, where a team of riders work together to achieve victory. They compare this to the ensemble approach in investing, where different strategies and asset classes work together to achieve optimal results. They also discuss the challenges of portfolio construction, including the trade-offs between different strategies and the impact of taxes on returns. They highlight the need for clients to have emotional buy-in and understand the rationale behind the portfolio construction. Overall, the discussion emphasizes the importance of a well-diversified portfolio that combines offense and defense strategies to navigate different market conditions and achieve long-term success.

4. The importance of line item risk and diversification in portfolio construction

Diversification and line item risk are key considerations in portfolio construction, as discussed in the conversation. The participants highlight the importance of holding defensive assets to provide protection during market downturns. They use the analogy of a Tour de France team, where different teammates play different roles to ensure success. Similarly, in investing, combining offensive and defensive assets is crucial to achieve long-term success. The discussion also emphasizes the need for broad diversification and the use of ensemble approaches to balance different asset classes. The participants acknowledge that predicting the future is impossible, so diversification is a way to mitigate risk. They also discuss the challenges of implementing leverage and the importance of understanding the tax implications of different investment strategies. Overall, the conversation emphasizes the need for investors to consider line item risk and diversification in their portfolios to achieve their financial goals.

5. Challenges of explaining complex investment strategies

Explaining complex investment strategies to clients can be challenging, requiring emotional buy-in and the ability to get clients to hold defensive assets. One way to create emotional buy-in is through the use of memorable names, such as ‘cockroach’, which can help clients remember the strategy. However, there are also challenges in getting clients to understand the importance of holding defensive assets. The participants discuss the need for a combination of offense and defense in investing, and the importance of diversification to protect against various risks. They also mention the difficulty of predicting the future and the importance of broad diversification. Additionally, the discussion touches on the challenges of explaining the complexity of Return Stacking and capital efficiency to clients, as well as the impact of taxes on investment strategies. Overall, the discussion highlights the trade-offs and complexities involved in explaining investment strategies to clients, and the need for clear communication and understanding of the risks and benefits involved.

6. Considerations for high net worth individuals

When it comes to investing, high net worth individuals face unique considerations. Concentration risk and risk tolerance are important factors to consider for individuals with significant wealth. For example, individuals with $200 million may not be receptive to advice unless they have experienced significant losses and built back up their wealth. This suggests that risk tolerance and the ability to take risks may vary among high net worth individuals. Additionally, the participants discuss the challenges of explaining the complexity of investment strategies to clients, particularly when it comes to taxes. The inclusion of commodities in a portfolio can introduce tax implications that need to be carefully considered. Furthermore, the conversation highlights the trade-offs and decisions that investment managers need to make when constructing portfolios for high net worth individuals. These decisions may involve limiting allocations to certain markets or asset classes to ensure risk diversification and manage scale. Overall, the discussion emphasizes the importance of understanding the unique needs and circumstances of high net worth individuals when designing investment strategies.

7. Capital efficiency and leverage in investing

Capital efficiency and leverage are important concepts in investing. Leverage with a deterministic payment schedule, such as real estate, is different from leverage with a non-deterministic payment schedule, like futures and options. In real estate, there is a fixed debt service payment due every month, and missing a payment can lead to default. On the other hand, when trading futures and options, the financing cost is baked into the term structure, and there is flexibility to go long or short depending on that structure. This difference is often overlooked when discussing capital efficiency and leverage. It is crucial to understand that leverage without a deterministic payment schedule can be risky. The discussion also touches on the complexity of explaining leverage and the need to consider tax implications. Adding commodities to an investment portfolio can have tax implications, as they are subject to preferential tax treatment, but still taxed. This complexity can make it challenging to explain the benefits of a Return Stack product, especially for taxable investors. Overall, capital efficiency and leverage are important considerations in portfolio construction, but it is essential to understand the differences between leverage with a deterministic payment schedule, and leverage with a non-deterministic payment schedule. Additionally, tax implications should be carefully considered when incorporating commodities into an investment strategy.

8. Tax implications in investing

Tax implications in investing can be complex and challenging, especially for U.S.-based taxable investors. One aspect discussed in the conversation is the preferential tax treatment of 1256 Contracts, which are commonly used in investment strategies involving commodities. While these contracts receive preferential tax treatment, they are still subject to taxation. This adds to the complexity of explaining investment strategies to clients, as they may not fully understand the tax implications. The discussion also touches on the concept of Return Stacking and capital efficiency, which involve adding leverage to investment portfolios. However, unlike traditional leverage, there is no deterministic payment schedule with Return Stacking. This further complicates the tax considerations, as investors may not have a predictable cash flow to cover tax obligations. The conversation raises the question of whether investment managers need to generate excess returns over a benchmark to compensate for the tax burden. This suggests that taxes can impact investment performance and should be taken into account when evaluating investment strategies. Overall, the discussion highlights the challenges of navigating the tax landscape in investing and the need for clear communication and education to help clients understand the complexities involved.

9. Dispersion of returns in different market environments

The dispersion of returns in different market environments is a key consideration for investors and fund managers. This variability in returns can be attributed to various factors, such as volatility and tail risk protection. In the conversation, the speakers discuss the example of long-vol managers in 2022, to illustrate this point. They highlight that the dispersion of returns among these managers was significant, with one manager experiencing a gain of 35% while another suffered a loss of 25%. This demonstrates the impact of different strategies and approaches in navigating market conditions. Volatility plays a crucial role in determining the performance of certain managers. The participants explain that in a mid-range volatility environment, managers employing relative value volatility strategies can generate profits regardless of the level of volatility. By going long and short on volatility pairs, they can capitalize on market movements and capture realized volatility. This was particularly successful in 2022, where there were small fluctuations in volatility, and managers with long gamma positions were able to benefit. However, the participants also acknowledge the challenges of maintaining profitable strategies over the long term. They mention the difficulty of timing tail risk protection, as investors may be hesitant to allocate resources to this area after experiencing losses in previous years. This has led to tail risk protection becoming relatively cheap in the market. The speakers emphasize the importance of keeping these strategies in the portfolio for when they are most needed, despite the challenges of timing and cost. Overall, the discussion highlights the dispersion of returns in different market environments and the impact of volatility and tail risk protection on manager performance. It underscores the need for investors and fund managers to carefully consider these factors and adapt their strategies accordingly.

Jason Buck
Founding Partner, Mutiny Fund

Jason Buck is an entrepreneur and trader specializing in volatility, options hedging, and portfolio construction.

After living through 2008 as a commercial real estate developer, Jason became focused on how investors could better manage their risk. He spent the following decade consulting on portfolio construction and building bespoke long volatility strategies for family offices and high net worth individuals.

This experience in cross asset class trading spotlighted the need to create a diversified long volatility and tail risk fund designed to hedge the risks associated with economic downturns.

A former D1 soccer player and IMG academy graduate, Jason currently resides in Napa Valley, California.

TRANSCRIPT

[00:00:00]Jason Buck: I realized I didn’t really define ergodic and non-ergodic quite clearly. The easiest way we think about it that’s very visceral is, if you think about Russian Roulette, right? Would you rather be one of six people playing Russian Roulette, or would you rather play Russian Roulette six times in a row, right? That’s the difference between an Ensemble and an individual path. Like, if I offer you a million bucks to play Russian Roulette once, you shouldn’t do it, but you’re probably, you might think about taking it. But if I gave you a million dollars, but you got to do all six of the same, like in succession, you’re not going to take that shot. So that’s the difference between, that means it’s non-ergodic, when your individual path dependency is different from the Ensemble average.

[00:00:42]Rodrigo Gordillo: All right. All right. Welcome everybody to another episode of ReSolve Riffs. And this time we have the one and only Jason Buck, CIO of Mutiny Funds and co-founder of Mutiny Funds, master of all trades. He is a “galaxy brain” that we always tap into whenever we have any thoughts on pretty much everything.

But today we’re going to focus a little bit on our area of expertise, which is investing. Jason, it’s been a long time, man. How you been? Not necessary, sure. We can go, we can go Bitcoin if you want.

[00:01:14]Jason Buck: I thought we were going to talk about, I thought I was here to talk about Keto, VO2 Max, that sort of thing. And apparently you guys shop at the same couch outlet for the color of your guys couches in the background.

[00:01:24]Rodrigo Gordillo: Don’t get me started on that, but yes.

[00:01:26]Jason Buck: Not probably not a lot of …

[00:01:27]Adam Butler: But we will not get into…

[00:01:31]Rodrigo Gordillo: How you been Jason?

[00:01:33]Jason Buck: Couldn’t be better. I actually, I didn’t mention it while we were off. I was, actually last week I was, I don’t know if either of you listen David Senra. Really cool to meet, you know, a hundred other great entrepreneurs that are big fans of the podcast, and everybody was kind of doing their own thing.

It was nice, because David had vetted them. So it’s on kind of a high from that, and then kind of crashing over the weekend, after all those intense talks. So it reminded me of like some of those, the collective events or Real Vision Blacklist, where you’re in those intense conversations like 24/7, which is, it’s really exciting, but really exhausting at the same time.

[00:02:07]Rodrigo Gordillo: Oh yeah, day one is amazing. Day two is pretty good. Day three, you’re like, how do I hide in the corner? Yeah, I remember those. It is draining, right? And you’re sitting around people that aren’t just first derivative thinkers. They’re second and third derivative thinkers. So you can’t just, you know, go at it half assed. You have to, you have to be fully engaged in those conversations.

[00:02:34]Jason Buck: The joy of the privilege, that we’re in positions in a lot of times, whether it’s in hedge fund’s room, or with other entrepreneurs, I love being in those rooms, where you have to really mind your P’s and Q’s. Like when we’re sitting around having a beer with the in-laws or, you know, some of your buddies, you’re just kind of shooting the shit. You could throw out some macro opinion or some political opinion and everybody just lets it fly. But in those rooms, somebody’s like, excuse me, I happen to be an expert on that, and then they deep dive and just crush you. And so I always love being in those kinds of rooms.

[00:02:59]Rodrigo Gordillo: The worst feeling is a head tilt as you’re delivering something with a guy that, you know, brilliant in that space. You’re like, oh, here it comes.

[00:03:06]Jason Buck: Exactly.

[00:03:07]Rodrigo Gordillo: Yeah. Well, it’s almost like every day with Butler and Philbrick, honestly.

[00:03:12]Jason Buck: Well, that’s why, as you know, before I said, I was raising the cauldron of Gen X, just beating the crap out of each other, growing up verbally and physically, so I’m well used to the Kumite.

[00:03:23]Rodrigo Gordillo: Indeed. So what have you been working on these days, because I think, honestly, Jason, since the day I’ve met you, we’ve always basically said the same thing in different ways when it comes to the investment side, but you know, I was reading one of your blog posts recently that I thought was quite insightful in terms of trying to explain, I guess, ergodicity. But why don’t you walk us through the Herschel Walker analogy that you guys wrote up recently?

[00:03:53]Jason Buck: Yeah, this is a great essay written up by my partner, Taylor Pearson, but the thing like you’re, that Rodrigo’s alluding to, we talk about ergodicity a lot, and, you know, it’s just a fancy word for sequencing risk or path risk, right, that we’ve kind of always heard about before, but we try to attack it in many different ways.

