ReSolve Riffs with Jason Buck on Slaying Dragons and Tail Risk

This is “ReSolve’s Riffs” – live on Youtube every Friday afternoon to debate the most relevant investment topics of the day.

Every time equity markets experience a major selloff, investors’ attentions are drawn to the handful of strategies that actually benefitted from the event. So-called crisis alpha comes in many flavors and iterations, which further complicates the allocation decision. Our friend Jason Buck (CIO of Mutiny Fund) sought to solve this problem a few years ago. He joined us for a conversation that included:

  • The different kinds of risks to portfolios and how to protect against them
  • What actually constitutes a tail event
  • Moneyness, sizing and using wrinkles to reduce volatility drag
  • Finding an ensemble of strategies that doesn’t bleed money outside of major drawdowns
  • Rebalancing – a true and underappreciated source of return

We also discussed how to position a tail protection strategy (or an ensemble of them) within an overall diversified portfolio and what form that portfolio might take. The difference between time-series and ensemble probabilities was also debated – and the term ergodicity may have been thrown around a bit.

Thank you for watching and listening. See you next week.

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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.


Richard:00:00:04 First of all, cheers.

Jason:00:00:07Cheers, everybody.

Mike:00:00:08I’m having a Pinot Noir from California in honour of the fact that there will be no Pinot Noir made this year in California.

Adam:00:00:20I’m having lager from Mexico.

Rodrigo:00:00:24 I also have lager and I get flack to you and Mike that I’m not a beer guy.

Jason:00:00:30I’m doing a vermouth and tonic and a little bitters.

Mike:00:00:33I like that.

Jason:00:00:38Yeah, my neighbor makes his own vermouth and drops it off on my front door. So there is some benefits to live in this post-apocalyptic Smoke Hill Valley.

Rodrigo:00:00:45You just blew my mind there. There are people making their own vermouth. You just live in the niche world in every respect, Jason.

Jason:00:00:57I’d be lying if I didn’t say that I just brought that up just for you, Rod, I need you to appreciate that.

Rodrigo:00:01:03 Love it. I frickin love it.


Mike:00:01:05Well, those of you who are joining us, I think everyone will know Jason Buck, who’s here today from, he’s partner at Mutiny Fund. And this is a pretty interesting high quality firm that really develops tail hedging solutions and strategies. So it is which tail? How to hedge a tail. What the tail might be. Telling me a story, all that good stuff. It’s a really exciting conversation with a lot of depth and context to that conversation. I always love these types of conversations, especially when I have to tongue twist that shit out of my mouth.

Adam:00:01:45This is the first time you’ve gone on camera in the very beginning of the conversation and marketed for the firm that we were talking to. I’ve never seen that before. That was amazing. … ranged in that, before that.

Mike:00:02:00We got a guy. He’s got a beautiful open road hat on and he’s having a drink with vermouth and bitters. You can’t get any cooler than that. And by the way, those are all signs that you should not take anything that you hear on this particular podcast as investment advice. Because there is none of that happening here. Go get that from qualified professionals if you want. This is a happy hour conversation that’ll be wide ranging and fun. So here we go, there it is.

Jason:00:02:26I want to piggyback on the disclaimer, though. I want to break this back. I’ve been a longtime listener, first time caller on ReSolve Riffs. In the beginning, the idea of riffs was that you guys would just turn on the camera and the mic so people could see all the shit you talk on a Friday to each other and then since then, somehow this has morphed into a presentation where people come with decks and slides, and I want to let, I am unprepared. This is a happy hour riff and my only request is that nobody brings up the Three Body Problem.

Rodrigo:00:03:01I’d like to talk about that, I know we have to talk about it.

Mike:00:03:04That’s me being literal.

Rodrigo:00:03:06What’s hilarious is that we want to bring it up and we want our guests to talk about it all the time and every single guest I’m like, yeah, no I have read it, it’s okay. And then moves on. Like we’ve never been able to get anybody to engage deeply on that. Adam is like incredibly thirsty to get into it.

Richard:00:03:26Well, Ben wanted to go down the rabbit hole. We were stuck a little bit in wanting to burn the US down, so we stayed clear.

All About Tail Hedging

Adam:00:03:40Jason is a Mutineer. So you guys are all about tail hedging. Are you getting a lot of interest these days? Like are you seeing a spike in inquiries and engagement from people with this pullback?

Jason:00:03:56Sure yeah, you guys know how this business goes is like when did Noah built the ark? Before the flood Gladys, before the flood, but nobody seems to care before the flood. After the flood they want their insurance protection but luckily we built Mutiny Funds so that way it was a permanent holding for long volatility and tail risk. We don’t believe you should try to time your insurance. We wanted to create a product where, we do the ensemble approach, you could actually hold it even as the market tanks off and V-shape recoveries and all the craziness we’ve seen this year. The interest has been just on fire since we since we launched in April.

Adam:00:04:32That’s great and no major pickup in engagement over the last few weeks as we…I guess it’s like been a week, what? A week and half of this little mini correction that seems to be, there’s lots of drama online about, but so far it seems pretty benign.

Jason:00:04:47Yeah, to me, it was a lot of noise. It’s like everybody is everything quieted back down after March, and now people just want some action again. So then everybody, it’s like, is this it again? Do we get to get involved again, and it was a lot of sound and fury in the end signifying nothing so far.

Rodrigo:00:05:05Well, that’s an interesting conversation to have. You had what? Like a four day run in the NASDAQ where you went down 10%. So it was like the fastest four day in history or something like that. I don’t know if this is true by the way, I read it. I heard I heard it in a book I read and immediately you start getting questions like, have you been in talks with guys at Mutiny? What Chris Cole is doing? Like, how’s his fund doing? And I’m like, it’s hardly a tail. I remember the first week of March when it started to happen. It was like a 10%, 12% drawdown. Investors, like Chris Cole investors were calling me furious that he hadn’t performed. And my God, you have to re-adjust your definition of tail here, buddy. Of course after that he was incredibly happy. But this is a problem when we talk about tail, right? When we talk about that temporary protection. If it were protecting right in the first 5%, then everybody would be doing it.

Adam:00:06:11Tesla’s down 8%. Where were you guys?

Jason:00:06:15We try to be explosive with our clients that anything less than 10% is just noise, and you can’t cover that. If you wanted to cover from 1% to 5% down, the bleed would just be so enormous that it would be pointless. So you have to pick where you’re going to make your mark and anything less than a 10% move is noise to us. But yes, we get those calls, like-


Jason:00:06:37Yeah, exactly.


Richard:00:06:39So you guys are -sorry Adam go ahead.

Adam:00:06:43No. You go ahead though.

Richard:00:06:44I was just going to ask, you guys are probably focused on the equity tail, which is what everyone seems to want to hedge. But do you guys ever consider other types of hedges across other major instruments, possibly bonds, or other asset classes that you believe might offer an interesting way to approach this?

Jason:00:07:05You went out of their way not to mention gold Richard, good for you man.

Mike:00:07:09Well, I was going to mention that, but-

Jason:00:07:13I think there’s multiple ways to look at that. Actually, I’m going to end up throwing the question probably back to you guys. Is that, yes, we try to primarily hedge against S&P beta. Because for the most part, that’s what most of the world has, like, especially as, North American investors and American investors but like, pretty much the rest of the world has a lot of S&P exposure. But then the question becomes, any risk off scenario, when you’re moving from a low vol to a high vol environment and you have that phase shift, is that really basis risk? The thing we think about often is like, if I’m trading other indices around the world, or, interest rates, or treasuries, et cetera. Those correlations go to one when you have such a violent phase shift. So I’m not sure you have too much basis risk when we’re moving from a low vol to a high vol environment. And then after you have that sell off in S&P the IV expands in S&P so it becomes a lot more expensive for you to have those positions on. Maybe you could look at for cheaper convexity in rates and treasuries and gold, et cetera. So that’s one way of looking at it, but for the most part we really try to focus on hedging that S&P beta exposure, but then the question becomes after that sell off too, are you now having enough duration of movements where commodity trend would be a better protection over that, a longer more drawn out lagging recession, versus that sharp tail risk protection.

Rodrigo:00:08:32Yeah, I think this is a contentious point of conversation for all of us here, because I think I’m in line with the idea that the world only cares about that S&P risk. And that the basis risk for that is likely to be small. When everything’s falling apart, and we saw it in March, and I said this before, when you have those three days where it didn’t matter what you held, whether it was gold, or treasuries or equities, they all went down together for a very small period of time in that liquidity event. You could have had, hedged on anything and made some money. I think the idea of tail for most people is that catastrophic point, that’s to me that’s what I really care about but there’s certainly other tails to hedge up there. I think the guys that Logica, use Wayne’s as part of your lineup. Remember back in the day when I talked to Wayne, they did use some gold in there, now as part of the tail.

Jason: 00:09:35It’s like a dynamic proxy situation, so as they’re long a straddle and they’re Gamma Scalping it daily and adjusting their positions and their puts and calls. Part of what they’ll look at is if they can’t load up on the inventory they want on puts or calls, they might look to proxies. If they can’t necessarily load up on S&P puts, you might use a little bit of proxy of gold or treasuries. Then the other way they look at it too is if you have that March event and vol’s above 80, they might look to going maybe deeper in the money on those straddles, but also maybe look more to those proxies. Because with vol whipping around at that size, it makes it pretty difficult.

Adam:00:10:11You have trend followers in your fund, right? It’s not just-

Jason:00:10:16Yeah, the way we always like to look at it was you can have these deterministic rolling puts where everybody knows the bleed of those where you bleeding 3 to 5% a year, and you maybe use a negative 15 to 20% attachment point and you know the bleed of those puts, but they’re always on, then you have the more dynamic options managers like the Universa, Artemis is the headwaters of the world, and we like to create a basket of those as well. But around the periphery we add in back these VIX arbitrage managers, and then these short term trend followers in the stock indices. What they’ll do is they can short those stock indices around the world. So, what’s great about that, especially after March as IV rises, they can go delta one short those indices and just position that way. And as you guys know, it’s incredibly difficult to be an intraday trend follower on markets.