And a lot of times people use sports analogies, but Herschel Walker was actually, the Herschel Walker trade was known as the Great Trade Robbery. Now, I know Philbrick’s not on here. You guys aren’t big American football fans. But basically, in the eighties and nineties, Herschel Walker was a great running back. And when Herschel Walker first came out, he was drafted by the Dallas Cowboys, and you know, over his lifetime achievements, he’s got Hall of Fame numbers. He put like up over, I think like 8,000 rushing yards, close to like 5,000 receiving yards. And this was a time when running backs didn’t do, really do receiving.

So he was really this multi-tool player that people thought was a true game changer. I think he had about 61 touchdowns-ish. So, you know, he plays for Dallas for like three years, is absolutely crushing it, and the Minnesota Vikings think, you know, we need to get Herschel Walker. This one player is going to change the fate of our organization. And now we’re going to win some Super Bowls.

So in the trade for Herschel Walker, the Dallas Cowboys received, if I recall correctly, eight draft picks and five players for one player, in Herschel Walker. And it was like three first round draft picks, three second round draft picks. It was pretty insane. So Minnesota Vikings get Herschel Walker. Turns out they kind of top-ticked him, you know, unfortunately for him. And after three years, they traded him on, I believe to the Eagles, and then they traded him on the Giants. So it was kind of like, he put up those great numbers the first year and then, and kind of languished a little bit after that. And they call it the Great Trade Robbery because of the amount of players that Dallas got, but more importantly, they went out right in that next draft and they got people, players like Emmitt Smith.

And they were able to, this is 1990, basically the trade was ’89, and then the early to mid-nineties, the Dallas Cowboys used those trades to build a team that won three Super Bowls in the early to mid-nineties. So that’s why it’s called the Great Trade Robbery, because it was the most lopsided trade in history. Basically one player for eight, and Dallas was able to win three Super Bowls, while the Minnesota Vikings were not able to pull it off at all. So it was just an example of, I don’t know, you know, we’re just, we started the beginning of this, you know, referencing being in these rooms at global macro events or entrepreneur events and everything.

And you guys have seen it a million times. Everybody’s like, what’s your number one trade, whether it’s the Zone Conference, whatever, everyone wants to know, what’s your number one trade, what’s your number one asset class? Show me how to make a fortune off of one trade. And as I know, you guys don’t think that way either. You know, we think teams or Ensembles or portfolio construction, because it’s more important. Like what if you’re wrong? And it’s more of the average return across that team than any individual trade or individual strategy or individual player. But it’s a mistake that we see time and time and time again.

And, you know, we could use millions of different sports analogies. Like, I’ve been working with, on the idea of Tour de France, which may be more in your, either of you guys cyclists? I know you’re swimmers, not cyclists.

[00:06:46]Rodrigo Gordillo: No, other stuff, runner, you know, Gaelic football. But that’s not…

[00:06:52]Adam Butler: I feel like, we…

[00:06:53]Rodrigo Gordillo: I know of it. I followed enough of it to …

[00:06:55]Jason Buck: Yeah, you could track it. I mean, I know you’d love to put on those uniforms and get in your full spandex, and that way you could be a team billboard like the rest of them. Yeah, exactly.

[00:07:05]Adam Butler: I mind my own bedroom. Okay.

[00:07:22]Jason Buck: Just, it’s a dress-up for all these rich guys to pretend like they’re cyclists with their big beer bellies. It’s great, and I’m sure you guys have seen this stuff about bone density and everything. It’s like being in space or something. It’s a terrible way to get exercise. Plus you end up like a T-Rex. Anyway, the…

[00:07:37]Rodrigo Gordillo: Check, check, check. We can talk about, you want to talk about that? You want to do a half an hour detour on that?

[00:07:41]Jason Buck: Absolutely. That’s, I thought we were here for VO2 Max.

So, there’s 21 stages of the Tour de France. What’s very interesting is the yellow jersey winner, the overall category winner, a lot of times may not win any stage, or just a few stages, but it’s the person with basically the best time, or the best average speed over those 21 stages, or 21 days. Lately, now they’re up to 42 kilometers an hour, which I believe about 26 miles an hour. It’s kind of the average speed to win the Tour de France. And during even that time, there’s been two guys that won the Tour de France that didn’t even hold the yellow jersey at all, to the very last day.

So once again, it’s about your average time. And if you think about Tour de France, you have the flats for time trials. You’ve got a little bit of hilly things for sprints. You’ve got the mountains for the climbers and there’s different jerseys, whether it’s polka dot green jersey, white jersey, for people that can win those stages, because as an overall winner, you have to be well rounded, right?

You have to not lag too far behind on those sprints, not lag too far behind on those mountains. Make sure your team can really put up great numbers in that time trial. So you have the ability to, once again, it’s your average Ensemble through time. You know, it’s that multiplicative process that we always talk about day by day.

How can you do, multiply by the next day?. And that’s what ends up with your Tour de France winner, and you don’t have to be really outstanding at any one particular side. And then it’s fractal in nature too, because you have a team with you. All these domestiques are the ones that are trying to, maybe you can ride behind them to get a little bit of a windbreak, to kind of rest during those tough times, pull you ahead. They can chase that Peloton down for you. There’s a lot of things that are going in that fractal nature of everything we talk about with Ensemble approaches to investing. You know, it just takes time and that multiplicative effect to really win that championship. And we view the same thing when it comes to investing. It’s offense plus defense wins investing championships.

[00:09:29]Rodrigo Gordillo: And I think that’s a key point here, because we talk a lot these days about line item risk. And if you think about each one of those teammates within the Tour de France, when you actually, there’s a great, I think it’s on Netflix, maybe it’s on Prime, but they follow the Spanish team…

[00:09:47]Jason Buck: Yep.

[00:09:47]Rodrigo Gordillo: …talk about how they’re dealing with the different stages and how important it is to have your anchorman to be able to be at the top.

When you have your lead guy exhaust himself in the previous run, it takes a few days to recover from that. Your hemoglobin count and all that technical stuff. But the point is that you are going to be a loser after being a big winner necessarily, physiologically, and you need your number two, and your other players to play integral roles. And if you are a typical investor and you’re looking at these cyclists and deciding whether to “invest in” them at any given time, you mightn’t be calling the best cyclist, if you see them underperform on the third piece of that tour, right?

So this is what we see all the time. You see the idea of an makes sense. Then you put the, and you get each individual item, each individual name, they have a poor period. You call the worst performing, you get more money. The best performing and it just creates a lopsided distribution. And it’s a problem. And yeah, I think your sport analogies, both of them, you know, bring light, try to say the same thing in different ways that the real goal here is to minimize the team’s distribution of outcomes and maximize the chances of success. So I love that cycling analogy.

[00:11:12]Adam Butler: Chris Cole had a really good, similar analogy to that. Rodman, in the role that he played with the Bulls for so many years, and I just love how it highlights that you can have a player who is just so unbelievably potentiated or synergizes so beautifully with a group, a certain group of people that all complement that player in different ways, or that player complements them in different ways. Together, they are much, much bigger than any of them would be if they were to be a diaspora that all went to join other teams, right? Together, they are something much larger than the sum of the individuals.

And you know, I don’t know the Tour de France nearly as well, but I imagine that that entire team is what wins the championship. It’s not the guy who passes the end line first, right? And similar with Dennis Rodman. Clearly a very niche player, had a very specific role that he played on the team. He got rebounds and he kicked it back out to provide new scoring opportunities for the other members of the team. He didn’t score much on his own. He didn’t have a lot of, he’s a pretty good defenseman in general, but didn’t have a lot of great offensive qualities. Without him, they would have had far fewer opportunities for the other members of the team to score.

And, you know, if you look at your portfolio in the same way, you can’t really in any way, determine the value of any of the constituents of the portfolio outside of the context of the portfolio as a whole, right? I think that’s very, very challenging for many people to recognize, and it makes the decision making hard, because now you’re making decisions in a multidimensional context, not in the context of, is this manager good or bad?

[00:13:14]Rodrigo Gordillo: And what’s challenging. And I’ll ask you a question here. Jason is, in my experience anyway, when you talk to people about the different components, and then you let them see those different components in their portfolio, they have a tough time with it. And we often get questions like, why don’t you guys just wrap it all up in a single, like a one shot solution?

And I would say, because then nobody understands what’s going on. That, nobody wants the one and done solution. Because it’s really, you want to know what’s going on underneath the hood, and it’s so non-correlated to S&P 500. So you straddle kind of that, you talk a lot about diversity of strategies, diversity of managers, but you have a lot of One and Done Solutions. Like, how do you think about that problem with investors?

[00:14:05]Jason Buck: Yeah, it’s the thing that, as a group, we’ve been talking about for a lot of years now. And so like Adam was saying, like with Dennis Rodman, if you’re looking for players that score, right, you’re never going to pick a Dennis Rodman. But if you look at his offensive rebounds specifically, and then you look at Scottie Pippen and Michael Jordan’s scoring, it’s much higher with Rodman on the court.

And similarly, like soccer, Liverpool got great because they got Alisson as a goalkeeper and then Virgil van Dijk as their sweeper, right? And now they could go all out high octane offense, and then they start winning championships, right, because it’s that combination. But you know, a lot of people have read Dalio and that 16 uncorrelated return streams, but as we’ve always talked about a million times, especially, it’s not just uncorrelated. If you can get negatively correlated return streams, that’s incredibly accretive to the portfolio over time. Now, individually, if you look at that snapshot and that negative line item risk of, say, tail risk hedging protection, it looks like a terrible negative line item.

You know, we’ve talked about how do you get over that hurdle in many different ways, and whether that’s zig, zag, zog? We’ve talked about, you guys talked about skis and bikes. I always bring up your guys’ great example from back in the day. You know, it’s, how do you put those together? So the way, like you said, I think about it is, if anybody wants to see our line items, we’re full open kimono. I like to show all that stuff.

But more importantly, you have to get investors buy in, and so you have to meet them where they’re at. And so part of that is like, we started at a very high level, just offense and defense. So we describe offensive assets as everything that people know, that’s like long GDP from stocks, bonds, private equity, VC, real estate. All of those things are offensive assets in our mind. We then like to pair those with defensive assets, like long volatility, tail risk, commodity trend following, gold, maybe even cryptocurrency. We can argue about that later.

Other people can argue about that. But the idea is like, you need to pair offense plus defense. So that’s the way we started about, and then other ways of thinking offense, defense, if you want to get more sophisticated, is implicit short volatility trades versus long volatility, trades or breakout versus mean reversion.

And it’s about pairing those kinds of things together and how the portfolio compounds through time. So we’d like to put together tons and tons of lineups to get that uncorrelated issue and that negative correlation, but it really basically boils down to offense plus defense, right? And that’s what we kind of paired together in our Cockroach portfolio. And then like you’re saying, Rodrigo, we allow people to pick. If they just want the defensive assets that fine. If they just want the long volatility, that’s fine. If they just want the commodity trend, that’s fine. But then within that, our Mandelbrot and fractals, we’d like to then use Ensemble approaches to even those different asset classes. So we’re just trying to get that broad diversification because we don’t believe we have a crystal ball that can predict the future. So I think it’s a combination of both. It’s, to get the emotional buy in, and we’ve talked about this many times when you’re dealing with clients, if you can’t get that elevator pitch emotional buy in to like offense plus defense, then all your line item risk doesn’t matter. And so you are right. I think if you could package it up into a one product fits all or total portfolio solution, I think people do a lot better just seeing that total portfolio solution and their, let’s call it their monthly returns, on that, than they would see in the line items, because like you said, then they’re going to nitpick those.

Like I know Rodrigo, you’re intimately familiar with, there was a famous tail risk manager that you, they developed a product in Canada that added tail risk. And during the good times, people had hated seeing those negative line items on there. And I think it closed down after like three or four years.

So it wasn’t even, didn’t even get a chance to live through the first Black Swan event. So it’s really about, I hate to be, it sounds pedantic to say it’s a form of babysitter tax, but by combining those things into a total portfolio solution and just getting your clients to hold those, it’s much better to figure out a way for them to hold those defensive assets so they will be protected.

And those things can kind of jump out of the curtain when they need them most, either during a Liquidity Cascade, you know, TM to Corey Hoffstein on that, or inflationary environments where you need those commodity trend followers or some sort of fiat, you know, default diaspora valuation where you need those gold or potentially cryptocurrencies.

So it’s about combining those in a way that people need the most. But then if people do want a deep dive, we’re more than happy to show them all the line items.

[00:18:06]Rodrigo Gordillo: So in the Mutiny Fund, you would allow people to understand what they’re holding. And I guess that’s interesting because I wonder if that’s behaviorally different. The idea that, hey, you can look through the window, but you can’t touch, right? This is not your portfolio. You can look through the window and be like, it’s your portfolio. And you can be like, yeah, this is all generally good, but can you take that one item out? Like, if you can’t do that because you’re in a pooled fund, look through the window all you want. I am not selling that fund manager that is down three years in a row.

[00:18:40]Jason Buck: Right. It’s, yeah, so it’s not a, and sorry, Adam, I’ll let you go, but like, it’s not a choose your own adventure. We don’t let you mix and match kind of in the portfolio. You get what you get. And I steer 99 percent of our clients to the Cockroach portfolio because it’s just better for them to hold that long-term.

They’re much more likely to hold it with all those asset classes in there. And then, quite frankly, there’s 10,000 hedge funds out there, and even more ETFs and mutual funds. If you don’t like our particular brand of putting those together, there’s plenty of other options for you. So it’s like, yeah, kind of like you said. It’s like, you can get any color Model T Ford, as long as it’s black ,kind of thing. And that’s the way we do the Cockroach run. Sorry, Adam, go ahead. Save me from myself.

[00:19:18]Adam Butler: I was just going to say that it’s funny, because there’s so much advantage to wrapping all these line items up into a single return stream. And then, of course, clients always want to look under the hood. And there is some benefit, because usually if you’ve done it properly, you’ve got something that you can point to, or that they can point to, that is working, right? So there’s going to be some equities in the portfolio, equities are rallying, you can kind of say, well, I mean, you own some equities, right? You’re not all entirely equities. So at this point in time, you’re dragging a little bit relative to some arbitrary benchmark, but there’s something there, the line item there that’s, it’s delivering this excitement that you’re hoping for, right? And then there’s these other line items that are not shining right now, but that we expect to shine under different market conditions. And so they can, you know, they’ve got something to root for even while they’re enjoying the slow and steady rise of the diversified portfolio.

[00:20:31]Jason Buck: I know, educate our clients that like, there’s always a part of the portfolio that probably makes you want to throw up, that all the news media is telling you not to own. You know, we’ve talked about this a million times, but bonds the last few years, nobody wanted to own bonds, right? But it’s part of a broader diversified portfolio. And quite frankly, if all your asset classes are up and to the right, you don’t have broad diversification, right? Like you need something you hate in that portfolio.

So it’s really about educating clients, making sure you find the right clients. And I think that’s the more interesting piece to what we all do is trying to find your tribe, right? And I spent a lot of my time trying to fire clients as they come in, because if they’re hot money and they’re looking for the hottest thing, they’re just not the right clients for us.

We just have very different time horizons and perspectives, and that’s fine. I’m happy to pass them along, that some may be a good fit for them. But a lot of times, you know, most of the time we’re not a good fit. So, it behooves us to spend our time on the clients that have been searching for what we do, have tried to build themselves, are looking for a solution like what we have, and that understand that broad diversification means, if you’re benchmarking to 60/40, which is an arbitrary benchmark, you can be above or below that given any month, quarter, year. And then, like you’re alluding to Adam, as we all know too well, it’s great that like, especially this year, you know, each month is different.

Like, one month, stocks are up and you’re cheering, and then you rebalance at the beginning of the month, and then bonds are up, stocks are down, commodity trend’s going up and down, and you’re getting this broad diversification. And then even more granular than that, we use global stocks and global bonds. And quite frankly, it’s been a pretty shitty 10 year run for global diversification. But we just feel that’s the right thing to do long-term.

[00:22:04]Rodrigo Gordillo: Yeah. And you know, it’s. I, I, I tend to speak about these strategies, these All Weather, All-Terrain strategies, Cockroach strategy as multiple pistons in a motor, that you want to have, because they’re going to move up and down in different times and different ways, but if you have them in balance, you’re going to have a well-balanced motor.

And oftentimes, I think people think non-correlation means each one of these is going to have negative correlation to each other. So when most definitely there’s going to be some, you’re going to have your non-equity bond exposures, be completely non-correlated and always making money.

But there is no, even at any given day, any given month, you can see a possibility if you have eight different pistons of, seven out of eight of them being down, right? Or like, if you just think of the major components of a Risk Parity portfolio or the All-Terrain portfolio, which includes trend following, that we’ve written about. You know, you have 2022 where you see, let’s say, equity and bonds, two pistons down, trend and commodities, two pistons up, making a zero return, and that being a great year for a Cockroach type portfolio, when you just, you didn’t lose 25%. And then the next year, the two that went down, went up. And the other two that went up, went down.

And you’re kind of like, flat-ish. You’re offsetting each other. This can happen for a prolonged period of time in an All-Terrain portfolio, but I just think it’s, I wonder whether the nomenclature, like Cockroach better than All-Terrain or All Weather, because it feels like cockroaches is about not dying, and All-Terrain is about winning all the time, and I think that’s where the disappointment comes. Have you found, in the last couple of years, has been one of those periods where half the pistons have been down and the other half have been up, have you had difficult conversations about the resilience of a strategy like this?

[00:23:59]Jason Buck: Yeah, I think you’re always going to have those different, those difficult conversations in the interim, right? Because it’s hard, we, as you know, in this industry, we can only get a 20-30 year back-test, and back-tests are caveat emptor, and you know, future performance is not indicative of past returns, right?

Unless, to me, you build really broadly diversified portfolios like we all do. Then you can have a better intuition pump that this is a little more accurate than probably just a singular short-vol strategy, right? Like it just hasn’t seen the blow up yet. So that gives me at least some confidence in what we do.

By the way, I realized I didn’t really define ergodic and non-ergodic quite clearly. The easiest way we think about it that’s very visceral is, if you think about Russian Roulette, right? Would you rather be one of six people playing Russian Roulette or would you rather play Russian Roulette six times in a row, right? That’s the difference between an Ensemble and an individual path.

[00:24:47]Rodrigo Gordillo: Wait, wait a minute. That’s so good. That’s …

[00:24:49]Jason Buck: Yeah. so ergodic system is where the…

[00:24:53]Rodrigo Gordillo: …it out to people.

[00:24:54]Jason Buck: Yes. The Ensemble is the same. Exactly. Exactly. Like if I offer you a million bucks to play Russian Roulette once, you shouldn’t do it, but you’re probably, you might think about taking it.

[00:25:04]Rodrigo Gordillo: Depends on how desperate you are. You might do it, family’s hungry. Maybe it’s like, it’s a period of starvation. Everybody’s trying to get along and have some fun. If I die, if I get it, my family’s set for life. I might take that one shot.

[00:25:19]Jason Buck: Right. But if I give you…

[00:25:20]Rodrigo Gordillo: …often to do all six barrels?

[00:25:21]Jason Buck: Exactly, but if I gave you a million dollars, but you got to do all six of the same, like in succession, you’re not going to take that shot. So that’s the difference between, that means it’s non-ergodic when your individual path dependency is different from the Ensemble average.

And this is where I think expected value gets people caught up a lot of times, and they don’t think about expected value in a portfolio construction construct. And so, that’s why we think about most of our life. The more interesting things in our life are non-ergodics. So that’s the way we try to think about hedging out some of that risk and trying to have those tighter bands of expected value and probabilities multiplied together over the longer term through broad diversification. Like we were saying with back-tests, you can have a better hope for that.

But yes, I think in, to answer your question, people have questions all the time. People question why we held bonds for a long time, you know? And like we said, maybe one day the bonds will come back, maybe they won’t. We just don’t know when. People hate having long volatility and tail risk until they really, really need it. Then they love having it. I’m sure when stocks eventually tank off, people are going to hate owning stocks, and then commodity trend comes and goes out of fashion. So these are the kind of life we all, we chose to live is, we like to beat our heads against the wall with this broad diversification, but I think more importantly for all of us, it’s not, there’s no way for us to even think or live any other way, right?

That’s the way we think about the future, because I don’t have a crystal ball. I can’t predict the future. If I could, then I would be able to pick what asset class is going to do great over the next six months, but I don’t think anybody possibly can. And so that’s why the other clients, primarily clients we work with are a lot of entrepreneurs, 25 to 45 that sold their business, had their first liquidity event. And like I always try to tell them is, you had to take enormously concentrated risk and you had to get enormously lucky to make that kind of wealth. Now to keep it, you’re going to need broad, broad, broad diversification to preserve and keep that wealth. And for a lot of people, that’s a very difficult 180 to make.

So going back to your thing about explaining what we do, or trying to get it across to clients, I think it’s more important to get the simple things right. Make it very simple about broad diversification preserves wealth, about offense plus defense preserves wealth. Those sorts of things. If you can’t get that, it doesn’t matter about the line items. It really doesn’t.

[00:27:32]Rodrigo Gordillo: So this is, I had an interesting discussion with a very wealthy individual who I like, I’m going to use that analogy actually. Like you played roulette, you played it once though, and you got lucky. And if they like had a couple of failed attempts, like you played, you got shot once, your wallet was dead, and you had to come back to life in order to play again.

But now we want to have a more consistent rate of return. But I was talking to this very wealthy single family office and discussing this concept of you don’t want to lose it. Now his view was, oh no, I have enough to live off of no matter what. Like I don’t need hundreds of millions of dollars. So with what I have left, I should go balls to the wall. What do you guys think about, like, how do you respond to that? And, and what if you’re actually giving proper advice to somebody who’s got 200 million and that person lives off of $500,000 a year. What’s the better advice there? Is it to keep it or …

[00:28:32]Jason Buck: I’m gonna, I’m gonna …

[00:28:33]Rodrigo Gordillo: … all in?

[00:28:34]Jason Buck: I’m gonna jump in before Adam. I was about to say, like, now that you put a figure on, I was about to say, I do know a guy that has a billion dollars in T-bills and lives in Puerto Rico and no taxes on those T-bills. So he can live off of that. And he’s got plenty more on the other side for him to go balls to the wall.

So it really depends on scale. That’s what, it was a Danny Kahneman, you know, utility theory, utility maximize. It really matters what your nut is, what are your living expenses, all those sorts of things. So I can’t really say what somebody else should do, but what I do think is interesting that nobody brings up, is going back to these naming conventions.

I like, we use Cockroach. You guys use All-Terrain, Ray Dalio used All Weather. By the way, you crushed it with the Return Stacking. I think you got to work on the All-Terrain. So like, and by the way, nobody, everybody told me not to call it Cockroach. Everybody’s like, don’t do that. Nobody’s, everybody’s going to hate that name.