Adam:00:11:02Yeah, it’s true. At least other than the recent March selloff, the typical character of a drop is that you do get the sort of initial drop and that tends to be abrupt and hard to predict and out of nowhere, and then you typically get some sort of follow through. I think if you go back and there’s whatever, six or eight major bear markets, if you look at the US since 1900, the average recovery time is about six years from peak to trough to peak. This has just been so anomalous. The only type of tail payoff that actually paid off this March was that true, just like always on, out of the money put hedge, and even most the trend followers except for the ultra-short term ones were still caught offside for much of the move and then those that weren’t offside managed to catch some of the first move down, then we’re offside for the move up or got whipsawed or whatever, it was just a very difficult test for trend following. So there’s always this discussion about whether the character of the market has changed sufficiently that you need a wider variety of different types of hedge products in order to be able to capture all the different types of crises that might manifest.

Richard:00:12:26That’s what I was trying to get at because I think a lot of people are now thinking about the risks bonds post, particularly sovereign bonds. There’s going to be a side of that argument, that’s going to say the central banks are going to continue doing what they’re doing. There’s yield curve control, what have you, and no one needs to really worry about that but that becomes part of the risk, that adds to the risky environment that one day this might unravel and come undone. So, I was wondering if you get some asks or if there’s any demand in that regard.  I know that we have a couple of instruments, there’s one VIX equivalent for treasuries.

The “MOVE” Index

Jason:00:13:04The MOVE Index?

Richard:`00:13:06The Move, exactly. Wondering if that’s part of any conversations that you’ve been having.

Jason:00:13:12Well, the MOVE Index is non-tradable. And Harley did a great job of inventing that, but the way we look at it is like going back to whether you take S&P basis risk or not, we believe around the periphery, we’re looking to add some of the more like European managers that might trade interest rate vol, Treasury vol and FX Vol. And because those are so prohibitively low right now, now, that’s because maybe “ceteris paribus” is telling you something that you’re never going to make money off that, but as long as it’s low or even positive carry, you don’t really matter. So, we’re looking to add those positions because then the volatility could manifest there, especially if we still suppress somehow such price volatility domestically, does that then get squeezed out into the FX markets, and that’s where we see it. We don’t know, a priority but that’s some of the positions we’re looking to put on. But going back to what Adam was saying, I think the way we kind of look at it is we’re not perma bears, we’re not permanent long vol guys. We look at it as it’s a piece of overall portfolio construction. And so, you can have instances like, Adam pointed out previous declines and recessions where you have this phase shift from risk on, where all those implicit shortfall trades, stocks bonds, PE, they’re all doing well. But then you have this violent phase shift to them before those commodity trend managers can take off. So we just want to really make money in that violent phase shift.

So that way you can then rebalance and redistribute all those gains to the rest of your portfolio. But then the thing that was always frustrating to me with building global tactical asset allocation portfolios and Rodrigo and I talked about this many times privately, is we just hadn’t seen in a long time where everything could have been in an uptrend and then you’ve got that sharp reversal because usually people are like, they mentioned ’87 or 2008. They’re like stocks were in a downtrend so they could almost market time their put protection, where as you saw with risk parity, or any other volatility with everything you got, if everything’s in an uptrend you get your face ripped off in February, March. Then as you’re adjusting get whipsawed, like Adam’s referring to which is like a form of data bleed I guess, but we were just looking to try to protect or ballast those portfolios whether it’s just your stock and bond portfolio, or just stock portfolio, or whether you really have a holistic portfolio, it’s a nice piece of the puzzle to make some money when shit hits the fan and when everybody’s running for the hills, and even more so when everything’s on sale, and you’re the one sitting on cash. But now cash has a very different value, and that’s hard to maybe sometimes get across. Cash in November of last year had a certain value, but cash in at the end of March of this year had a very different value to it.

Adam:00:15:43I just want to applaud you for using two Latin terms in one monologue there along with some Greeks. I think you’re the first guest, certainly first guest to wear a hat like that, to invoke two Latin expressions and some Greeks in the same monologue. So well done.

Jason:00:16:01Adam’s coming in hot already, I knew I was going to have to start drinking.

Adam:00:16:05Just throwing some shade back at you man. There’s lots of shade thrown in through the chat channel.

Jason:00:16:11 I thought we were going to wait to talk about free will to at least like 45 minutes in.

Adam:00:16:16You keep throwing out things you don’t want to talk about. It’s like, don’t remember this thing. And what’s the first thing that comes into your mind? You can’t not remember something.

Jason:00:16:23I’m just poking the bear.

Adam:00:16:26You’re poking four bears here. We’ve been bears for like 10 years. So we’re still waiting for our crane to come in. But it’s coming.

Jason:00:16:37Sorry. I don’t mean to derail the conversation. But I just realized I’m super jealous. Rodrigo are you up to three out of the five flags now on Flag Theory?

Flag Theory

Rodrigo:00:16:46I totally missed that reference.

Jason: 00:16:48Man, I thought you’d be all over Flag Theory. So, Flag Theory is like where you are born in one place, you have that passport, you move to another place so you get a second passport. It’s all about risk mitigation. Then you start your company in a third country, you hold your bank account in the fourth and then you’re basically I…there’s a fifth I can’t remember. But then you’re basically a PT, a permanent traveler or permanent tourist, and that way you’ve diversified, I thought you guys would be all over that shit with you.

Rodrigo:00:17:12Well, I think I just wrote a thesis on it and call it the Rodrigo Effect. But there’s something already out there called Flag Theory.

Adam:00:17:20Some people get the labels wrong.

Rodrigo:00:17:33I was wearing it the day I got my Caymanian driver’s license. I was ecstatic. Like this is the first step towards that third nation, and you are in land of many nations. The people that I’ve met and befriended thus far from like, nobody’s from the same country. You got a Spaniard, Brazilian and Peruvian, a guy from the UK, an Australian, an South African, and it’s fantastic. Who knew you can be more multicultural than downtown Toronto.

Mike:00:18:04Yeah. Just off the Commonwealth nations. That’s great. Yeah, multicultural.

Jason:00:18:10We’ve got the CARICOM nation here, this and this and this one.

Adam:00:18:15So Jim Carroll, I guess did you send him some of your neighbour’s vermouth? Because he’s on asking you like, the perfect setup questions for you to talk about Mutiny. What is your view of single ticker offerings like TAIL or HDGE or DWSH or ABRVX? And then number two, is Mutiny available in an SMA.

Jason:00:18:35Men, Jim was tweeting before and I asked him for softball questions, and he just hit me with the hammer right away. So this is one of the hardest questions we get always is, we love what you guys are doing do you have an ETF? I’m sure you get used to these kind of questions.

Mike:00:18:53Or could you construct a very complicated derivatives based daily trading, trading multiple markets, overnight in multiple jurisdictions? …

Rodrigo:00:19:06 traders.

Mike:00:19:08Yeah. Could you have that traded on the NYSE and make it so it’s a penny wide all the time? If you don’t mind.

Adam:00:19:15 if you don’t mind.


Jason:00:19:17No fees, to negative fees. I don’t want to pitch our book but basically, my partner and I were just tired of having these conversations about, with friends and family. Like, I’ve read Nassim Taleb’s book, Chris Cole’s paper, whatever, how do I protect my portfolio? That was going, do you have $20-$50 million dollars? No, well, you’re fucked. Someone needed to solve this problem. We spent the better part of the last few years figuring out what would all the workarounds be to bring a product like this to market? So we think we finally after years of working on it and getting all the approvals, we think we figured it out where we’re able to take retail investors, accredited, why do we have to deal with this accreditation is beyond all of us, but with $100,000 minimums and we allow them to access, to these best in breed long volatility and tail risk managers. So, we have done the best we possibly can to bring that ticket size down to as minimum as possible because some of our managers have $10 million ticket size minimums. We think at 100K we’ve brought it as close as we can to retail. Sure, I wish I could stuff it inside an ETF. We actually talk with our mutual friends at Alpha Architects all the time. I annoy the shit out of them with questions every month, like, how can I stuff this in the ETF and they’re like, that’s too much leverage, that’s too much derivatives. I’m like, but what if we change this? It’s just impossible with the regulations and the regulatory costs. When we talk about other products like TAIL or the AREX and Ahrens product, and even Nancy Davis’ Eyeball, we tend to recommend like all of them, but just like you guys, we firmly believe in an ensemble or mosaic approach to that basket. So, you’re not going to quite get the sophistication that we’re able to offer the managers we invest in, with Mutiny Fund. But if I was building one of the retail ETFs, I would want to combine a lot of those different products and hopefully that gives me at least some pseudo tail risk protection. Like I just- Mike go ahead, sorry.

Mike:00:21:09Just a challenge there is the capital efficiency of it all?


Mike:00:21:13Keep going, finish your thought, because maybe you’ll wrap that into that.

Capital Efficiency

Jason:00:21:16The capital efficiency is another issue. We even in house offered our long volatility fund overlaid with 100% S&P exposure, because the capital efficiency we can use with rolling futures and have the combined cross margin. Now if somebody wants full exposure, they can take it and we think it’s a great product, and it’s far superior to 60/40. But then if they don’t want 100 hundred percent exposure, they can toggle that down and at least they get the capital efficiency then, rather than us doing 50-50. So we provide that capital efficiency. But with all of these products and whether its tail or anything and if you talk to Meb, as you guys know, is like how many, he sees the people trading in and out tail all the time and trying to time, tail trend time their insurance. I think it’s just crazy to me that everybody is, all of their everybody’s portfolio of assets goes up when the market goes up and down when the market goes down. And then all I say is like, why not include something that goes up when the market goes down and people look like me like to have two heads. It’s like people have pulled their goalie in the first period of a hockey game, and I’m like, hey, that goalie might add value to your team a little bit, sometime along this game.

Rodrigo:00:22:20On that note, I love the idea of the combined portfolio, S&P plus a tail, capital efficiency and so on. When you have a product like the ones mentioned here, and I think like your product, without it, when you don’t have that capital efficiency you need to allocate a lot more to it in order to get the protection for whatever equity allocation you have. I always struggle with this question because the way we used to do it is, we’re putting it in as efficient as possible, you put in 2% or 3% and that decays, and every four to six months we have to call clients and be like, you’re going to re-up again. And that got old real quick. So, your only other option, and the most accessible option is this one where it’s like the protection plus cash, and then you have to overlay the S&P. How do you answer that question? How much tail in that type of product, versus my S&P exposure?