And I’m like, will you remember it, right? Because we know how many people have these terrible names, like three letter acronyms, that we can’t remember any of them. But it’s just about, like you said, survive anything. You’ll remember it. Those sorts of things. But getting back to what you can live off of. Oh, when Harry Browne came up with his Permanent Portfolio, which I think all of us are doing a somewhat derivation of, because Harry Browne kind of came up with a four quadrant model.

[00:29:39]Rodrigo Gordillo: With what you could invest in at the time, yeah.

[00:29:41]Jason Buck: Right. At the time, the 1970s, he came up with the four quadrant model that we always talk about on the excesses of inflation and growth and kind of how that Venn diagram overlaps.

But what people forget is Harry Browne also has Variable Portfolio. So he’s incredibly smart. He said, look, put 80 to 90 percent of your assets in this Permanent Portfolio that can kind of trundle along in any macro environment. And then he’s like, I know you’re a human being, so you’re going to want to take flyers on, you know, specificity or like things that you think will, are going to take off, an individual kind of bets.

And so that’s your Variable Portfolio is like 10 to 20% of your fund money, but you can’t replenish it from your Permanent Portfolio. But I think that was a really interesting thing that never gets brought up. People bring up Harry Browne’s Permanent Portfolio, but they didn’t bring up the Variable Portfolio where he really took into account human psychology and you know, our ability to want to bet, to want to tell our neighbors about our wins.

Now conveniently we forget to tell them about our losses, but that’s how we like to live in every day, in the real world. Sorry, Adam, your take should, can they take …

[00:30:41]Rodrigo Gordillo: Are your …

[00:30:41]Adam Butler: Whenever someone asks a question like that, I always think of the movie Heat. Remember in the movie Heat, right, and, but she, not Pacino, De Niro’s character says, “You know, you’ve got plenty put away. You don’t need this job. I recommend you step back and, you know, he considers for a second, he says, you know, for me, the action is the juice.” And I think that for some guys, the action is the juice, right? It’s not about putting money away. It’s not about having a safety net for future generations. It’s not about wanting to give it away to causes you believe in. It is, the action is the juice, right? So it’s going to really depend from person to person, what they want to do with that wealth.

[00:31:43]Rodrigo Gordillo: But from an intellectual perspective, sorry, Jason, go ahead.

[00:31:47]Jason Buck: No, I was going to say, you guys are Trend aficionados. So, you may remember like the old Ed Seykota quote that like everybody gets what they want out of the markets and most people want the juice, right? Like, it’s just like betting on the ponies or whatever it is. Everybody wants some juice. And, um, there’s another great movie that you’ve guys seen The Gambler with Mark Wahlberg and they, and that he’s like,

[00:32:05]Adam Butler: …years ago.

[00:32:05]Jason Buck: Well, it was like, I can’t remember the exact numbers. Like anybody gets up two to 5 million, you know what you do? You buy a house with a 50 year roof on it, you pay it off free and clear, you buy a Japanese shitbox car, and that’s your fortress of fucking solitude. And you put like a million dollars in T-bills. And he’s like, any idiot that doesn’t get that fortress of solitude before he wants the juice, that guy’s a moron.

[00:32:25]Rodrigo Gordillo: Well look, the way I see it, I love that by the way, but I think everybody wants the juice, but do you also have to take the risk?

[00:32:35]Adam Butler: I don’t think everybody wants the juice. You know, I think lots of people don’t.

[00:32:38]Rodrigo Gordillo: People that tell me that where they say, look, I got X, I want, I want to go for, you know, I want to maximize my returns. They’re not really willing to put in hundreds of millions of dollars into a single small cap company.

What they’re saying is, I want to put it in all equities. All right. They’re put it, or private equity. Mostly private credit. Like, they like the idea maybe of being the insider. But what bothers me about that concept when we’re, let’s set the table. We’re talking about people who are still investing in equities that on average will have a volatility of 15-20%.

If you’re doing privates, maybe in reality, your volatility is 20-25%, that you’re still better off with a well-diversified portfolio if you have access to cheap leverage to get you to that same level of risk, right? If the Sharpe ratio of an equity portfolio going back to the, 100 years is 25 to 30 basis points, right?

So if you’re taking 20 units of risk, you’re going to get six units of return, according, if that math is correct, right? If I can put together a portfolio that gives you 60 units, 60 Sharpe points, then you’re going to get the same return for half the volatility. Why wouldn’t you take that bet every day, if you can indeed get access to enough leverage to get you there. And I think you can be, most people at that level will be able to, can, and nobody’s walking them through that. I just don’t think it exists. It’s, there’s just no reason not to do that.

[00:34:06]Adam Butler: I don’t know, because I mean, you and I have observed this for many years, that we’ll go through the presentation on diversification means diversity plus balance, go through the different economic regimes, go through how the different assets and strategies are fundamentally designed to respond in different ways that are highly complementary. Everyone’s nodding through each of these slides. They’re, you know, just is the most obvious thing in the world. Once you show it to them. And at the end of the conversation when it’s time to, you know, okay, great, how should we move forward on this?

Well, you know, I’ll get back to you because the reality is there’s a number of different objectives that they’re trying to meet. One of them is, well, I don’t want to look silly and do something that’s different than my friends because this might not work out, or what my friends are doing might work out way better than anybody anticipates. Now I’m way behind. I want stuff to be able to talk about with my friends at dinner parties. I personally really like stock picking. I got really excited about new fundamental trends and love the excitement of being part of that.

Like there’s just all these different dimensions of objectives for participating in markets. I’m going to go out and say probably a minority fraction of those motivations have anything to do with wealth maximization or utility maximization. You know, most of them are driven by the limbic system. They’re often very status oriented. And, so, you know, while stuff makes sense to the prefrontal cortex, all the rest of their brain is totally asleep as you’re going through all this, and getting the nods.

[00:36:04]Rodrigo Gordillo: It’s the Meb Faber hoops, always tapping hoops and saying, hey, whenever you’re ready, fire everybody. We can just do the ETF portfolio that’s basically 99 percent correlated to yours, but without all the employees and the fees. I love that.

[00:36:20]Adam Butler: It’s like I’m going to come back to this once I’ve tried and failed at everything else, but you know, I’ve got to try and fail at everything else.

[00:36:27]Rodrigo Gordillo: You know, what’s the motivation for hoops to continue, to do not pay attention to Meb’s suggestion.

[00:36:35]Jason Buck: We love complexity. But also like, as I told Adam once, you never go full quant. Rodrigo, you never go full rational when you’re trying to do sales, right? You’re trying to show these rational layouts and this is what you guys do all so well, but people buy into emotionality, right? And it’s not really sexy and it’s not really that emotional.

And that’s maybe when it comes to, closing the sales, it’s difficult, when you’re doing something so different, right? Like, so if everybody else is like doing 60/40, like Adam said, and all their neighbors are trying to, whatever they’re doing, or chasing these different real estate deals, whatever, they want to be like their neighbors, right?

They like to keep up with the Joneses or be similar to have, or like you said, to have something to talk about. Not a lot of people are necessarily just as disagreeable as Adam and I are, right? Like, they like to agree with their friends and neighbors and have fun conversations and not say, excuse me, excuse me.

I have a, you know, be that turd in the punch bowl at all the parties. So I think that’s a big part of it. I think the other thing is like, if somebody’s got that kind of money, like we said, that concentration risk, you know, if they can sock away, even it’s only 10 million dollars into something that’s much safer, whether that’s T-bills or some sort of Permanent Portfolio style product, then they can take that risk.

So for, a lot of things wrong with Elon Musk. One of the things I do appreciate is that he’s still going for it. Like, I can understand some people, like it’s great. A lot of people make a bunch of money and then they get ultra conservative and they get ultra scared of losing it. And that’s why I think even more so, like when we were growing up, people were just living proof, profligate, right?

Like, especially the, Wall Street was known as greed is good, all that stuff. It’s interesting to me that, what is it, Bill Perkins book, Die With Zero is becoming more popular, as people in our industry and people in all the industries are just hoarding money, because everybody’s so afraid of losing it. You almost have a different problem these days. And then quite frankly, like you said, what would you do if somebody made $200 million? The whole point is the three of us here talking, don’t have $200 million. This is why we’re on a podcast talking. This is why we have products to sell. We’re trying to get there.

So I, you know, somebody with $200 million is not going to listen to you, for the most part, unless, like Adam said, they went up $200 million, they lost $200 million, now they built back up another $100 or $200 million, they got the scar tissue, then now they go, yeah, maybe I should be a little more circumspect about it. But if it’s their first go around, it’s not really likely.

[00:38:39]Rodrigo Gordillo: Yeah.

[00:38:39]Adam Butler: I also think there’s an actualization component too, right? Like, you reach a certain wealth threshold and it’s not about, can I secure a future for my family, can I secure wealth security for me? It’s how can I put a dent in the universe, right? It’s like, you know, I want to find meaning with my wealth. I want to invest in projects that are going to make the world better, be exciting in some other way that is, you know, adding in some positive way to the world, right? Like there’s something about All Weather or Cockroach or whatever, which is retrenching, right? It’s a defensive attitude to the world.

And I mean, obviously I personally espouse that people should take a meaningful chunk of their wealth and commit it to that kind of strategy, because you do want to truncate that really awful negative potential downside of bankruptcy with no optionality on getting out of it, or your family’s destitute. You’ve got all these future liabilities for your children, etc., right? There’s a certain amount you want to protect, but once you’ve reached a point where you can protect that, I definitely get the idea of wanting to project your will on the world to create positive, some outcomes, and to use your wealth for good in that way.

[00:40:20]Rodrigo Gordillo: Again, I know you’re playing devil’s advocate here, right? But you can create a well-diversified portfolio that creates 2X the wealth for half the volatility.

[00:40:30]Adam Butler: But it’s not the…

[00:40:31]Rodrigo Gordillo: …and then use that.

[00:40:32]Adam Butler: …to say, right? And I don’t, I think we’re really, I mean, we’re not really arguing. I’m just saying, yes, if wealth maximization is your only objective, there are ways to do that that are more efficient than most people choose, but most people with that level of wealth, their objective is not really wealth maximization, it’s self actualization.

[00:40:53]Jason Buck: Yeah, I think Adam’s saying…

[00:40:54]Adam Butler: They’re projecting their will on the world.

[00:40:56]Jason Buck: Yeah, he’s saying something incredibly prescient. I wouldn’t say it’s more like defensive. The way I think about it is like, we have a, I don’t know, philosophy right, about the future. And if you don’t know you should really require a broad diversification, and at a cocktail party, it’s great to know things. It’s great to talk about the future and like, and the perversity of the worlds we live in. Whenever we’re at these events, or speaking on stage, et cetera, at any of these global macro events, everybody’s telling me about the future. Tell me what they know, you know, throw that out there. And then I’m just standing there going, I don’t know.

I don’t, I really don’t know. I don’t, I don’t have a crystal ball. And like, that’s not sexy. Like you’re saying, it’s not like, you can call it self actualization, you can call it make a dent in the universe. It’s just not sexy. Right. There’s just like, nobody likes the person that just says, I don’t know, right. Our entire society and culture is built on knowing things. And in school, you raise your hand and get called on. You’re supposed to know things. You can’t tell the teacher, I don’t know. It’s indoctrinated from a young age. And we’ve had the perspective, I don’t know. And that’s a very hard thing to live with because it’s just, it’s not cool.