Jason:00:23:14As you know the $64,000 question for all of us is position sizing. Portfolio construction position sizing. That’s what everything comes down to is position size and it’s really hard to get that across. That’s the most important piece. Rodrigo you know more than anybody that…you’ve felt the pain more than anybody having that allocation, that 3% bleed, that’s the most cash efficient. I firmly believe people should eat that bleed and balance it with your implicit short volatility or long GDP positions. And you’re going to compound wealth better over multiple cycles, but you have to wait multiple cycles. And so, you know all too well better than we do, the behavioral problem with that. So, we’re just trying to solve that behavioural problem to try to make this hopefully flat or slightly positive carry over the business cycle or risk on cycle, which also means we can be down in quarters to years, but over the cycle we’re trying our best. So part of that is I look at it three ways to try to give people an idea, maybe three or four ways. One is, if you have less than 10% allocation to like a long vol tail risk product like us, that’s the bare minimum.

As you know that can barely balance the draw downs of 90% of the portfolio. If you take the perspective of risk parity, I’ll even go back to permanent portfolio is, if you view Harry Brown’s permanent portfolio of 25% in stocks, bonds, gold and cash to handle any macro environment, I would take the 25% in cash and allocate that to long volatility tail risk. It’s a much more convex cast position to make up for the left tails that you would experience in stocks and bonds, especially if their correlations come back to positive. It goes back to something Adam said, I just wonder how much the markets are changing and with the notional leverage across not only trading but in the economy that you almost need derivative exposure, that structural negative correlation, to make up for the rapidity or the sharpness of those drawdowns. So that’s one way we think about it.

The other one is, if you look at classic 60/40, I don’t know why we got anchored to 60/40. To me, it would be 40/60, that you would be 40% short volatility, 60% long volatility, do the extreme left tails, the short volatility. So people like, that blows their minds because they’re so anchored to 60/40 the other way, that if you just look at it mathematically, it compounds wealth better over time, but you’re going to probably drag behind your neighbour for three years at a time. But because of that huge left tail of stocks and bonds, or implicit short volatility you’re really going to ballast it out that way. Then another way that’s maybe a little crazier, but I’m a guy in a hat drinking vermouth, is that we look at it as entrepreneurial put options, so myself as an entrepreneur I look at my holistic risk. I have my business risk, I have my house, I have my car, I have my girlfriend’s profession, I have all of those risks to worry about. It’s holistic risks. So any savings I’ve left over after consumption, I put it all in long volatility tail risk because I really want that cash when shit hits the fan, and then I can go out and buy assets for pennies on the dollar because of the pain that we’ve all lived through and those experiences of what that’s like to not have cash on the books when those things happen.

Rodrigo:00:26:15 I also love that. I actually heard Meb say that he used tail protection for his own business, like the business bought it. Because he’s exposed to a lot of beta, as many … cash position that he can reinvest into the company.

Mike:00:26:32Meb went out of his way to draw that to the attention of advisors everywhere, you’ve got beta on beta on beta in your business. So where should your investments be? Well, one would have to consider having a pretty significant tail type investment in your portfolio so that when shit hits the fan you’ve got actually an asset that has had a positive convexity. If you think about that, if you sort of take that through to other business models and other entrepreneurs, because you know where most entrepreneurs put most of their business risk, is in their small business. Now, go talk to any restauranteur, go talk to any hotelier, go talk to basically any small business and if they would have had a significant…obviously, they’ve been saved, Fed, the S&P, they’re fine. But if we walked out during March, they would have probably felt a little better with the tail hedge in their portfolios or actually their portfolio recognising the risk they have in their own business, sort of crossing the chasm between the public markets that they’re invested in and the private enterprises that they might own. I wonder if there’s a fourth function. I think you talked about a little bit with the 60/40. But it is to basically eliminate the bond. Everyone’s worried about bonds, sovereign bonds may not have any return, what if we get into an inflationary environment? So, let’s just eliminate the whole bond portfolio and replace it with the convexity that comes with the VIX strategies and not have to worry about that type of idea? I’m just throwing it out there, guys. Don’t shake your heads yet. I know it’s a crazy idea but all I hear is, oh my bonds, what are they telling me? Well, what are they telling you at 68 basis points for 10 years, or whatever it is, they’re alluding to a lot of different opportunities for shit to go wrong.

Rodrigo:00:28:24I was just anchored to your permanent portfolio approach. I do want to address what you said, Mike. But can I share my screen Ani?

Mike:00:28:32Oh no, … While he’s sharing the screen, this is where my mind went to is that if I was going to actually replace something in the permanent portfolio at the current rate level, I might actually replace the bonds and keep the cash because the cash will actually rise, the potential return on the cash rises if returns rise in cash, and I’m getting convexity in a bond-like way, in the permanent portfolio. I’m sure you don’t care where I replaced the 25% as long as it goes to Mutiny.

Jason:00:29:10Yeah. And it will take all of it.

Rodrigo:00:29:13We got a pretty graphic there.

Jason:00:29:15I was just agreeing I might be front running Rodrigo on this is that if you think about the permanent portfolio, in your bonds are more for a deflationary protection, so if you’re not going to use government bonds, maybe you look at alternative fixed income with real assets. That’s why I view it more of a cash position but, going back to what you’re saying I would do agree with, is if your primary holding is stocks, and you’re using bonds as a portfolio weight to reduce the volatility in stocks, then that would be a replacement for the bonds and that’s why we think we’re much better than a 60/40. It’s multi layered and I think Rodrigo has done a great job of even talking about from here to zero, there’s still great returns on long bonds and then if real rates are higher than interest rates, there’s another kicker there. The problem is I guess, if we go negative, then it’s as Mike Green would say, then you essentially have a bleeding put option without the convexity.

Richard:00:30:08Yeah. Becomes return free risk. Remains is, but I think people have been trying to short German bunds for the last five years since they became zero bound, and I think for the JGB’s, it’s been 30? Maybe. So I guess that whole trade and that whole idea that bonds are just gone. I go to that initial knee jerk reaction sort of, I don’t want to own bunds in the portfolio from a gut reaction early on. But when you think it through and you go back in history and you look at these other sovereigns, it doesn’t seem like that, that reaction has been there all the time, which isn’t to say that the risk isn’t there and that this time couldn’t be different, that whole paradigm shift idea, it could be there.

Mike:00:30:56I have one further point to add on that, Richard, which I just realized, as we’re talking about this. One, we’re talking about the first initial potential reaction for longer sovereign bonds to be able to create some sort of ballast in the portfolio. That’s one thing, and that’s over the next crisis. Over the next 30 years, it’s very difficult to argue that bonds are going to provide the same amount of ballast and drift that they provided over the last 30 years.

Rodrigo:00:31:26But that could end in a year, right?

Mike:00:31:30What’s that?

Rodrigo:00:31:30That this all of that could be when we talk about 20 years, well, what if bonds blow up in a two year period, and all of a sudden they become super valuable? They have this massive-

Mike:00:31:41There’s a pattern-

Richard:00:31:42If you were invested-

Rodrigo:00:31:44Hold on. This is what I want to show, it like the idea of the permanent portfolio was that I got some gold and some treasuries, some equities, and then some tail protection. I think when you have that diversification, what people fail to understand is that you have diversification, because you can’t foresee the future, you don’t know whether treasuries over the next five years is going to be the best performing asset when it goes from point seven to negative three. So it could be the best five years for bonds we’ve ever experienced. Or it could be the worst thing and it’s probably going to be, if it’s going to happen, it’s going to be highly correlated to equities probably going to be because of inflationary pressures. And if that is the case, and we’re going to see some ridiculous outsized returns from gold and commodities and that is an inflationary push upward. So if you have that in your portfolio and you can’t foresee the future, you would admit that you can foresee the future, then you may not have a bad experience, even with the shitty expected returns that we might see from treasuries and from equities in a high inflation scenario, as long as you have that gold in there.

Mike:00:32:46Sure. But at the end of the day, gold notwithstanding, which is correct. The bonds will not provide the returns that they have provided over the last 30 years is the sort of the theme. And that’s because you had a discount rate and everything in your portfolio that is a cash flowing asset is priced off of that discount rate that’s gone from 18% to zero.

Rodrigo:00:33:13But what was a real…when I hear those numbers I often …I’m not sure, I think there is a VIG there. But what were the real returns that when nominal rates were at 18%?. I think Corey did something on this. Maybe you could pipe in. But is there a lot of value in like-

Jason:00:33:33You probably have like, 3% real returns or something like that or negative.

Rodrigo:00:33:38What would be the difference today?

Jason:00:33:40Yeah. My favourite part about all this is just the irony of watching you guys debate this, because you guys have done better than almost anybody about educating people about global tactical asset allocations, is there’s only going to be a part of our polio. That’s absolutely repugnant, odious, and you don’t want to own …

Richard:00:33:58We’re aligned with the narrative that comes from the gut feelings coming down and Adam is just shaking his head going, Please, God, let it stop.


Adam:00:34:06No, you we always bring this up. The idea of, do people care about real or nominal returns? I think we’ve done a lot of…we published our research and we had a lot of conversations, I think we try to skew to real returns. But I’m coming to terms with the fact that nobody gives a shit about real returns and in fact, only people only actually care about nominal returns and maybe that’ll change if we go into some sort of Weimar inflationary regime. But barring high teen inflation again, I think that nominal returns are going to be what people anchor to for the most part, and so it’s a-

Richard:00:34:41I disagree, Adam. A four or 5% inflation I think would be enough, people have anchored that sub 2% for a long time. If it goes to four that’s already two X and inflation is creeping up and cost of living in many other areas that aren’t really captured by CPI because substitute-

Adam:00:35:01That’s fine, that’s true. But the reality is if you deliver the best, you want to hedge inflation, deliver the best nominal returns you can. There’s no sort of inflation hedge that’s going to guarantee, you can go and get TIPS and TIPS inflation, or buy TIPS and you’re going to get, be hedged against the CPI, which the government is able to go in and change the definition of, and it may not be representative of your consumption basket, there’s no good inflation, there’s not even a good consensus on the definition of inflation. So what inflation are we hedging? I was going to go back and ask Jason like, in the era of the omnipresent Fed Put, I would actually push back and say, why does anybody even need tail protection insurance, and what tail are we protecting? The Fed is going to protect nominal returns, they cannot protect real returns. Shouldn’t we all just be buying puts on the dollar?

Jason:00:35:56Yeah, I look at it in two ways. One is, you’re right. There’s a Fed Put so far and that I would ask, how did the Fed Put work out in March when we were down 35%? It takes a while for the gears of the Fed Put to get rolling.