[00:41:52]Adam Butler: I just think also that what’s missing, and you know Rod, we’ve spent a fair amount of time on this over the last few years, but a lot of people, as you say, they gain wealth through concentrated positions. Maybe they were one of the early people at NVIDIA or Meta or Google or Microsoft, or any number of a thousand other companies that have, that have done well, have generated wealth for more than just the founder over the years. They’ve got, they’re sitting on a concentrated position that came out of that, and they want to continue to bet on it, or they don’t want to maybe face the tax consequences of disposition, or there’s a number of reasons why. Somebody might maintain that. Maybe they’re not allowed to sell it for a term, but they’re not aware of the fact that they can, so pledge some of the value of that large concentrated position to collateralize an allocation to other positions that may offset some of the volatility or risk of catastrophic loss on that catastrophic…

[00:43:00]Rodrigo Gordillo: Like a diversified futures strategy on top.

[00:43:03]Adam Butler: So you’ve got a couple of big positions in Google or NVIDIA or whatever, and you want to hold them because you really believe that in AI, and the future of these companies, et cetera. That’s great, but it doesn’t need to be the only thing you own. You can have that, maintain that bet, and then just deposit those at Interactive Brokers or something and have somebody run a managed futures mandate on top of that. Just use those stocks to collateralize that strategy or any other kind of strategy, like a tail hedging strategy or what have you, for example. Maybe your AI bets are going to pay off, but the U.S. economy is going to go through a major recession, or liquidity crunch, and your bet on AI is right, but the U.S., but the global economy implodes. And so like, there’s just things that you can do to diversify while maintaining most of the actualization of that concentrated bet that you really want to make.

[00:44:04]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios.

So we actually manage private and public funds, as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:44:46]Jason Buck: Yeah, I want to touch on two things that you said there, Adam, but I’ll also get to like, is going back to Rodrigo’s previous question is like, you know, a lot of times we deal with a lot of people coming out of the e-commerce space and everything and they go, you know, I know things or whatever. And people have Gell-Mann Amnesia and they go, I sold products on Amazon FBA. I understand Amazon.

I go, really? Tell me who the CFO is, right? They have no idea, right? Like, so they’re doubling down on their risk or their exposure to Amazon by buying Amazon stock. And I personally believe, and this has been the hardest thing to maybe get any sort of following with, or get any sort of foothold, is that entrepreneurs, business owners, should actually not hold any offensive assets.

They should only hold defensive assets because, if you’re buying stocks, bonds, private equity, private credit. VC, real estate, you’re just doubling down on your long GDP exposure. You know, you’re doubling down and hopefully volatility doesn’t hit the markets. You’re just doubling down that credit and liquidity is a wash in the future, and so you’re really just really double or triple or quadrupling your exposure to that sort of environment. And that’s where you get hurt the most.

So we always think about what we do as like an entrepreneurial hedge, but that’s really hard for people to gain traction on. But going back to then Adam’s point, that I think the two interesting things for us to talk about in that vein, that I’m curious about, how you guys work around, is one, our mutual buddy, Corey Hoffstein was on my friend, Bill Brewster’s podcast the other day, and he was talking about the capital efficiency, which Adam was just kind of referring to. But what I think that’s missing a lot of times people hear, you know, through Return Stacking, you’re adding leverage. But what they don’t realize is there’s not that deterministic payment schedule that you get in leverage in anything else, right?

Like, if I buy a house or commercial property, every month that’s called, the 15th, that debt service payment’s due. Every month on the 15th, right? And if I don’t have the cash flow that times perfectly with that 15th, I might miss a payment, and now I’m in default. If you’re trading futures and options and you’re getting that financing cost, which is like roughly about the three month T-bill rate, it’s baked into the term structure, and you can go long or short depending on that term structure. And I don’t think it’s talked about enough that that is a huge difference in using capital efficiency or leverage. If you don’t have a deterministic payment schedule on like the 15th of the month, that’s where you can truly get into trouble with leverage. And I’m just wondering if you guys have thought about different ways of talking about that. And then we get into the second one as well.

[00:47:03]Rodrigo Gordillo: I think that’s, I have some thoughts about different aspects of the leverage side of things, but in terms of the non-deterministic, the fact that the pricing can go up and down, I don’t know, Adam, if you have any thoughts on it?

[00:47:16]Adam Butler: No, I mean, my big question is always, because for most people, they’re experienced with that, as real estate, right? And the challenge is that that bet on real estate has for the most part paid off. I mean, I think it would be really useful for you to share. I know you’ve done this on occasion and, but share, your experience. I just think like the hardest conversations to have are with people who have gotten very wealthy with real estate portfolios, right? They literally are like impossible to shake free of their belief that real estate is the way, right, and leveraged real estate especially, is really the way, right? And you know, for the most part, Rodrigo and I don’t even bother. Oh, you got wealthy in real estate. Gotcha. I don’t really have anything to say for you at all.

The entrepreneur has a similar bias, right, or reasons that we’ve sort of touched on, but you know, the entrepreneur wants to invest in other entrepreneurs, right? Like if they’ve gotten wealthy, I don’t want to diversify. I want to bet on other entrepreneurs. I understand what it’s like to be an entrepreneur. I believe that, I understand entrepreneurship. I can identify other people who are likely to be successful entrepreneurs. Why would I do this, diversify into this thing when I’ve got this gift? So those two types of individuals, I feel like they’re never going to get what we’re trying to say, and nothing we can say to them will overcome their lived experience.

[00:49:02]Jason Buck: Yeah. As Rodrigo used to always ask me, like you’re in the Bay area. Why don’t you go down and talk to those VCs about tail risk hedging, long volatility and commodity trend, because it’s the perfect complement for VC. And I’m like, have you ever talked to VC? They’re not interested at all. It’s just YOLO it and then, you know, keep YOLO-ing and keep YOLO-ing until you can’t anymore.

And then you raise another fund, but that’s fine. Like, to your point about, Adam, about commercial real estate, that’s what I have a background in, and at best, commercial real estate is unbelievably tax helpful, in America. You know, let’s, ex the rest of the world. Unbelievable tax alpha that I don’t think people truly understand or fully take advantage of. And that’s more important than anything else, is the tax alpha of being a real estate professional.

And then in the best case scenario, you build a 1031 golden cage around yourself, so you’re constantly rolling properties and refinancing properties to never have a tax consequence. And then next thing you know, you’ve built up this $100 million cage around yourself, where, yeah, you could tap the liquidity through refinancing and everything, but now you still have those deterministic payments like we were talking about. And can you service those over time, especially if something bad happens and people don’t realize how much of real estate is just floating rate debt, right?

Like you can’t really get more than five to 10 year terms and it’s usually floating rate debt. So it makes it incredibly difficult, especially to service the cap rates where they are. And then Adam, you asked me to talk about, so actually somebody just asked me at this event in Austin was interesting, they were, they asked me if I was over levered in real estate.

And I was like, so I was a commercial real estate developer in Charleston, South Carolina, going into 2007, 2008, the great financial crisis, and end up blowing up for lack of a better term. But then the question about, was I over levered? I said yes and no, in a way. Obviously, real estate requires leverage, right?

Like, you don’t put 30% down in cash, the bank finances the rest. But it’s not necessarily the leverage that kills you. It’s the time horizons and the granularity of those investments. So if I’m building out real estate developments that take two, three, four, five years to come to fruition, I need the environment to stay low volatility. If low volatility or rates pick up over that time horizon, and people can’t close on, let’s say, I’m flipping condo units or whatever, then I get crushed and I can’t make my payments. So it’s not necessarily the leverage that’s the issue in real estate. It’s those deterministic payment schedules and giving the global macro environment and a liquidity crunch can you roll over that debt? Can you refinance that debt? Or can you make your payments on time?

So that gets back to what I was saying about, what’s beautiful about managed futures or options is, you don’t have to necessarily worry about that payment schedule. It’s baked into the term structure of the instruments that you’re trading.

[00:51:21]Rodrigo Gordillo: Yeah. You’re trading Carry.

[00:51:23]Adam Butler: Unless you’re earning expected positive Carry and in other dimensions from the trade, right?

[00:51:29]Rodrigo Gordillo: Yeah. It’s the, for those who don’t understand it, a futures contract, you’re getting the price movement of the excess returns above cash, right? So it’s what you’re trading is already stripped out from the cost of borrow. So if I were to put up a Treasury, the price return of the 10-year Treasury index fully paid up, like an actual bond return, and I would have put up a Treasury futures contract, a roll, kind of stitched together roll yield, just to compare what you’d find, is a big gap between one and the other.

I think oftentimes when I say, listen, I’m buying a 10-year Treasury futures contract. Okay, great. So we’re going to get 10-year Treasury returns. No, no, no. You’re going to get 10-year Treasury returns minus the cost of borrow, right? And what you trade is the excess returns, and as a long/short futures manager, you have the benefit of being able to trade that line long or short. If it’s, you know, if there seems to be some sort of expectation of continued cost of borrow and Treasuries are going down more aggressively, then you can play that by going short that thing, right?

So when we talk about overlays and we talk about the benefits of futures strategies, you know, the reason that when we talk between us, between one CTA shop and another, we always talk excess returns. We don’t talk about total returns. So what does that mean? If you’ve had 4 percent annualized excess returns, that’s what you’re Stacking.

That’s already taken into account, to borrow. So when people ask me, are you sure you’re gonna be able to outperform the cost of borrow long-term? I’m like, well, every CTA manager that you know that survived has had to overcome that cost of borrow. It does a good job at doing that. So you’re really just Stacking that little juice on top, regardless of what the borrow is.

And you’ve seen the benefits of that in periods where rates were really, really high. You’ve seen CTAs provide positive outcomes above the rate of cash, and you’ve seen them do it when rates of borrow were low, right? So, that’s a nuanced part of the discussion, that few people really truly understand at this point.

[00:53:39]Jason Buck: And, even,…

[00:53:39]Rodrigo Gordillo: Go ahead.

[00:53:41]Jason Buck: I was going to say even better, what you guys are hinting at is that borrow rate is like close to a bank lending rate, right? It’s like that, roughly the three month T-bill tracks over time. So more importantly, I think Corey is kind of alluding in this podcast on the previous podcast. I don’t think he can necessarily say it. I mean, might want to timestamp. I’ll say this and you guys can tell me if it’s regulatorily viable. But what I think is fascinating, that I always think about if you want to replicate, and we’ll, I want to get more into tax consequences of like, real estate really is a tax alpha, as I explained to you, so you have to fully understand the tax alpha you’re getting in real estate. But what’s interesting with your guys products, like if you’re Return Stacking stocks and bonds, and let’s say I want to build a 50/50 portfolio, stocks and bonds, right. I can get much more capital efficiency out of your guy’s products and I can allocate.

Let’s say I’m sitting, we’ll make the math simple, even though good luck finding houses for these prices, but let’s just say I have a million dollars, right, and I want a million dollar portfolio of stocks and bonds. Well, I can put up $500,000 into products similar to what you guys run, and then I’m sitting on $500,000 in cash. And for that leverage, to get my notional value of that million dollars of 50/50 stocks and bonds, like we said, I’m borrowing now at the three month T-bill rate. Now people are used to going to their brokerage, like Schwab and borrowing. And right now that’s what, 10-12%. It’s pretty insane. The best one is Interactive Brokers, are passed through SOFR at size, but you know, you’re getting closer there.

So I can borrow then at the T-bill rate, and then I can use that $500,000 cash leftover. I can go buy my house cash if I could find a house for $500,000. Let’s just make that assumption, and then more importantly, I can then pay myself back, like a loan. I can now be my own bank and provide my own mortgage, pay myself back, plus interest. None of these are taxable consequences, and it’s a way to use that capital efficiency to be my own bank and not be giving that VIG to the bank, where over time I may be paying double or triple the actual value of my house, by financing that mortgage through a bank.

[00:55:23]Rodrigo Gordillo: Yeah, I mean, that use case is, it’s just about borrow. Where, how can you find the cheapest borrow on the planet? Okay, so if you want to find the cheapest borrow on the planet, you go where the vast majority of the world, the capital world goes to, in order to achieve that without having to physically go out to five, seven banks, say, hey, I need a hundred million dollar loan. I want you all to bid on it and give me the cheapest price.

Okay. Which is, I got to do paperwork with that bank and then that’s on how it’s done at that level. At that level, what you do is you say, I’m going to go to a futures …, I need to borrow Treasuries, 5-year Treasuries, 10-year Treasuries, I’m going to go to the futures market because if I, if there’s a futures contract that is charging me more than the cheapest bank will charge me, there’s an arbitrage there. There is somebody that’s going to be willing to take out that loan and then place the shorting position on the futures contract. And then that futures contract goes in line with market, the margin of the market. So when we think about derivatives contracts, the reason they’re so valuable is that you are getting the same rate, the same rate of borrow as you, as an institution would. Let me say that again. You now with, with products out there in the U.S. and Canada that have these derivatives inside these, these Stacking inside, you can now get the same borrow as an institution gets.

I mean, that alone is mind blowing, right? And yes, there are portfolio construction use cases for that. But like you said, Jason, there’s also a very interesting use case of, hey, I have a million dollar portfolio. I want to stay in the market and I want a mortgage and I want a house. How do I get exposure to real estate in a city that I like and also get exposure to markets and do it cheaply? Well, the cheapest way to do it is if you can get a futures contract type of borrow.

[00:57:22]Jason Buck: And then it takes a long at that notional value, which is the most important thing, because you’re not selling off your portfolio to buy those assets. You’re still maintaining that notional level. Let’s say an example, I use that million dollars. Similarly, the way I think about it, what we do as an entrepreneurial hedge, if I want to maintain my notional at, let’s say a million dollars, but I have a creative entrepreneurial idea, but as we all know, business is very risky and it’s most likely to fail.

But if I carve off 10 percent of that, what we call portable alpha or capital efficiency, and I put a hundred thousand dollars in this business, but I’m maintaining my portfolio value of that million dollars. Let’s say I blow through all that $100,000 on that business I thought would succeed. Well, it’s not going to hopefully take me too long to make up for that because I’m trudging along at that notional value of that $1 million. And that’s why I think about what we do much more as like an entrepreneurial hedge, because I know how difficult entrepreneurism is, or like buying properties, et cetera.

Like, all these things are inherently difficult and you inherently can’t see the Black Swans in the future, or you can’t see where your risk lies. So how do I reduce that risk? How do I hedge away a lot of that risk? And I think there’s much more interesting things with the products we all create to hedge a lot of entrepreneurial risk. And then maybe, especially if you’re raising capital from friends, family, outside sources, having a bunch of better fiduciary responsibility, you may need to raise more capital to maybe hedge that risk.

Like we used to, it’s very similar to, they’re starting to come back, thankfully, like zero coupon bonds, right? Principal protected strategies where at least you got returned that principal and you could use the delta between what you needed to post for that 10-year, you know, zero coupon bond now, and use that for more risky investments.

So it’s about those things. I think it’s a little bit better maybe than principal protection because like, you can hopefully make a return over time, given that 10-year time horizon that you may outpace that zero coupon bond, and maybe not miss out on the inflationary prints. But I think it’s a very interesting way of, of looking at either housing or entrepreneurship, to use the ideas from Return Stacking or capital efficiency that we’re talking about.

But the other thing that we’ve been hinting at is taxes. And I’m curious the way you guys think about it for, let’s say for a U.S. based investor that’s a taxable investor and they’re not put in like a self-directed IRA or any 401k, anything like that is, how do you think about with like a Return Stack product, especially when you’re adding those managed futures in there?

Because I think generally like everybody loves the mantra of low fee, no taxes, right? And ETFs, but we all know as soon as you put commodities in there, you know, you have the 1256 contracts, they have a preferential tax treatment, but they’re going to be taxed, right? And so, that’s another hurdle for you guys, explaining the complexity of what you do. So how do you think about, do you think you have to produce excess returns over a 60/40 benchmark with the managed futures, to be able to compensate them for the tax consequences? Or how do you think about the Delta, the tax consequences when you’re talking to investors?

[00:59:59]Rodrigo Gordillo: So I think this is an, should be a relatively simple one. But of course, when we think about traditional portfolios, you’re thinking about I’ve made, I have X, I have a hundred dollars. That $100 made $110. A portion of that is owed to the tax man. And so that, they’re going to take away that return, right?

So let’s say I’m investing in the S&P 500. I make 10%. You’ve got to pay and you want, and you sell it. So you have what a year should be long-term capital gains. So you have to pay the tax on the long-term capital gain. The concept of futures on top of an S&P 500, or the futures on top of anything.

If you’re Stacking whatever it is, and you’re using futures to do it, is the S&P 500, let’s say, makes you 10%, but you’ve used margin on that S&P in order to have another type of return in the futures space. Managed futures are taxed as 60/40, meaning 60% of it goes to long-term capital gains, 40% goes to short-term capital gains.

To be honest, I want to take that back. Forget about how it’s taxed, right? Forget about how it’s taxed. Let’s say it’s taxed at 80%. Okay. The fact that you Stacked it on top of the S&P 500 is that you are going to get something above that 10 percent if that strategy had a positive rate of return, right? So you get your 10 percent from S&P. You’re going to get taxed on that. You may or may not get taxed on that. If you don’t sell, if you do sell, you’re going to get taxed on it. And then whatever it, that futures strategy made you, it’s going to be above and beyond that. And if they take away 80 percent of that, it’s still a positive outcome for you.

So as long as you find a Stack that Stacking positively, taxes are less of it, you’re still better off doing it than just investing in the S&P, by one is what I’m getting at. Right now, if people do care about maximizing the returns on that and understanding what that means, if you’re doing a full separately managed account, like Adam was alluding to, something like, somebody owns an NVIDIA and then you Stack the strategies on top, you’re, well, NVIDIA is not going to be sold.

You will be paying taxes on whatever futures strategies you have, and that’ll be 60 percent long-term, 40 percent short-term. And then if you’re doing it within a public structure, so all the managed futures funds, any returns that come out of financial assets, like currencies, equities, and bonds will be 60/40, but then the big curve ball is how many, how much of your returns this year came from commodities, which is traded on a Cayman Blocker. That’s going to be regular or ordinary income. And so it’s a little bit complicated to say to somebody, here’s what you can expect every year from a 40 Act fund, because it’ll all depends on where the returns came from.

And if we have a year like the last couple of years where most of your assets are in T-bills and you’re getting 5 percent on that, then you’re also paying tax on the T-bills. So, you know, I think it becomes cleaner if you’re a separately managed account, it’s much more clean. If you’re a 40 Act fund, you have to just kind of keep track and keep on communicating with investors about how it’s going to look like every year.

[01:03:00]Jason Buck: Well, the good thing for you, though, is it goes on to 1099 income. We’re K1’s, and people hate K1’s. So I’d much prefer the 1099 tax breakdown. So I want to bring Adam back in before he falls asleep, but also like, by the way, is this my interview?

[01:03:13]Adam Butler: Buck is hosting this and…

[01:03:15]Jason Buck: Yeah.

[01:03:15]Adam Butler: …all the guests

[01:03:16]Jason Buck: No, because I had a question that I should have asked you privately, but like, it makes me think about, so CTA trend following strategies, right? If you’re running a replicator strategy, they’re top down or bottom up. And let’s say you’re using your benchmark SocGen Trend Index, right? As we all know, SocGen Trend has just the 10 biggest Trend followers in the world in it, in equal weight, right? And as we all know that in the last few decades, those big managers focus more on the financials than on the commodity space to be able to raise more AUM, right? And as we know, 2010s was a tough time for Trend following and that sort of thing. I mean, still, I think it did great. Like, especially if you can Return Stack it, at that like 2 percent CAGR, I think that was SocGen Trend in 2010s. Great, whatever. And we’ll get back into that in a second. But like the idea though, I wonder though, by running a replicator, it’s not necessarily top down or bottom up replicator.

My question is more like, if you limit the scope or the choice of the instruments, because you’re trying to stuff it into this ETF wrapper, how much does that concern you? But it does great for replicating that SocGen Trend because those big managers focused on the financials. So you can kind of reduce the financials. Very similar. I mean, Andrew Beer is not here to defend himself. So I won’t talk about that necessarily. And I have zero problem with any of this stuff. I hope people load into commodity ETF managed futures. But like, you miss out and we’ll get to the, like the last few months, you can get some crazy trends and like these obscure soft contracts, right, that you’re missing out on by reducing the universe that you allocate to try to replicate a SocGen Trend index. I’m not sure if that makes sense, but do you see what kind of where I’m going with there?

[01:04:46]Adam Butler: Well, there’s a couple of different points I think you’re making, right? But one of the big ones is that the replication indices typically have a narrower universe of markets, and for scale reasons, they tend to skew more financial. Now, the way that the replication takes place, there’s no necessary bias, right? And if the index itself is not skewing to financials, there’s no reason to think that the replication strategy is going to be biased to financials. You make a point about larger managers needing to focus more on financials because of liquidity and CFTC limits in commodities. And that’s an absolutely valid point. And I think that’s the big point, which is that if you’re in the top 10 CTAs by market cap or by AUM, then the amount of excess juice you’re able to extract from more peripheral CFTC limited or low liquidity markets is relatively small anyway. So like, while a small CTA manager may be able to put up gargantuan returns because a very illiquid market has a real spiky, like, remember orange juice a few months back had a, had a huge…

[01:06:23]Rodrigo Gordillo: Cocoa

[01:06:24]Adam Butler: Cocoa is now. Cocoa is certainly more liquid. Yeah, but OJ is great because it’s very thin, right? You just you can’t be a large CTA and trade OJ in any size. So if you’re a small CTA, you can trade OJ in like the same size you trade ES. Well, if OJ is going to run as an illiquid market, it’s going to show up as really strong percent returns in those months that you’re capturing those OJ returns, but it didn’t really translate to much in terms of actual dollars that are accrued to the fund or to the strategy, right?

You’ve got your big CTA, you might trade 400 markets, but you know, 80 percent of your returns in terms of the dollar returns are going to come from the same kind of 40 markets, and most of those are going to be financials. So you need to take steps, either heuristic steps as you’re forming the portfolio to say, you know, I, even though the majority of my markets that are liquid, that have high capacity, are financials, I’m going to limit my allocation to those financials to ensure that I’m getting the same amount of risk, or my target amount of risk from commodities, right? That is an active decision that may limit the amount of scale that the strategy will have, right?

So it’s just trade offs all the way down and, you know, you can’t scale a multi-billion dollar Trend replication strategy, and also trade 80 markets in full size. Like it’s just, it’s impossible to do. And the fact is, because most advisors are more concerned with that I under or outperform this benchmark of big managers, than they are with have I maximized the potential of Trend strategies, then this kind of replication works really well. If you actually want to maximize the performance of your CTA allocation, there are other ways to do that, right? We run other strategies that more formally have that objective, but that’s not the objective that people are going for when they buy a relatively low fee Stacking product that is primarily designed to replicate a benchmark.