Adam:00:36:09That’s fine but nobody benchmarks liabilities to three weeks of returns, or nine days of returns. The reality is the Fed stepped in with everything in their arsenal, and stocks went to new highs more rapidly by a factor of five than they had ever gone up before. And they have continued to demonstrate that they will not allow this market to break in nominal terms, they will not allow it. When it breaks again, they will be in buying stock indices and when it breaks again, there’ll be in buying individual stocks, they have demonstrated time and again that they will not allow this market to break. So they cannot control both-

Richard:00:36:52The system is built on it, right?

Adam:00:36:55-and the dollar. So they’ve already said they’re all in on nominal prices, which means that they are willing to sacrifice the dollar. So where’s the real tail?

Jason:00:37:07Sure. So I’ll answer in a couple of ways. Well, inflation is one tail. That’s another tail that we think about often. But that’s not what we cover with our portfolio currently. But the other way I look at it you guys actually had this argument before is, I wonder how much…Adam, you started out as discretionary and went to quant. But as Tropic Thunder’s taught us you never go full quant. So, maybe we need to bring your ardent philosophy back a little as Rodrigo and Richard are far too aware of, is there’s massive left tails that none of us could think about. And so, to me that Fed Put is a Malthusian Bargain, it only has to be wrong once and I’ll be waiting there happily just waiting to bring it all you have the inventory of my books.

Rodrigo:00:37:47Absolutely great answer. I would also say that there’s an answer for your product, remember, the way you’ve thought about it you came from how do you help your friends and family? That’s retail. And the truth is that we’re not talking about matching liabilities, we’re not talking about the fact that it’s going to go down and then go back up and you don’t you can’t move fast enough. The vast majority of retail investors as we learn from Dan Egan, and even our Portnoy interview recently is behaviorally flawed. So, what you’re hedging against is making bad mistakes at the worst of it, even if you think that the Fed’s going to be there for you three or four months down the line.

Adam:00:38:18The point is the volatility risk premium. That’s what you’re describing, the volatility risk premium. I’m uncomfortable with short term losses. I wish I could make Mike’s whiny voice. I don’t like short term losses. That’s terrible. This is uncomfortable, I’m afraid, but the reality is that from a financial standpoint the big boys don’t really give a shit about a stock market that drops for three weeks and then rebounds by 4%.

Rodrigo:00:38:46There was coverage of indices that chose not to rebalance. Those are the big boys making big boy mistakes.

Adam:00:38:55Sure. They didn’t rebalance the S&P or a few of the different indices. I hear you. That’s fine.

What To Do Now

Jason:00:39:04You’re looking at hindsight on one data point just because the market has recovered this time. We can’t go off on one data point. But to piggyback on several things Adam is saying that I think are interesting that maybe takes us off down a different road, is what’s the right thing to do? I think you guys are so good about this a lot of times but part of it is like, do we do the right thing to do or do we do what the clients want? So going back to your nominal versus real. If the permanent portfolio chugs along at two to 3% annualized real returns above inflation, like you said, all we want is our savings to keep pace or outpace inflation and be there when we need them. So that’s one way to look at it. I just did an interview with Steve Diggle that was fascinating where we talked about what is money or wealth. Steve had a huge windfall in 2008 and then now what does he do? Does he think about money differently or wealth differently. So now he’s going out to buy a basket or ensemble approach to real assets, with farmland all over the world to German rental properties to then barbell that with a little bit of VC exposure to kind of create a flywheel.

But my question for him was, great, everybody said that’s great for you Steve, you made hundreds of millions of dollars, you’re in your 50s. But I’m 25. What do I do? My argument is, and I’m curious about you guy’s take, if you’re 25 and you’re making, let’s say, you’re doing great, you’re making 100 grand a year, you should treat your savings the same way Steve Diggle treats his savings. You want to increase your amount of savings through your job or through your entrepreneurial activities but you want to have a well balanced portfolio that keeps pace with or outpaces inflation and will be there when you need it. Whether that’s one year from now, or 50 years from now. And it’s incumbent on us to not tell the clients what they want, but what they actually need. You guys have gone down this road better than most and it reminds me of your first podcast with Ben Hunt where he said, if you do that the right way, you’ll be a much smaller business. As I said, it’s the pride of the craftsman. At least you have that internal pride, like you could have a much bigger business if you sold bullshit but that’s not what you guys do.

Adam:00:41:02So the question in there I think was, what does a 25 year old do? So you’re earning whatever, 100 grand a year, you are looking for your retirement to be funded from your savings and so how would you invest?

Jason:00:41:24You need to focus on real, is my point, you were saying fuck it, let’s just go nominal. My point is you should always be focused on real and building a well balanced portfolio of an ensemble approach to short vol and an ensemble approach to the long vol, rebalanced properly, that then you worry about your real returns after inflation year after year after year after year, and as we all know, by reducing volatility you reduce volatility drag, and you compound wealth better and it’s there when you fucking need it, whether it’s one year 10 years or 50 years. Not like, if I invest in stocks now, and the big drawdown happens when I’m 28. I’ve still got 50 years to make up for it. Come on. It’s fucking nonsense. I should get fined for saying ergodicity but it’s an ergodicity problem.

Adam:00:42:07Yeah, it depends on how far down the rabbit hole you want to go. There is this sort of what risk are we hedging if it’s the cataclysmic risk, and we’re all in this together and you don’t even want gold you want guns and beans and shit. So let’s take a step back from that and you’re 25 you’ve got a 30 or 40 year investment horizon, I’d say candidly, if you’re 25, some kind of global equity proxy is probably fine. The reality is the conversations that we have are with people who are in their 40s and 50s where they’ve got maybe 10 or 15 years before they retire and the correlation between the sustainable income they can they can draw from their portfolio and the returns, the real returns they get on that portfolio over the next 10 or five or 15 years is extremely high. It’s not the same kind of equation for a 25 year old as it is for 45, 50, 55 year old. And that’s a much more interesting and … problem.

Jason:00:43:12I’m actually arguing it’s the same, you still have-

Adam:00:43:15I know you are, I’m not convinced it is.

Jason:00:43:18Because you’re guessing that they have 10, 15 years, you’re 45 to 55 year old client, you’re assuming they have 25 year old client has 40 years. Neither of those are true. It’s the time versus ensemble average. None of us know when we’re going to die or when we’re going to need money or when we’re going to fall sick, or when the next COVID is. None of us know.

Richard:00:43:36That’s where he’s dropped ergodicity, that’s where he dropped it.

Adam:00:43:41But the whole point of your ergodicity is that there’s a day or week or month along the way that derails the entire path. So that’s fine and I agree but the point is that matters a lot more, if you don’t have time to recover from that major event.

Jason: 00:44:06It’s double serendipity, though. My point is, the well diversified portfolio with also tail risk and option and then whether it’s modern risk parity or not, combining that overarching portfolio, it actually compounds better than any other, there’s no reason to say that a 25 year old should be all global equities, because it would actually compound better by reducing the volatility for the 25 year old as well as the 55.

Mike:00:44:28Totally. The arithmetic versus the arithmetic return.

Adam:00:44:30I agree, permanent portfolio and risk parity, what have you. I guess what I’m saying is, if you’ve got a 30 or 40 year horizon, it matters a lot less. I would argue that the permanent portfolio or risk parity is still the optimal solution levered to the right risk level. But if you choose levered risk parity, or a global equity portfolio for the-

Richard:00:44:56Those are two very different approaches in terms of their ability to navigate the uncertainty of potentially walking into an inflationary regime or looking into a dollar slide that provide-

Mike:00:45:10I think we’re talking about, if we can summarize it to the high risk area when your pre and post retirement, that first year of your retirement if you have a poor investment outcome, it represents something like 20% of the overall success of the entire portfolio. It goes down, it’s like 20,18, 15 whatever it drops, but those first five years, and there’s some stickiness to the lifestyle. I own X dollars and I am about to retire. And thus, those X dollars are to pay for my golf course, I do not like golfing on public courses, once you golf  at your private course. I don’t want to drive a Hyundai, ride a bike. I want to drive my Mercedes. So I have a level in my mind that I’ve accepted as my reality and I have an amount of money. And that is staring me right in the face. Versus a 25 year old who doesn’t really know any of that and if they encounter an unlucky stream of events, they’re going to come to a place that they’re used to living in whatever that particular lifestyle is. I think there’s a lifestyle shock that occurs…

Adam:00:46:12In their entire peer group.

Mike:00:46:14Well, that’s not life. Yes.

Adam:00:46:15And it’s the same adjustments at the same time. And we all know that happiness is a relative context, not an absolute context. So if you and all your friends suffer in the same way at the same time, for the same reasons, it hurts much less. Listen, it’s a hypothetical argument anyways, like I think we all agree diversification is better than no diversification.

Richard:00:46:36I thought we did Adam, you went down that rabbit hole, we did.

Adam:00:46:42You know what my main thrust is? The investment problem for 25 year olds is not very interesting.

Jason:00:46:56Let me ask it a different way. Actually, I was just doing my favourite thing I like to do when I watch these ReSolve Riffs, I look at Rodrigo and I imagine what he’s thinking. But I don’t know if you guys ever saw that 80’s movie – like what are you thinking? It’s like, swimming pools.

Rodrigo:00:47:14I went down the permanent portfolio rabbit hole in our … plotting app. And I’ve like cut out like five different charts, I want to show that I’ll never be allowed to show clearly. What were you guys saying the last 15 minutes?

Jason:00:47:27Yes. Adam, maybe a different question. I’m curious how you guys think about it, because I can’t stop thinking about this is like, we all have due to these conventions of the retirement account in North America is this idea of Absorbing Barrier, that then you’re worried about with your 45 or 55 year old clients, I’m very curious about how you construct portfolios that then maybe is not in a tax advantaged account, but maybe takes advantage of borrowing against your overarching portfolio so you don’t have defined reductions once you hit 70 and a half years old. And so then you can transform a portfolio to make sure it is more short term and long term and well diversified. While not having to worry about having to take those drawdowns when it hurts you the most.

Adam:00:48:11Yeah, so you’re talking about asset location, is that-?

Jason:00:48:15Yeah, It’s more like you’ll see like a tech giant US equity lines of credit. Like Elon Musk will borrow a loan against his stock so that he doesn’t have a tax consequence. So, if you had like an ETF, that was a well-diversified portfolio that you could buy and hold forever. And then when you reach retirement age, if you just start drawing like a 2% loan against that with Interactive Brokers is like a percent, maybe 1.2%. It’s a way for your overarching portfolio to still continue to compound when you’re actually withdrawing less, and you’re not worried about that absorbing barrier of when you retire and having to take forced liquidation of those assets.