[01:08:46]Jason Buck: Yeah. I think another example is this one. Lumber took off during the pandemic, right? The reason it took off was because the float was so low. It spiked because nobody’s trading it because the cut, like you couldn’t really get in there. There’s, a little bit of money can move those real markets tremendously.

And that’s why it was lock limit up every day. But like you’re saying, I think there’s, it’s interesting on like, like the soft side, the year to date, like those cottons and cocoas are ripping. You could also have been short your grains, you know, but like, what size can you get off and how much percentage of your returns are coming that way. Like you said, I think it’s perfect to say there’s trade offs all the way down.

I think that’s really inherently what our business is. It’s every day just dealing with trade offs and trying to figure out which trade offs you can accept and which ones you can’t, especially when you’re trying to productize something for retail clients. I think what I was getting at that, I think you were alluding to that, I think is interesting that you’d maybe have a broader answer to, is going back to where we started of like, people are always, what have you done for me lately, right? During the 2000s, you know, 60/40 was underwater, right? So you had the rise of managed futures, alternatives, everything during the two thousands. So everybody, right.

But it takes, it’s like these slow moving cargo ships, but it takes like 10 years for people to get there. They see a tent in the back 10 years. Oh my God, the alternatives are amazing. Then they rush into all these strategies, right? And then the 2010s, the alternatives do poorly after the money’s flowed in. And during the 2010s, 60/40 comes roaring back. So now we’re here in the 2020s. Everybody’s talking about 60/40. Nobody wants alternatives. Is that part of it?

And then what I’m getting at is I haven’t really double checked, and I’m curious off the top of your head without putting you on the spot. It’s like during the 2010s and coming into now, like I said, those SocGen Trend managers were primarily financials. When you really need those CTA most, do you really need those less liquid obscure markets?

Like in the 1970s when they produced their returns, right? Like, so maybe we’re looking at the hindsight bias of the last 20 years saying you’re fine. We’re replicating with the financials, but maybe when you need CTAs most for like a, if there is a commodity super cycle, then you need those smaller contracts that are less liquid.

[01:10:43]Adam Butler: The only way to really get material access to commodities is by investing in a large number of small managers, right? Because any single manager has a finite amount that they can allocate to any particular contract under CFTC limits, right? So if you want a really broad exposure to more esoteric markets, you just cannot get that by buying AQR or buying Winton or AHL, right? They’ve got phenomenal research teams. They run great strategies. But they just cannot possibly allocate materially to the tail of esoteric contracts. You know, the AHL Alpha Strategy has one of the best track records in the business, but it’s a secondary and tertiary market strategy. It doesn’t even trade any of the more common liquid futures markets.

And by design, it therefore cannot scale to hundreds and hundreds of millions of dollars, right? The trade offs are along a few different dimensions. One of them is access, right? Like, you can run a much more complex, diverse, managed futures strategy within a mutual fund. And you can very easily Return Stack in a mutual fund, the same way as you can in an ETF, but getting shelf space as the mutual fund from all of the major wire houses, or RIA platforms, or whatever, is a lot more complicated.

And, you know, the zeitgeist right now is nobody, there’s no dignity in buying mutual funds. Everyone wants to buy ETFs. So, you know, you launch something ETF, there’s things you can easily do in a mutual fund, you can’t quite as easily do an ETF. There’s trade offs. A lot more investors from around the world can buy an ETF than can buy a U.S. mutual fund. But you’re slightly more limited in what you can do in an ETF than what you can do in a mutual fund. So, you know, access is a really big dimension. So just figure out what you’re, who you’re trying to serve. What the objectives are, what the objectives of the end buyer of the product are, and then try to optimize.

And different clients are going to find optimal exposures through different means. Clients with really big positions in Google and Meta and whatever, are going to want to have those on deposit at Goldman Sachs or Morgan Stanley or Interactive Brokers and run a futures strategy on top of that, right?

That is vastly more efficient. You can get as much access to esoteric markets as you want within the limitations of whatever are offered on that, you know, broker’s platform. But if you’re not in that position and you’re a retail investor or you serve retail investors, you’ve got a more limited product list and you know, you, you make do with what you can.

[01:13:47]Jason Buck: Maybe it’s just me, like in my via negativa in general is like, I think it’s important for us to illuminate or elucidate those trade offs because I think that’s, a lot of times I’m sure before you guys launch your products, we were getting those questions all the time. It’s like, why can’t you bring that institutional quality portfolio and stuff it into an ETF, tax free and low fee?

And I’m just like, here’s all the reasons why we can’t. I wish I could, but I can’t do it. And you know, write your congressman or whatever it is. Like, there’s all these rules in our industry that make all these trade offs that we have to think about constantly, extremely difficult. And it was, also made me think about Rodrigo, you’re saying questions about selling rationally and explaining, using historical representations. I think it was Jason Zweig said something like, I can draw you a picture of the snake, but if I throw a snake in your lap, you’re going to react differently. We’ve always heard it a million times. People are like, oh, if the market’s down 30 to 50%, I’m a buyer. And I’m like, really, have you lived through that before?

Do you know how you feel like the world’s ending, everything’s going to shit and like all that stuff. I think it was, Philbrick, I think retweeted it, but my partner Taylor wrote an essay about stocks for the long run. And it was interesting, even just trying to be, look at basic things.

If you look at global stocks from the 1840s to now, it was like in over 30 year time horizons, and if you look at the 25th percentile, it went from a 7 percent CAGR, down to a 2 percent CAGR, right? So then over a 30 year time horizon, I mean, you have a one in four chance over a 30 year time horizon, and make a 2 percent CAGR on global stocks. And that was the difference between starting with $500,000 and retiring with like $910,000 versus starting with $500,000 and retiring with $3.8 million, if you could get that 7% CAGR. And this is the idea we’re talking about with nonergodicity, right? Those issues.

And even worse over that 30 year time horizon, you had a one in eight chance of finishing underwater. Over a 30 year time horizon. One in eight. And if you go to 20 year time horizons, it was one in six of finishing underwater. But like I said, we can show all those things, but I don’t know how you get people to believe those things. It’s a very emotional versus rational perspective, but we try to…

[01:15:42]Rodrigo Gordillo: …time versus behavioral time. That’s Asness’ recent statement, and I think that’s 100 percent true, right? How do you get people to deal with, get as close as possible to statistical time with their behavior? Honestly, I think a good advisor that understands what we’re talking about, that’s kind of, if I’m going to pay anybody for anything, it’s got to be for emotional handholding.

The problem is, as it stands today, you know, I’m just, by the way, if there are advisors out there who are doing All-Terrain or stuff like that, and they really know it and they know their stuff, reach out to me because there’s a ton of retail that comes to me and asks for help, and they only have a handful of people that they can talk to.

Like very, very small elite group of advisors that are willing to do that for smaller clients, right? But, and then after that you have to handhold and that’s what you’re paid for as an advisor, to make sure that they stick to it. That’s how you get closer to statistical time with your behavior, I think.

[01:16:38]Jason Buck: Yeah.

[01:16:38]Adam Butler: I do think you need to grant investors a little bit of the benefit of the doubt, and I will say that I have, it’s taken me a long time to internalize this, right? But it is legitimate to be attempting to find a Pareto Frontier between minimizing the risk that all your peers, your peer group are going to outrun you, and that by doing something different, you may end up in the I failed and I’m alone instead of the I failed, but I’m with all my friends who failed with me quadrant. You know, like, it is a difficult thing.

You can know what’s right from a wealth maximization or utility maximization standpoint and then still also recognize that we live in a social world with a community of friends around us that we’d like to spend time with. And, you know, everybody’s sort of concerned with maybe, not day to day preserving their exact social status, but, you know, being one of the gang, being one of the group and…

[01:17:55]Rodrigo Gordillo: I mean.

[01:17:55]Adam Butler:stepping too far out of that is, is very uncomfortable and probably not rational for most people.

[01:18:03]Rodrigo Gordillo: I was at a dinner party on Saturday and everybody was in a good mood, right? We had a guy in real estate, we had a guy who was a stock trader, long only, we had an investor that had a portfolio that was 80/20, we had a business owner that, whose business was booming.

Like you said, all of the things tied to stuff, positive GDP. That’s, I’m going to steal that one as well, Jason. And everybody was just in such a good mood. Everybody was talking about how well they were doing with their Bitcoin portfolio. Yeah, I forgot about the Bitcoin guy, right? Like Bitcoin portfolio going through the wind.

I’m like, you know what? I’ve been, I’m, my portfolio is up like four or five percent. My All-Terrain portfolio is up mildly okay. I’m not complaining, but I’m not as happy as the rest of you. Everybody’s ecstatic and there’s something wonderful, but I’m like, good for you guys. Like actually, it’s great.

Everybody’s in a good mood. Everybody’s doing great. I love these moments because you know, the wives are happy, the husband’s happy, everybody, the kids are happy, they’re taking extra trips. There’s something to that social, like being part of that. And if you exclude yourself from that, it might be a little, a little shitty. But I kind of want to tell me your thoughts, Jason, but I do want to get into volatility a little bit before we…

[01:19:12]Jason Buck: Yeah,

[01:19:13]Rodrigo Gordillo: …podcast, so tell me your thoughts. And then I want to have a question for you.

[01:19:16]Jason Buck: Yeah, I think what you’re saying is like, we’re not … at all, right? Like you said, these high liquidity, long GDP, stock market up environments are great. Like we all have friends and family. It’s awesome, right? And we want to participate in those and that’s the beauty of capital efficiency or Return Stacking is like, you can give them those stocks and bonds.

And then you could Stack in those defensive strategies that hopefully jump out behind the curtain when they need them most, right? So you’re giving them exactly, hopefully what they’re looking for. And what Adam was saying is about finding the clients. Like I couldn’t agree more. Like, I believe in the clients, like you’re sending out your bat signal or Adam, when you say like, Pareto, utility maximizing, you know, and when you’re doing these dances on here, it’s because like, it’s maybe one out of a thousand people that agree with us. And so that’s all you’re trying, that’s what I’m saying, I’m trying to find the one out of a thousand, focus on them, eliminate the other 999.

They’re just, they don’t like the cut of our jib. And so it’s just trying to find those people that agree with you. And I think that, I don’t know if we’ve talked behind the scenes before, but I think what is interesting when you’re dealing with financial advisors, is you might have a financial advisor that buys in, but now they need 50 of their clients to buy in.

And I think that’s much more difficult than people realize. And I like to kind of control that narrative with my clients, because I know exactly who the end client is. And because if the advisor fully buys in, the clients don’t necessarily, they see those negative line items, they start complaining, then they’re going to make the calls to the advisor, and the advisor is eventually going to cut you, just even though they don’t want to, but then you’re getting that whole cloth. You’re just getting cut off because they believed in you, but the clients didn’t. So you have that secondary effect. So I just think that’s interesting, but what do you want to talk about at vol?

[01:20:42]Rodrigo Gordillo: Yeah. So, I just want to, I think vol has been very confusing for a lot of people over the last couple of years. And so you now have…

[01:20:50]Adam Butler: As opposed to before when it wasn’t confusing at all.

[01:20:51]Jason Buck: Exactly.

[01:20:53]Rodrigo Gordillo: Well, I think there were certain expectations of volatility that in a lot of people’s minds didn’t come to fruition. And you’re currently one of the funds that you have, for those that have big positions is that defensive fund, and I know part of that is commodity CTA, but part of that is volatility. How do you describe that volatility element, especially in the face of, maybe we can talk a little bit about how those long volatility managers performed in 2022, versus expectations, and then how do you articulate what to expect from them?