Adam:00:48:53Right. So don’t bother to fund the retirement accounts because of the constraints that you need to liquidate at a certain rate, is that kind of where you’re going?

Jason:00:49:07I’m asking like, from you guy’s putting all of your four entrepreneurial hats together is like, how do you think about that? Because it just bothers the shit out of me that you have this absorbing barrier that the government is telling you when you have to take a withdrawal. And we all know if that happens during a massive drawdown, especially if stock-bonds are correlated, everybody’s fucked. So it’s like, is there a way around that? And that’s why I’m asking. Like, I’m trying to think creatively and I’m sure you guys have thought about it. Is there a way around some of these issues that we’re constantly dealing with?

Adam:00:49:33Well, a lot of clients that already do that. We’ve got a lot of clients that put on deposit, stock, large stock positions, and they use that to collateralize futures accounts. So, that’s a large business for us and I think we obviously endorse that as an excellent strategy. And there’s ways you can hedge the stock position or not, there’s lots of different ways to roll that and I like the way you’re thinking. Like certainly the forced liquidation of retirement accounts and by the way, we have the exact same problem in Canada, but the forced liquidation of retirement accounts adds a layer of…it amplifies the ergodicity problem which I think the strategy that you’re endorsing that we employ for a lot of clients goes some way to addressing.

Jason:00:50:24I wonder if anybody’s ever addressed it like, what I’ve always wondered is, the tax advantages that you get until that retirement age, I wonder if they could be completely offset by those forced liquidations into a sell off market? Are you actually adding up ahead by trying to take a tax advantaged account instead of having a taxed account?  And maybe Corey, or somebody else has done some work on this, but I doubt.

Mike:00:50:48It functions a little bit. It’s slightly different in Canada, but it is, the money you get back is like an interest free non-recourse loan if you will to the portfolio, which is awfully hard to beat. That compounds for a very long period of time and then part of the solution to the problem is to construct the thoughtful portfolio with products that will prevent the issue wielding its head. So prevent the 40% drawdown in your portfolio construction within your portfolio, then you’re forced to take some out, you’re right, you have this smaller amount and then if there is a rebound, you’re taxed on that rebound, even if you did shrink your spending in order to offset that. So there’s definitely a drag there.

Rodrigo:00:51:35There’s a few things here. Number one, the first line of defense is diversification both from asset allocation and strategy diversification, that there is no forced, well, I guess there’s a force moving from a taxable to nontaxable, you don’t have to pay taxes, you’re not to sell your positions, you can transfer the actual units from your nontaxable to your taxable and as long as that’s diversified and the world is blowing up and you’re not because you have this beautiful permanent portfolio with tail protection in it, then really the issue becomes…I think the bigger question is…the whole idea behind deferring, putting stuff in your IRAs or Canada’s RRSP’s is that you are going to be withdrawing in a time where your income’s lower. And for a lot of people, that’s not the case. And so for those people that are still in the highest tax bracket at the time that you’re going to be taking it out, is it that much more beneficial than having being able to do more things than you’re allowed to do in your RSP and IRA and the like, that’s a whole different conversation.

Adam:00:52:37But it just depends so much on what is the future path of taxation? What is the distribution that you’re expecting for returns? How much negative skew are we expecting in the distribution? What’s the long term mean? Like there’s so many different pieces to that. I think some of it’s just I’m going to put a little bit over here, and I’m going to put a little bit over here and I’m going to try a few things and like Rodrigo said, and I think what we’ve all been saying is, just diversify all the bets in the different dimensions you can. And I do want to point to the fact that a few people, Brian, Jim, in the comments did mention that a Roth IRA or an IRA rollover, there are methods in the US that you can employ to address some of these forced liquidation issues or tax related issues that I don’t think anybody on this call is a particular expert in. But they’re certainly worth contemplating for sure.

Jason:00:53:37I think it’s just what Mike Green’s thesis is. I don’t know why he has to put such a long deck together to say the most obvious thing that we’ve seen from all of our clients is that if they’re only allowed to invest in stocks or bonds or target date funds that is going to have perverse consequences over time.

Mike:00:53:55He gets paid by the slide, obviously. I mean, this is a classic, you can’t go to a very sophisticated conference and just say that and then drop the mic.

Jason:00:54:08The obvious never work out, I guess.

VC, PE and Tail Protection

Rodrigo:00:54:11Jason I have a question for you. Because you live in an area where there’s a lot of VC, private equity, big private pools with long lock ups. I used to think that that would be ripe for the picking for a tail protection trap. But you go to these guys and say, look, you have the most tail to protect and it’s going to happen all at once and when it does happen, it’s gonna be catastrophic. But none of them would ever care or listen to me. I’m curious to hear what your experience is when talking to VC people, and then I’ll share some of the responses that I got.

Adam:00:54:53These aren’t pessimists?

Jason:00:54:54 Yeah, they’re long optionality. What tail do they need to protect? It’s only upside for them.

Richard:00:55:01And also … trends. The businesses that they’re investing in don’t necessarily have a high beta to the S&P, they might have these one offs that are going bust that aren’t necessarily going to be protected by liquid tail protection.

Rodrigo:00:55:18Yeah, well, we’re talking about systemic risk to the global-

Richard:00:55:24Systemic risk for sure.

Rodrigo:00:55:28The only thing I’m ever talking about when I talk about tail. And the response from these guys was even more like, if I do, I’ve thought about it, but if I do that, like I’m competing against other VC funds, and if I underperform by this much, because of your goddamn drag, I’m done. Like, I cannot afford to have any drag.

Jason:00:55:50Do you think if they’re doing their PA then or what’s even worse than that argument I’ve heard from people that even like, or let’s say, they’re long a tech company, and they’re long the stock and they’re long the stock options, and I always talking about you maybe should hedge with some puts. And then they think that’s somehow, that’s magical thinking that they’re going to bring down their company if they buy puts on their company.

Rodrigo:00:56:11and that’s a problem, right?

Mike:00:56:15Yeah. How can you after…they’re the turkey that has been treated insanely well by the farmer for so long, why on earth would they even? Why would that thought even cross their mind?

Rodrigo:00:56:28 because I’ve always been saying just wait. When this thing comes down on your head, it’s going to be so bad for you, all your PE’s, all these pension plans and invest in PE, then I sit down with the pension plans and they’re like, I’m like, how you doing? How’s your PE’s? I thank God for that. Because we’re not going to see those losses for another 18 months.

Mike:00:56:47Well, that the other thing, right? Private Equity …

Adam:00:56:50 the actual marks, like negative marks, marking back up again.  Like if you’re in a market right now, what would it be like, it’d be horrendous, it’d be the worst thing. But that’s the beautiful thing about accounting, like the accounting based at nav that we don’t have to do that and it’s a bit of a blessing and it keeps the-

Adam/Rodrigo:00:57:09 … board honest and confident and comfortable. They don’t have to see the market. Like, it’s the best. There’s nothing that they could do wrong.

Mike:00:57:19It’s a behavioural advancement, advancement in financial technology. They can mark up their long range expected returns, the pension fund by investing in private assets that they can’t get out of. If at any time that they would need a bid, there will be no bid. But they are allowed to mark up their long term rate assumptions, appease the board, appease the actuaries in the pension plan, it’s a great scheme as long as it continues to operate.

Rodrigo:00:57:53If the Fed Put continues, I mean, that is the area that will benefit the most…

Mike:00:57:58I mean, it’s the area that’s benefited the most definitionally by the change in the discount rate, and illiquidity, and all of these things. They have funded this thing to the nth degree, what do you think infrastructure is? It is the most long dated asset you can have. If you think your bonds are a problem, my God, how’s your fricking infrastructure project going to work?

Adam:00:58:20We hear plans for this water plant.

Building Portfolio Strategies

Richard:00:58:22Mike, are you going to go down the Green, the New Green Deal, I just want to prepare for that. But I wanted to maybe shift gears a little bit to ask Jason, because you’ve mentioned kind of tangentially about some of the holdings that you have. You mentioned Logica, but you also said that you’re not just hedging for tail, you’re actually trying to construct sort of a diversified holding there. Maybe you want to mention some of the strategies and often there’s mention them by name, but maybe the framework that you use, and then perhaps in the broader scope, what kind of portfolio you’d be looking to, to creating that diversified approach that you think is an interesting way to fit the Mutiny structure in an overall portfolio.

Jason:00:59:05Sure, that’s a great question. So let me start with by the way, Adam’s saying that happiness is relative, but I’m not so certain based on this crowd. I think it’s the inverse responses, it’s a bunch of schadenfreude in this crowd. Everybody’s waiting for the VCs to die off and the PE and like, I don’t think you have, it’s inversely correlated.

Rodrigo:00:59:21It’s not fair man, it’s not fair.

Jason:00:59:24Yeah, exactly. The way I like to think about it is, we all come from the same background. There’s Harry Brown’s permanent portfolio, then risk parity and these intellectual developments and then you get to Chris Cole’s Dragon Portfolio. And to me, they’re all kind of…we can argue about the attenuation of percentages here there, but they’re all relatively the same thing. So, we think about Mutiny Fund, this ensemble approach to long volatility tail risk, just being a piece of that Dragon Portfolio. So like the Dragon Portfolio is one fifth each stocks, bonds, gold, long volatility tail risk and commodity trend. We built this long volatility tail risk piece because my partner Taylor and I just must be insane and gluttons for punishment because it was the hardest piece to build by far, it’s the hardest piece to sell. But we wanted to build that piece first because what we needed for our friends and family, so this is very a scratch your own itch, soul in the game project for us, so we built that first but then we are looking to add an ensemble approach to commodity trend using different look backs and everything. Stuff that you guys are very well aware of, as far as using a dimmer switch instead of an on/off switch on that you guys work with Corey a lot on too. We believe that you can build that overarching portfolio, where long volatility tail risk is a piece of, and it’s going back to that idea of, you just want my savings to outpace inflation over time. And we view that.

The difference though between Chris Cole’s Dragon Portfolio and what we look to build, is we’re entrepreneurs first and so we really believe in entrepreneurs. We believe in small active managers and we believe that gives us an edge because when people look at alpha and beta, they’re always looking at just the nominal return. These active managers have dragged behind the S&P by 2% annually, and I go great, that’s just nominal return, what was their MAR ratio? What was their return to drawdown? And that’s where you see the active managers usually excel is on the risk mitigation for drawdown not necessarily volatility, but drawdown. So, if the S&P is at, say a 10% return with the 50% drawdown, this manager has an 8% return with a 20% drawdown, I can combine that in a capital efficient portfolio and using other uncorrelated pieces, it makes a much more robust return to drawdown. So that’s the way we look at it as, each of those pieces to the Dragon Portfolio, we look at using active entrepreneurial managers to reduce that risk, create an ensemble approach that way, as you guys know all too well, we reduced the signal to noise ratio, we get a much more robust signal, we’ve reduced the drawdowns, and then we combine that with the same ensemble approaches to the other pieces of the Dragon Portfolio. And that’s what we’re working towards that we think will be…that’s what we can look at to protect our own selves and our families and clients as well.

Adam:01:02:04I … like the Dragon Portfolio is sort of an evolution really of Harry Brown’s permanent portfolio and risk parity, it’s all the same line of thinking. And really what the Dragon Portfolio does is it takes a global risk parity portfolio and it adds an extra dimension which is maybe you want to call it convexity versus concavity, or divergent versus convergent risks. So you could take a global risk parity portfolio, and you can add, I don’t know why we keep calling it commodity trend, but like, diversified trend following and-

Jason:01:02:40You know why we have to do that.

Adam:01:02:42-is whatever, because Chris Cole calls his commodity friend..

Jason:01:02:44No, because how many CTAs went after large AUM and now they just trade the most liquid instruments and commodities are out of their portfolio. You have to find the smaller managers that actually still trade commodities. Imagine that. Trading commodities without vol targeting.

Adam:01:02:56You don’t need to be just commodities, right? You’re just trying to create a convex risk profile which you can do by trading any combination of instruments – long/short…

Mike:01:03:05You think it’s convexity or also the positive drift? I mean, it’s a long term exposure passively to equities, as an asset classes is muted. I think you’re hoping that you’re going to have tailwind as well as convexity if you add the trend, but-

Jason:01:03:24And, yes, in two ways. What’s interesting in two ways is like if you pair it with buy and hold equities, and you pair commodity trend or CTA trend, you actually need to buy and hold equities. If you start trending equities, that actually throws off the correlations with those. So you’re looking for that uncorrelated trade. The second part is, I’m more looking at one of those commodities being uncorrelated and as we know the kind of payout profile of them. But more importantly, it’s more about like the inflation side of it. Like, basically Chris is carving out from permanent portfolio that inflation side of gold, putting some of that in commodity trend, at least that’s the way I see it, is that let’s talk about like gold for a second, is the gold path you need is the way gold works for you is, it outpaces inflation. If it keeps pace with inflation, it’s okay. Or if it loses to inflation, that’s what you’re really looking for. So the way we look at commodities trend is that by diversifying across grains, metals, energies, one of those or multiples of those are going to keep up with or outpace inflation. So that’s more of the inflationary hedge if you think about permanent portfolio, gold was to be that inflationary hedge, I’m not so certain it is before any more or, gold is a single path dependency, whereas commodity trend has multiple path dependencies to try to hit that inflation hedge.

Adam:01:04:38I think it’s just really an evolution of that concept. Thinking about it as long only versus long/short trend is, like you can say the exact same thing. So, a global risk parity portfolio, let’s say it owns a bunch of global equity indices, a bunch of global bond indices and a variety of global commodity indices, including gold but also including let’s say grains and softs and metals and energy, etc. That’s a global risk parity portfolio, holds all of those different dimensions of risk and you’ve got nice risk balance and what have you. If you overlay trend following on all of these different dimensions, then you’ve got long only plus long short trend following means that if you size it right, when the trend following sleeve is short equities, you’re keeping money out of this strategic long only equity sleeve.

So when a trend is shorter, is you’re just neutral equities or zero equities. When you’ve got this long commodity sleeve or when the trend following strategy is short commodities, then now you’ve got zero commodities. So it’s really just like a timing overlay on this diversified basket of exposures, some of which are going to thrive during a deflationary episode, some of them are going to thrive during periods of benign inflation and robust growth. Some of them are going to thrive during periods of poor growth and larger than expected inflation and the trend following overlays just de-emphasizing those markets that maybe have a lower drift during this macro-economic regime. And so, it’s just different ways of saying the same thing. Like you can have a diversified global risk parity portfolio combined with, I love that the dogs are barking, combined with a trend following and a tail protection strategy, they all amount kind of the same thing.

Rodrigo:01:06:29Chris Schindler when he was talking about his commodity sleeve, he said commodities don’t have positive risk premiums. So, I just decided to do something different, like basically alluded to a commodity trend as the commodity side of risk parity, and called it risk parity. But that’s not like, the diehard risk parity guys are not going to do that. There’s some positive risk premium in trend and commodity trend. So if you can get your cake and eat it too, you’re positive trend factor and that inflation protection and that non-correlation to your equities and your bonds.

Mike:01:07:02But coming back to the way Jason framed the long buy and hold equity portfolio, so you’ve got a nice risk premia there in commodities. I think this is changing, but commodities historically have been an input cost for that long equity book. And that input cost has implications for profitability. So, if you’re timing your commodity, you have a commodity trend exposure, you are offsetting some of those cost increases that are happening in your equity book when commodities are trending up and can be a headwind to the potential profitability of your equity book. Also, when they’re short, obviously in a traditional economy, now the economy’s changed a lot obviously, we’re in a Bits and Bytes economy now. So what has what has occurred of last hundred years, these structural relationships may or may not proceed in the same fashion. But I can certainly see that from a very first principles structural basis resonated with me when you said, well, you’ve got your equity book, but you’re buying/holding in that but then you had input costs. So what do I do about these input costs? Harry Brown said, gold is just another currency as a proxy to hedge inflation and those costs that might be going in and just in one asset class, when you start to expand it, it gets a lot more complicated. What do you say to that?

Jason:01:08:26I was going to touch on one thing you said, Mike, and I got a couple of questions for you guys I would want to ask is like, one is, the way we try to look at if you take this ensemble approach to commodity trend into tail risk long volatility pieces, is that if you can get those to a flat or slightly positive carry or as close to zero as possible, they’re not that drag on the rest of the portfolio. And then you can use your notional exposure to have much more exposure to those implicit short volatility assets, like the stock exposure. Therefore, you’re actually out competing your neighbors without the drag on the portfolio and those things are just laying dormant, if it’s 10 years before, you have a target rich environment for commodity trend, they’re just laying dormant just waiting for that to happen. Meanwhile, you have much more stock exposure than you would have in any other portfolio. And so that’s why you have to argue all the pieces together, than into any of the individual pieces. So part of that is I wonder whether you guys like, when you’re building these ensemble approaches, the literature would say that you need seven and a half percent conviction of any trade or any manager to have that diversifying effect. How do you guys think about how much position size each trade would need to have to have any balancing effect or conviction to the ensemble approach to the portfolio.

Richard:01:09:39To matter? You mean?


Adam:01:09:40Well, I think it depends on the number of bets in the portfolio. I don’t know how you get to a, seven and a half seems arbitrary.

Jason:01:09:51That’s some of like, the academic literature on what a conviction minimum would be to have any effect on the portfolio.

Adam:01:09:58Well for example, if you load up with equities in the portfolio then I guess you would want to have, if you’ve only got equities as one bet. So you’d want to have at least 50% of the risk exposure in at least a completely different bet. And I think that’s the challenge with portfolios is they’re almost exclusively equity risk. But to the extent that you can expand into multiple bets, if I look at the, the global risk parity portfolio, let’s call it 65 or 70, futures markets, there’s something on the order of 9, 10, 11, 12 bets in there, so you kind of want to have approximately the same amount of risk exposure.

Jason:01:10:38The 9,10, 11,12 is seven and a half percent. That’s why I think it’s interesting, right?

Adam:01:10:42Sure. But I don’t know very many investors that actually have 9, 10, 11, 12-

Mike:01:10:49And the problem is, when there’s three you shouldn’t be doing 33, 33, 33. That’s not particularly otherwise.

The Rebalancing Risk Premium

Jason:01:11:00The other thing that Mike touched on that I really wanted to ask you guys about that, that always bothers me is, we’ve talked actually, throughout this conversation, they brought up VRP –  volatility risk premium and ERP – equity risk premium. I’m not sure either of those exists. So if you can go decade-

Mike:01:11:13It don’t exist. You know where I stand. You guys chat.

Jason:01:11:26If you can have negative for decades, if you could have a negative VRP, then that doesn’t mean there’s a risk premium. It’s just this thing we make up. But then part of that or what I’m really getting to is, when you build this well balanced portfolio and you rebalance frequently, you get a rebalancing premium, but I feel like when we talk about rebalancing premiums people think it’s fucking magic. And like we made it up when you can show the mathematics of it, but you start talking, I don’t know if you guys soft pedal on rebalancing premium. I eternally do.

Adam:01:11:51 at the moment, and I think it’s a wonderful, magical premium that everybody should be thinking about especially in this low return environment. We’ve got bonds at point five to 1% return over the next 15 years, and equity, equities that arguably somewhere in that sort of two and a half to five range, then every extra point of rebalancing bonus or any other type of premium really makes a huge difference. If you look at the typical stock bond, gold portfolio then the expected rebalancing premium, assuming you’re using like a 20 or 30 year Treasury, the typical annualized or historical analyse rebalancing premium is on the order of one to one and a quarter percent. The amazing thing is if you allocate appropriately to maximise diversification in a portfolio with 9, 10,11,12 different bets, like a diversified global risk parity portfolio formulated the right way, that premium might be two or 3% a year. So, you go from one and a quarter percent from even like a portfolio that’s more diversified than most people own. So, stocks, bonds, gold, 65 or 70 diversified asset classes, constructed in the appropriate way to two to 3% per year in expected premium from rebalancing bonus. Absolutely, that was a really good point. I’m glad you brought that up and it’s a current focus of ours.

Mike:01:13:15It’s a challenge though…go ahead Rod-

Rodrigo:01:13:18I was just going to say that it’s one of those objections that drives me nuts about this whole concept of being diversified. Why would I own any bonds? The risk parity is going to be terrible because this isn’t it, they don’t understand that by taking away any diversifier, by just being concentrated in equities, you’re taking away a massive, real mathematical entity premium. We don’t need to argue about whether this exists. If we believe these things to be non-correlated on average, and we can do it the right way, as Adam’s is writing an awesome paper about this, then you have this massive premium that nobody talks about. Nobody knows about it. In fact, like you said, I don’t know where you stand on this, do you hate it? Most people do. Because most people think about this rebalancing premium within rebalancing your equity portfolio. You got 50 stocks, every time you rebalance what’s that premium? It’s between zero and 50 basis points. 2-3%.