[01:21:27]Jason Buck: Yeah. So I’ll start at a high level. And one of the things I was yelling from the rooftops and even talking to you guys prior to 2020 about is, when I look at the defensive side of the portfolio, commodity trend advisors do incredibly well, right? They have a high beta to high inflationary environments. They have a high beta to recession, at least protracted, prolonged recessions, they’ve allegedly done well. And that’s how they originally got that term crisis alpha that they’ve kind of walked back from. The only time they have problems is when you have acute Liquidity Cascades, right, like March, 2020.

And I was really scared of that prior to March, 2020. And that’s exactly what happened, right? They’re on the long side of the trend. They’re on the same trend of stocks and bonds. Everything, correlations go to one. Even your CTAs go down together in an acute scenario like that. That’s why I believe in tail risk protection.

So the combination of those two are very powerful. Like if you have a sharp liquidity event, whenever he’s caught on the wrong side, you need some long volatility or tail risk protection. If you have a more protracted recession, like a 2008, 2022, your CTAs are likely to do better, and that’s why I think the combo is very powerful for the defensive side of the portfolio. And 2022 was interesting. Like you said, as anybody who really understood vol, like why did I pick one of the hardest industries to try to explain to people, is always difficult. But the thing is with volatility, there’s so many different path dependencies. There’s so many different ways of trading vol.

Even though we are philosophically aligned, the thing that we do that I think that’s a bit different is we try to build institutional style portfolios. And what I mean by that is, maybe a lot of retail clients don’t understand is that your large pensions, endowments, or multi-strat funds, they look for individual hedge funds that do very, very niche strategies. And it may not be like an absolute return strategy. It may not be anything. It may be a very specific strategy. And what they do is they aggregate those together into Ensembles, and that’s how they build their portfolio, which is very different from the way a retail client may assemble a portfolio. So that’s what we try to do.

So when we think about like the volatility space, like I said, there’s a lot of different path dependencies. And so, we have 14 managers in that vol space, and we kind of look at them across relative value, volatility, long-volatility, opportunistic trades, Taylorist trades, and even short futures, like intraday Trend following on short futures.

Like, those are the kind of spaces we look across. And even inside of those buckets, we use once again, that fractal Ensemble as well, where we have different managers attacking it from different viewpoints. Now, the reason we do that, like I said, is the path dependency. So in 2022, specifically, like you’re asking Rodrigo, the interesting, just like CTAs have a large dispersion of returns, depending on what they’re doing, volatility has a large dispersion of returns.

So in 2022, the delta between our top and our bottom manager was about 60%. We have a one manager up about 35 and another manager down 25. So that gives you an idea of the…

[01:24:01]Rodrigo Gordillo: Now were these long-vol managers or just vol managers, because…

[01:24:04]Jason Buck: This specific one is long vol managers, and I’ll explain a little bit why. So as long as you have a kind of mid-range vol environment or a decent, pops are here, they’re involved.

Relative value volatility is kind of those pairs trading, going long and short. They can kind of make money in any vol environment, and separate one more in like a 2017, 2019 where vol is just dead. Very hard for anybody to make money in the vol space. So, that’s relative value. On the other sides of the vol, like I’ll call them opportunistic long-vol trades.

You might have managers that are looking to basically Trend follow volatility, right? As implied volatility or vega expands, they’re waiting for it to start expanding. When it reaches a breakout, they’re jumping in and riding that up before it mean reverts. So, managers that were doing that style in 2022, we had a lot of false breakouts, right?

So they were, they were just like a CTA, a lot of small losses, that start those death by a thousand paper cuts, start to really add up into real serious losses. So that’s where that problem was in 2022. Yeah. In 2022, though, you had this medium to high vol kind of environment, was still that echo of volatility from 2020. So managers that were trading more long gamma is a way of looking at like long realized volatility. So that’s the difference between kind of gamma and vega’s implied versus realized.

And, I’ll give a really simplistic example. If I’m long an at the money call, right, I’m long gamma and long vega, right? And the gamma is the acceleration of my delta or my exposure. And my vega is the long implied volatility. But then I calendar that, right? And six months out, I go short an at the money call, right, which would be a short gamma, short vega trade, but because gamma is highest at the money and you’re offsetting its theta, your time decay, if you position that right, you’re going to have a long gamma trade, short vega trade.

So in a market like 2022, where you’re having these little movements in volatility and you’re constantly restriking and you have that long gamma or gamma scalping position, and you’re capturing out those realized vol where realized vol a lot of times was popping higher than implied vol in ‘22, those managers did incredibly well, right? The other managers that did really well in ’22.

[01:26:00]Rodrigo Gordillo: And just, can I stop you there? Will those managers have done just as well in a continuation of volatility spike?

[01:26:07]Jason Buck: I’m gonna get to that . So, you really need, that continuation is debatable, how well they have done, because if it starts to affect an implied volatility, right now you’re short vega, you’re short the implied volatility, you’ve got a problem. And I’ll get to kind of the latter in a little bit.

The other one that did really well in ’22, particularly this trading style, is cross-asset volatility. So if you were buying deep money or like, let’s call it seven to 10 year LEAPs, if you had an ISDA on cross-asset volatility and also on, rates fall, FX fall starts spiking, but S&P falls down, then you can make money on the cross-asset volatility.

Now, the problem is if you have a portfolio like ours, and most of our clients are tied to S&P 500 vol, you can only kind of sprinkle that in around the frontier. Like you don’t want…

[01:26:49]Rodrigo Gordillo: I want to understand what you mean by cross-asset volatility. Is it the volatility of, like how many assets are we talking about?

[01:26:58]Jason Buck: Think of managed futures, like that whole entire space. Like if you can, if you have an Insta, you can buy a 7-, 10-year LEAP on almost everything and have like a swap that is a mark-to-market daily. And so the idea is. You know, if you’re on, you’re in, rates fall, you’re in FX fall, you’re in commodity fall, you would have done well in ‘22, right? But then, so then to the flip side of your question, the continuation or discontinuation, those managers that did the best in ‘22, probably did the worst in ‘23. So this is why you have that Ensemble of returns and that dispersion. And then the ones that were maybe doing the Trend following on vol, they didn’t even have any opportunities in ‘23.

Because I don’t know if you guys remember ‘23 is very similar to ‘17 or ‘19. We had two days in the entire year where the market moved plus or minus 2%. We had two days of backwardation. Like it was only, I think it was in maybe like two days where vol went above 20. Like it was like the lowest vol environment in ‘23, similar to17 and 19.

So that makes it difficult for any vol strategy to aggregate those up. That makes it difficult. But like you’re saying, if you’re doing that cross-asset vol, and then let’s say you have a liquidity event, like March of 2020, everything crashes except for S&P vol spikes, because it’s the most liquid market in the world. You may be getting a trade off, right? You’re taking basis risk, as we know, by not pinpointing your risk, you’re taking that basis risk. So you have to be, once again, trade offs all the way down as Adam referred to. So those are the kinds of things that we look at is like, trying to have a sprinkling and a diversification across all strategies.

But like that kind of dispersion across the vol space is similar to the commodity trend space, is why I firmly believe on broad…

[01:28:30]Rodrigo Gordillo: Especially small managers in the CTI space, that can trade those smaller markets in size. So when, but ultimately when you look at the Ensemble of volatility, all of those managers are trying to make money in periods of abrupt illiquidity and abrupt losses, right? They’re all trying. It’s not going to mean that they’re all going to, I’m actually asking, are they all trying to do that? Like, are they all expected to make money in 2020?

[01:28:54]Jason Buck: Yeah

[01:28:54]Rodrigo Gordillo: …their minds

[01:28:55]Jason Buck: …part. It depends on who you pick, like a relative value. Like, so we try to find relative value managers, which I would argue that Paris Trade is implicit short volatility. Whenever you have a sort of Paris Trade on, and by the Paris Trade, I mean, like between S&P and VIX or a calendar spread or whatever they’re trying to pitch us, pick off like a little bit of that Paris return, but we try to find managers that still maybe buy the wings.

So in a March 2020, 2020 sell off, they make money, right. But yes, then the rest of our portfolio, the opportunistic long vol trades, tail risk trades, et cetera. They are really trying to make money in a March, 2020 scenario. But like, if that doesn’t materialize and people are fighting the last battle, it can be difficult. So you’re also trying to find managers that aren’t really attenuating all of their strategies to March, 2020, because the future battle is not going to look like the…

[01:29:36]Rodrigo Gordillo: Right, right.

[01:29:36]Jason Buck: So those are the things you’re looking for.

The Sixth Bullet

[01:29:37]Rodrigo Gordillo: So that’s kind of what I went to, because I, you think about your mate, you’re placing bets for a specific scenario, and I just wanted to like, they’re all trying to win that game. And sometimes they’re just, their strategy is not going to work out. One or two might not, but the, as long as more numbers of them are doing well, and you’re going to get that payoff, right? And the worst thing that you can do is choose a single manager, and just hope that they’re not the one with the sixth bullet on the revolver.

[01:30:04]Jason Buck: Yeah. Nice callback. But yeah, you were, or you hope it was the one that was up 35 instead of the one that was down 25. So you can look at a hero or zero that way. The other thing that like not to get, you know, just first order Greeks is like, yeah, we look for different managers, managers that are long vega, managers are long gamma. Managers are short delta.

And we think about the combination of those managers. Then we think about paths of moneyness, overlaying, overlapping .Those paths of money are from at the money, down the money, the deep out of the money, all those sorts of things are interesting. And then so far in the last six months-ish, relative value volatility managers are starting to pick back up a little bit, and then tail risk is as cheap as like it’s ever been.

It’s one of those things again, where you’re seeing 2017, 2019 levels of buying that tail risk protection. Now, the hard part is this, like we were talking about, 2010s for commodities versus 2000s is like everybody’s still burned from the last three years of buying tail risk protection. So now they’re getting out of that market, which makes it incredibly cheap now. So this is the thing about just surviving and keeping those line items in the portfolio for when you need them most, is really hard to do, over longer term periods.

[01:31:09]Rodrigo Gordillo: Amen, brother. Well, what a ride as per usual, Jason. We went all over the place. Thank you for the interview. Thank you for interviewing, Adam. Thank you for interviewing me. One day we’ll interview you.

[01:31:24]Adam Butler: Appreciate your gracious hosting.

[01:31:26]Jason Buck: Now what you forgot to ask me is, I should just like, just use you guys as a wall, just keep asking myself questions.

[01:31:34]Rodrigo Gordillo: Well, look, where can people find you, and tell us a little bit about Mutiny just before we go? Where they can find all the information about Mutiny Funds.

[01:31:44]Jason Buck: Yeah, you can find us at mutinyfund.com, that’s singular, and Twitter, I’m @JasonCBuck on Twitter, and my partner’s @TaylorPearsonMe on Twitter. We also have @MutinyFund on Twitter as well. So everything Mutiny Fund, Cockroach Fund, that’s where you can usually find us.

[01:32:00]Rodrigo Gordillo: And I got to say, like you guys are very close to winning the best website design and logo out of all the asset management firms out there. So if you guys haven’t checked it out, if you just want to check out good design and forget about the strategies, go to MutinyFunds.com. You will be blown away.

Well done. All right. Thanks, Jason. Really appreciate your time.

[01:32:20]Jason Buck: Appreciate you having me.

[01:32:20]Adam Butler: See ya.

[01:32:21]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we’re doing useful.

Thanks again.

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*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.