Mike:01:14:13I don’t think most people think about it. Most people think about the fact that over the last 12 years or 11 years, that the S&P 500 has crushed everything and that any rebalancing that you have done, any diversification that you have done, subtracted from what their buddy did next door. And so, it’s just not sustainable, unless you are thoughtful, long term investor that will invest over multiple cycles. It’s not a thing. At the end of the day, I believe gold is still outperforming the S&P over the last 20 years and long bonds outperform the S&P over the last 30.

Rodrigo:01:14:46Proper risk parity levered to 20 vol global equities hasn’t done too shabby either over the last 10 years, but you can’t avoid- I don’t want that type of volatility. But that’s, you’re missing 20 vol. This is what you’ve invested in. You can’t do very-

Mike:01:15:05I’ll take the other end.  I’m not really. Look at my 10 year vol’s not that high.

Jason:01:15:13How do you guys think about…I think about this often is like, if you think about rebalancing premium, the idea of any sort of rebalancing is a form of short volatility or selling a straddle, because people say your rebalancing is a mean reversion. It’s implicit short volatility. I semi agree but I also like to look at it more as like you’re monetizing the trend of the other asset classes. It’s not a light switch, you’re using a dimmer switch. So as you’re rebalancing, you can be monetizing the trend, you’re not truncating the left or right tails, you’re still riding them. It’s slightly mean reverting, but also it has the U shape as well.

Adam:01:15:50Well, and also, it’s not a pure martingale shortfall type trade, because clearly, you want to harvest rebalancing premium from markets that are either orthogonal, or if you can get it negatively correlated. The two markets are negatively correlated, if one thing’s dropping like a stone and the other ones rising. And I’m not suggesting that we can always count on stocks and bonds having negative correlation. But ideally, you’re going to want to put a variety of assets in the portfolio that are not all dropping at the same time. And in fact, if some are dropping, it’s because of economic dynamics that are causing others to rise.

Mike:01:16:31I think meat’s and S&P or NASDAQ probably relatively uncorrelated, and corn and frickin, the XLK would be marginally uncoordinated and if you develop these types of strategies, or the access points to these differentiated return streams.

Adam:01:16:50I just want to point out that we’re actively ignoring Corey Hoffstein’s question-

Mike:01:16:55Corey’s question is “who pays” and the answer is, we’ll tell you later.

Jason:01:17:03But Adam, let me ask you this, you’re just saying as you were singing the praises of a structurally negatively correlated trade, I might just raise my hand on that is, I don’t know if you saw but they wheeled in a couch behind you. So, if you could just lay down on the couch and tell me why you hate long volatility and tail risk so much, we can work through that.

Adam:01:17:22The point of a rebalancing premia too is that hopefully, you can find things to rebalance into that have a long term positive drift. Keep in mind, I don’t hate tail hedging. What I do, I think it’s very difficult for clients to stick with, it is very difficult for managers to include in portfolios because they have to answer to clients in the short term, and I think it’s very difficult to do well, because you’ve got issues about monetization timing, we were talking, we just glossed over this earlier about position sizing. Well, how are we position sizing? Are we position sizing on normal? Are we position sizing on delta? Are we position sizing on gamma? Like, are we changing our position sizing as vega rises and falls? On what period are we rolling? How much theta decay are we going to tolerate in order to get the appropriate, the gamma that was … about the fact that there’s no good answers to this. And we just want to like you say have a good ensemble of things that are designed to protect against a mosaic of different types of risks? And I like that answer. It’s like, you just want to be generally correct so that we can avoid the possibility of being specifically wrong or minimise the possibility of being specifically wrong. I like that answer.

Jason:01:18:43Like I said, you went full quant. You just can’t, if it doesn’t have a good Sharpe ratio, and you can’t fit it into an efficient frontier. And you can’t vega hedge it, then it’s just worthless.

Mike:01:18:52I think that’s a fair statement, Jason. I actually don’t think that you need precise answers to say all of that, and then come to 100% conclusion that zero is the right allocation. I don’t think that we would say that either. I think that’s just an outline of the things one has to consider as you absolutely should have an allocation to something that does this type of thing in your portfolio. These are the complexities that you have to deal with and coming to some position size, which is to say zero was not the right answer, I would suggest.

Adam:01:19:32 how to pinpoint a correct answer is also.

Mike:01:19:37There are no correct answers. There’s no equity risk premia, there is nothing. This isn’t even happening right now.

Rodrigo:01:19:44Specificity. … only right, like the permanent portfolio, risk parity, Dragon Portfolio. At the end of the day, they all kind of end up doing similar things. So it’s almost like you just choose when to stick to it. Like when you get too specific, one of the things that bothered me about some of the papers and like the Dragon before I said, it’s not like one fifth each. It’s like 19.5 here and 22.5 there. We’re trying to be too specific, like there’s these broad metrics and this broad beliefs as to what, how you stretch it. Do that, and you should be generally fine.

Adam:01:20:16I just want to apologise to the millennials on the line who I obviously take exception to my acrimony in …

Jason:01:20:28 Corey can’t understand this is how Gen X people show their love to each other.

Hiring and Firing Managers

Mike:01:20:33 So Jason, I would love to actually also know on a more serious note, I’m going to say equally a serious note. So, when you’re looking at all of these emerging managers that you’re putting together and assembling and ensembling, what’s the process you go through? Actually, a thoughtful process on how you interview, select, put together managers, that’s as hard a task as there is, never mind the risk premia. I think that’s got a level of dimensions beyond just the risk premia that you might try to harness, that is very complex. So I would love you to just give us what you’ve learned thus far, what you learned in the interviews, how you might replace people as you continue on your Mutiny journey. Because there’s a lot there that we haven’t, I hope you have time. I mean, we’re at an hour 20 now so if you’ve got time I think that this is…like I’m really interested in this particular area too.

Richard:01:21:31We got three hours on us.

Jason:01:21:33So I go back to I think about, during this conversation, I’ve actually been thinking about Meb a lot and one of my other back in my mind is like Meb reminds me of, I used to live in the south and these guys would do all this ah shucks, I’m just a southern guy. I don’t know what I’m talking about and everything. To me that’s Meb’s schtick but Meb’s a genius if you think about some of the things he talks about, like Rodrigo is just hitting on one of them. Meb did a study on like, the portfolio construction, didn’t even need to be exact if it was roughly right, that was good enough. But one of the other thing Meb talks about, it’s like, he falls in love with every investment he looks at. We all have the cognitive fallacy, like we fall in love, because everybody’s showing us great back tests. They’re so smart, they all went to Ivy League schools, especially the managers we deal with, they all went to Ivy League schools and Goldman Sachs, then prop firms and then their own hedge funds. They’re all geniuses. It’s all amazing. So it’s hard not to get sucked into the narrative. But the way we structured is, I think slightly different. And to me is, as long as anybody just wants access to these managers, and that’s what they use us for. And they think I’m a portfolio construction idiot, great, just use us for access. But the way we thoughtfully try to put this together is we look at specifically, we try to buy as many options as possible. So, the entire portfolio’s constructed about around buying options, because we all know what that that debit card bleed is of those premiums.

So you can’t blow up and you’re just buying options. But the way we look at buying options is we look about across the moneyness. So we might use like a Logica for the at the money straddles and they’re covering maybe that negative five negative 15% move primarily after you pay up for the premium on the other side. Then you look at like an Artemis option profile that’s much more strangles, we like Headwaters volatility that’s much more maybe opportunistic, and is looking for cheap convexity but it crosses that line of moneyness may be from 10 to 40%, out of the money moves.

So those guys are very dynamic in the way they’re trading options. They may be market timing a little bit or just adjusting their inventories of options. So, we added back in those deterministic rolling puts, just in case something were to happen on a Saturday, Sunday, some sort of exogenous event, and our managers weren’t fully in the market, we want to be able to sleep at night. We added those back in because we think we can carry that cost via the overall portfolio construction. Around the periphery, we added in this VIX arbitrage, like a relative value VIX trading which still has a long vega, long gamma profile, which is fantastic. Then we talked about the short term intraday trend on the stock indices going short, those indices. When we look at those managers, what we’re really looking for is a wrinkle of diversification.

So once again, it’s like, I’m actually saying something ridiculous, I want a beta signal from volatility arbitrage and those short term trend managers. And I can create a beta signal out of them if I create an ensemble approach to that. And all of them have different heuristics and timing of the trade, but more importantly, different heuristics for monetization. And so, if they offer a different wrinkle, and I can combine a handful of them into that basket, I can create a more beta signal out of VIX arbitrage, and a beta signal out the short term trend. What that does is it provides a much more robust return stream that helps me pay for that potential bleed of the options. So that’s the way we look at it and part of that diversification is, what’s been fascinating is during a risk on cycle, our managers are fairly uncorrelated, and then in risk off, their correlations go to one which is negative one to the S&P. So we have this very serendipitous converging correlations. So we really like. It’s more about finding somebody with a slight different wrinkle to volatility arbitrage. or short term down capture to see how that combines at the ensemble level and then the options are really about trying to cover as much of that moneyness and then those different monetization heuristics to make sure you capture that move, and make money off that move, and capture the meat of that move.

Adam:01:25:15I like that because of the nature of the distribution of the underlying strategies, but by their nature, there’s a huge amount of dispersion in the different outcomes from the different funds. So, this is where an ensemble approach can really show its strength by trying to narrow that distribution just by averaging error terms. And you’re just narrowing right in on the signal, which I think is a really good

Jason:01:25:46I get that logic but if you think about the dispersion, not only do you have wide dispersions, but then you have three different market microstructures with VIX options and in short indices futures. And so that adds to the interesting part of bucket dispersions. And then, Richard, I think you were asking, we rebalance quarterly, unless the single manager’s up double digits in a month and will rebalance across the portfolio. It’s an issue of granularity. As AUM grows, we might move that to monthly no matter what. But it’s a granularity issue when you’re dealing with the contract sizes that we’re dealing with.

Richard:01:26:20We were discussing earlier about the benefit of having that rebalance. Just something that just says, shot out three standard deviations just cashed that excess, put it back into the rest of the portfolio. So yeah, it makes a lot of sense.

Rodrigo:01:26:34One of the things I think of the first podcast when we discussed tail Adam, one of your concerns was what happens if you get it specifically wrong, like pick that guy that was supposed to pay off, and it were like 50 basis points away from the payoff, and we never got it? I think that one of the things about the way that these guys have approached it is that there might be one or two of those guys that never get hit. But because of the way the asymmetry works in these strategies, when one of them hits, it’s massive. It’s not like you are giving one-tenth of the portfolio across 10 managers, and they only get one-tenth of the impact on the asymmetry side of things, you can make it so that their impact is 100%. Structured it that way but there are ways of mitigating against that diversification risk of ensembles if you don’t hit all the triggers.

Richard:01:27:26Maybe Jason can also talk about the sizing, because you’ve talked about the different strategies and the different styles that helps us just get a good grasp of what you’re trying to hedge across this spectrum of risks and moneyness that you were talking about. But I guess the sizing also makes a big difference.

Mike:01:27:44While you’re talking about sizing, maybe touch on netting too.

Jason:01:27:46I think Rod was actually going down that road perfectly. So most people worry about netting risk. There’s two ways to look at netting, but like, if you have an ensemble approach and everything they’re worried about what about that payout? What if some managers catch it, some don’t. You lessen the convexity via an ensemble? Well, the beautiful thing is when you’re building an ensemble with VIX arbitrage and short term futures, and then the options bucket, is you’re maintaining all that convexity of the options. So, the ensemble approach is beautifully just reducing the noise during the risk on cycle, when the risk off cycle happens, we’re sitting on a massive inventory of options. So, going back to Richard’s is like, we think about that moneyness primarily. We’ll maybe overweight closer to the money, because we need more of that kicker there. But they might require more premium, and then your trend, and so it’s more about the probabilities. So, it’s like weighting based on the probabilities and the moneyness and that combination leads to a better construction of the options bucket.

Rodrigo:01:28:45Very cool.

Mike:01:28:49You’re muted, Adam, I think you might be muted, sorry.

Adam:01:28:53Sorry, I was just so passionate. I was-

Mike:01:28:56Is that damn dog? Whoever’s dog that is, shut up.

Adam:01:29:01I was just going to say it’s been 90 minutes and we finished on a high note. I think we were in violent agreement there at the end which surprised-

Rodrigo:01:29:09There’s a lot sewed up in that – everybody’s happy. I think people can take away something positive, the world’s not exploding.

Mike:01:29:17But he still hadn’t talked about how we actually, like I get the portfolio assembly and all that sort of stuff, but like actually interviewing of these people, how did you decide on these people, but we can leave that as a teaser for an interview down the road as well. Because I think that …


Richard:01:29:36That can be the stinker after the credits. … we’ll show that one at the end.

Adam:01:29:42That’s right. We’ll meet you back here tomorrow, same cocktail, 6am.

Mike:01:29:50If you have time and energy for it Jason. I’d love to hear that and how you’re monitoring on an ongoing basis, you never want to replace one of the managers you have, how would you think about that as the ongoing monitoring is in place, all that sort of stuff.

Rodrigo:01:30:05Before you’re answer, I have to go do some pickups and drop offs and stuff for the family. I will let you guys be, enjoy the conversation Jason, we’ll see you guys next week.

Adam:01:30:15See you Rodrigo.

Jason:01:30:15Yes. Just like you guys, this is my favourite subject in the world. So happy to continue the conversation. When we’re interviewing managers, we look at one, like we said, everybody has a great back test, so we just like to talk about where they get hurt and then we talk about layering in the different ensemble approaches where they get hurt. So that doesn’t make us the most high returning portfolio, but it helps robustify the portfolio, if robustify is a word. So that’s why we look at it. And then like, I’m saying, we focus on the moneyness of those options. You guys know it’s a very niche market, there’s probably only 30 to 40 players and we’ve been tracking all of them. And I’ve been tracking most of them for over five years. And then it’s also every year going to contacts in Miami, meeting them there, always talking on the phone, flying in to see them. But that’s how we build the portfolios, we kind of knew the structure the buckets we wanted to create, and what those buckets needed to look like. And then we’re just trying to find slightly diversified managers to fill those roles and think about where they get hurt the most, is do we have somebody that makes up for that? Because like you said, we want to create just a slight robust return during on risk on, and then all that convexity for risk off. But then my guess is that the hardest question in the world and you guys didn’t feel a lot, maybe now with the Evolution Fund is that, how do you fire manager, why do you fire a manager? When do you fire a manager?

Now if you guys have an answer for that, I’m going to sit back and shut the fuck up. But like, it’s the hardest question there is. Because as long as like, every goes oh, if they get away from their knitting, I’ll fire them, that’s easy. Yeah, if somebody goes rogue and starts selling volatility, I’m gonna fire him. Like, that’s the easiest question in the world. But certain programmes will do well in certain environments less than others, and our future drawdown’s always ahead of us. So if they have their biggest drawdown today, but it seems like they’re sticking to their knitting, have they lost their way or is their style gone out of favour for a few months, a few years? Like, it’s impossible to know that, and it’s one of the things in our industry that nobody really will claim or raise their hand about is, that none of us really have a good answer for this. It’s really gut feel, right?

Adam:01:32:21… the frequencies that we observe the market at, for sure.

Mike:01:32:27I think there’s probably probabilistic dislocations that might be obvious. If there’s a, here’s the structure, here’s the cone of probabilities for the particular manager, and you see this operating outside of that, but maybe the-

Adam:01:32:45It’s a hard sell, because the distribution is so strange, right?

Mike:01:32:48Correct. And it could be like you point to, it might be the actual strategy that filled the area of the moneyness that you were looking for is just that much out of favour, the manager’s actually doing what you want, the outcome is not what you thought. So I asked this question because it is a really tough question. I was hoping you had the answer.

Jason:01:33:14No. The funny thing about that moneyness is like, like Rod brought up before is like, if you had a manager that you were covering that negative 20%, like attachment point, and the market drops 18%. Well, you never hit the strike, so you didn’t make any money. So you kind of got egg on your face, even though you just told your clients that. But the way, Taylor and I think about it is like we have Thanksgiving risk, because our friends and our families are in this. So that’s why we’re trying to overlay those moneyness, overlap it. So like you pointed out, if a manager misses it somehow or it didn’t touch the strike they needed or didn’t have the path dependency, to Adam’s point, it didn’t have the sharpness of the move, all of this stuff is so difficult to hit that path dependency to strike. That’s why we think it really lends itself to this ensemble approach of layering on top of each other and overlapping those Venn diagrams, to try to make sure you capture that meat at the move, because especially if it happens once a decade, you don’t want to be like, we’re your guys for the sell off and then the selloff happens once a decade. And we’re like, Well, this- we thought, Yeah, we’re doing the best we can to try to make sure we don’t have to have excuses once every 10 years and go out of business.

Mike:01:34:15Yeah, I could just see the board meeting-

Adam:01:34:17… the convexity of the exposure will be, but you do know that you’ll be there for some of it anyways, you’ll do some of the job that you were paid to do. Exactly.

Jason:01:34:25Yeah. And I hate those shock tests people pull. There’s a lot of managers we talked to they’re like, here’s a shock test, if it looked like 2008 or 2011 or 2015. Like micro crisis season, this is the shock of our portfolio. Now, what did it return like? It’s just never going to look like that.

Adam:01:34:41No, exactly.

Mike:01:34:42I love it. I’d love to hear the board meeting. There was a board meeting at CalPERS where they decided to pull it all. And then and then there’s some guy at that board meeting. We got to get rid of this thing and he’s sitting there like … boards, then you got Wimbledon. Wimbledon has been buying insurance for a pandemic against, for 19 years. Can you imagine if there was a board meeting there last year and they’re like, we don’t need this thing. And they’re like, just keep it one more year.

Jason:01:35:09How did you guys handle it internally or outwards to clients when you probably experienced a different kind of drawdown in February, March, than your models were expected or to be kind of the extreme of your models? How did you manage clients through that?

Mike:01:35:24Looks like it’s time to go.

Adam:01:35:28It’s a really good question. Because it’s like for trend followers, right? Like, you’ve got these, the trend followers so often position as being crisis alpha, but they’re only crisis alpha if the skew manifests at a very specific frequency. If the skew manifests at a monthly or preferably quarterly frequency, then that’s when those trend followers are really going to do well, you’ve got some old short term guys that maybe profited at, with a few weeks. But you’ve got to be just so unbelievably short term to be able to take advantage of a move that happens that quickly, which admittedly had literally never happened before. It was three times as fast as the move in 1987. So you can’t build a model that is tuned, you’ve got to be positioned, like you say, for a crisis that happens in a way that no one’s ever seen before. So that’s where your type of strategy really comes in handy. And is just question of how much you’re going to pay for it? How much you allocate to it? I think that was a really good lesson in risk management this March.

Mike:01:36:41Yeah, the other thing was that we had a pretty significant run up. There was a significant amount of paper gains that were given up prior to, but again, as much as we say paper gains, everybody thought they own those 100% and they were in their portfolio. So it’s like, I fully recognise that, that’s not an excuse, it doesn’t matter. And there’s improvements that have been made and will continue to be made and that’s the evolution and I think that’s what I’m hearing from you as well is that there’s managers that you have in place and you are constantly looking for new managers that will add those wrinkles in order to continually develop a really robust process that has at least a breakeven or slightly positive carry that allows you to do some other things too that that really kind of round out the tail hedge which is incredible. Well I was keen to get those last two little bits in about the managers and manager selection and other than that-

Jason:01:37:40I’m going to copyright that endorsement by you. I think I’m good now.

Mike:01:37:47Done. Well, thank you for taking all the time. I don’t know about you guys, you have anything else left?

Richard:01:37:53No, I think that’s it. That was great. Jason thank you.

Mike:01:37:54I know if we’re going to continue I got to take a break because I got to go get my-

Richard:01:38:00 I got to go too.

Adam:01:38:05Good luck. Are you interviewing, what’s his name Diego Perea.

Jason:01:38:10I actually did that right before we got on with Diego and I did two hours and I had like a 30 minute break and then we got on. It’ll come out in a few weeks.

Adam:01:38:17Wow. Yeah. No raspy voice or anything. That’s great. All right. Cool. Thanks so much for coming on again.

Mike:01:38:28I just got a DM from Rodrigo. He said our risk parity crushed it by the way in that period, so I was thinking of different mandates, but he’s everywhere all the time. You can’t say anything without him being here.

Richard:01:38:42Yeah. Have a great weekend everyone.

Jason:01:38:44See you guys.

Adam:01:38:47See yah.

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